Rebecca Cretney discusses how investors can distinguish between solid companies and the zombies, and changes we have made to our fixed income positions.
We are now in the third quarter of 2020 and it is very clear that the coronavirus pandemic has led to a marked change in our lives in the short term. And it will undoubtedly have profound long-term ramifications on the way that we do business, the way that we communicate, and the way we consume.
But at the height of the market turbulence created by COVID-19, opportunity was created. Companies with strong balance sheets and broad business models, able to withstand the coronavirus and its aftermath, were sold alongside ‘lame ducks’ and ‘zombie companies’ – organisations with business models that would have eventually been called into question, at some point, since they largely exist due to the prevalence of cheap credit. However, in the initial flight to cash, everything was sold – good and bad alike.
Since then, headlines have been shouting that the equity market has rebounded, with the S&P 500 back to its previous high, as if the virus and its economic aftermath had never happened. However, if you dig into the detail, it is interesting to examine just how narrow the range of companies that have rebounded is. These companies sit in only a handful of industry sectors, and can be identified based on the differing impact COVID-19 has had on their Q2 2020 corporate earnings numbers – a divergence that seems set to continue according to the forecasts. As such, I have included some graphs for flavour:
As you can see, there was little to no impact to the earnings of healthcare and information technology, whereas industrials, energy, financials and consumer discretionary were hit for six. The indiscriminate selling brought on by COVID-19 created both risk and opportunity. As the investment managers for your portfolios, we made some high-level changes to our strategy as we divested emerging market debt, and added marginally to our alternative investment allocations. If your portfolio holds equity, we also reduced cyclicality and increased our quality bias. Our equity managers were actively buying in March and April, in particular investing in stocks which they had previously held off buying because they were expensive.
Since April, we have made relatively few changes – not least as our portfolios are designed to be ’all-weather’. This means that we do not have to constantly adjust the composition of our portfolios to reflect a changing macroeconomic environment. And while we have talked extensively about equities – to counteract the hype and excitement reflected in the headlines – most of our portfolios hold varying levels of fixed income, as appropriate to each client’s goals and objectives.
Within the fixed income allocation, we advocate a bias to the US across the board, as yields are comparatively higher versus other developed nations, and the paper is backed by the world’s biggest economy, i.e. by the central bank with the deepest pockets. Overall, we invest in:
It is this last category that is perhaps the most interesting to explore here – not least because of its diversity, but also because it provides a glimpse of the level of detail we go into during our fund selection process.
As we believe that credit default ratios are likely to increase from 2% to 10%, and that the average recovery rate of those defaulting will be 50%, we chose to mitigate this increased risk in four ways:
All of these actions on the fixed income front are on top of the diversified investments into alternative closed-end trusts, property and equities, all the while using currency management to further mitigate risk. We follow a conservative approach in everything we do. You have entrusted us with your investments, and we work hard to retain that trust.
We believe that investing doesn’t have to feel like you’re on a runaway roller coaster that is about to go off its rails at any time. We carefully assess the level of risk you are willing to take alongside your return requirements. However, if COVID-19 or the headlines have made you want to learn more about our positioning, please call your private banker. They can explain how our strategic investment approach dovetails with the investment plan you have in place, and provide reassurance that the short-term headlines should not end with you missing out on your long-term wealth goals.
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Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’
portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
+44 (0)1624 645813
Nedbank Private Wealth manages mainly multi-asset portfolios, so our communications don’t tend to focus exclusively on one asset class. However, today we propose discussing equities. Why? Because when you consider the news headlines, and then consider equity markets, we appear to be living in a parallel universe.
Read moreThe news feed from the coronavirus is all consuming, and rightly so. A disease that was widely touted, just a couple of months ago, as ‘similar’ to influenza has infected millions and killed hundreds of thousands of people.
Read moreTwo major disasters have crossed paths and it seems that the only good news we read about these days relates to how the coronavirus pandemic is slowing down climate change. Otherwise the press is full of heart-breaking stories of loss, peppered with acts of kindness and a sense of us trying to pull together. No one can tell us with absolute certainty what the future looks like, or when this will end. It can feel like we are staring into the deep unknown.
Read moreOne of the first lessons you are taught when studying anything investment related is the role diversification plays. For my investment exams, I was taught a diversified portfolio consisted of around 20 stocks ‒ a mere nod to today’s view. Instead, your portfolios – if you are a client of Nedbank Private Wealth that is – are invested across thousands of companies.
Read moreAs we witnessed in our latest webinar (click here for the Q&A), investors are struggling to understand everything given the tsunami of news. Markets have begun to claw back losses in some areas, but there may well be more bad news ahead, before we see a sustained trend in positive headlines. So what’s next?
Read more“He allowed himself to be swayed by his conviction that human beings are not born once and for all on the day their mothers give birth to them, but that life obliges them over and over again to give birth to themselves.” ― Gabriel García Márquez, Love in the Time of Cholera
Read moreAs children, most of us were excited to visit a sweet shop – I definitely was. Dazzled by the bright display of shelf upon shelf of glass jars, there were sweets of every possible shape, colour and taste – all covered in sugar. Some coins lay in my hand, but which sweets would I choose?
Read moreToo often we believe clients sit in too much cash. We understand why people do this, but we think that too much can be an issue. How much do you really need?
Read moreWe are one of only a handful of wealth managers who use currency management as part of our investment approach. In this short 45-second video, we explain why.
Read moreInternational Women’s Day was on Sunday 8 March, a day that since 1910 has focused attention on women’s rights. The day – and the invitation to speak on the topic at the Institute of Directors on 6 March – prompted me to think through how much has changed for women in the last 110 years. While there are still challenges ahead, this is pivotal time for women.
Read moreAllie Kirk, private banker, speaks to Rebecca Cretney, one of our investment specialists, about the current market turbulence.
Read moreIf you are interested in becoming a client, please complete the form via the ‘become a client’ button below. Alternatively, if you are already a client, or if you have a question about how we help clients in particular circumstances, please use the ‘contact us’ button.
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