During this pandemic-induced recession and global stockmarket volatility, we have seen a trend of fund managers boasting positive returns in comparison to global indices and the majority of funds.
However, many of these are the same fund managers who hesitate to do the same during a bull market.
But why? There is an important distinction that exists between performing well during a bust and achieving consistently positive returns during both a bust and a boom.
Even though the market is cyclical, we find that many fund managers tend to call the end of these cycles toward the end of every boom. Quotes such as: "Changes to the market have seen an end to the boom/bust cycle" or "The market is doing so well, we do not see an end to this any time soon" are just a flavour the rhetoric heard.
But as many economists know, while there is greed and fear, we will not see an end to these cycles.
Although many economists (including myself) felt that a market correction was not only due this year but needed as a necessary part of the global process, Covid-19 was the straw that broke the longest bull market's back.
Although US President Donald Trump boasts confidence in stockmarkets as indices return to pre-lockdown levels, the US base for indices such as S&P 500 and Dow Jones are expressing signs of an economy in crisis, even more so than the 2008 Global Financial Crisis.
With manufacturing in decline and retail sales lower than ever, the US is undergoing unprecedented levels of unemployment. Like the 2008 Global Financial Crisis, major indices enjoyed positive returns once stimulus packages were introduced, but consequently underwent a double-dip.
Consider this closely as during the current market downturn, we have yet to see the economic impact of enormous unemployment.
Look beyond your comfort zone
While there are circumstances where a market correction helps the marketplace and offers a plethora of opportunity, most investment funds are locked into their area of expertise and cannot take full advantage.
When looking deeper into the structure of funds, many managers maintain a one-dimensional approach that often leaves them and their investors' portfolios exposed to market volatility.
Although Warren Buffet states index funds beat hedge funds, even major indices such as the S&P 500 see immense amounts of volatility, suggesting growth experienced is unsustainable and highlights a lacking confidence in the economy.
During a downturn, this exposes those unprepared for the worst and sets them on a course to suffer from either a lack of financing, liquidity, or demand during a recession.
While many businesses do well during a boom, the companies that also did well during a downturn, such as Zoom, may enjoy a plethora of success circumstantially.
To continue their success, they must generate new ideas and adapt to trends through innovation for the next change in the market. Their willingness and ability to prepare or not will determine their success over the long term.
The Covid-19 pandemic and subsequent stockmarket volatility shows that funds of the future need to break the trend of locking themselves into one asset class or strategy by adhering to a layered approach.
While some funds focus on equities, real estate and more traditional asset classes, others are looking to utilise long-term secure opportunities with multiple business plans in preparation for a downturn to adapt to an evolving marketplace, ultimately reducing volatility.
Furthermore, brokers and investors should pursue funds utilising investment approaches that are considered balanced, requiring their respective investment committees to discover new market opportunities that see success during both boom and bust cycles.