02 July 2020
Uncertainty over the impact of Covid-19 is prevalent. Whilst a number of managers have expressed opinions on the likely longevity and path of this virus, not one is prepared to make big market calls based on them.
They understand the limitations of their knowledge and there is simply too much uncertainty to allow them to do so. There is a sense that even if they could map the global profile of the virus with perfect foresight, they would still not be able to predict how the markets might react to it. As a result, most managers are taking a cautious and more measured approach and are focused on longer term opportunities in line with their more strategic investment objectives
It is fair to say that we are not seeing any evidence of managers putting all their chips on red. However, we are seeing evidence of fund managers being more opportunistic in their asset allocation.
The pandemic has created a number of opportunities to invest in companies across the capital structure and many managers are taking advantage of this, albeit on a selective basis. In March and April, when valuations were low and managers were re-introducing risk to their portfolios, this opportunism was at more of an asset class level.
This narrative has now switched to one of selectivity within asset classes. What is consistent across the board against this backdrop of uncertainty is a bias to quality names. Within equities, managers are favouring businesses with strong balance sheets, low debt and repeatable earnings. Within fixed income markets, managers prefer high quality issues: investment grade over high yield.
Third, managers are tending to focus on long-term themes. Many of those that we rate have longer-term investment horizons and so naturally try to identify the trends that will drive growth over the next 10 to 20 years. A number of businesses that have performed strongly during the coronavirus pandemic are at the forefront of these trends. Furthermore, this crisis has precipitated a structural shift in their favour and raised awareness of them. These might be technology companies benefitting from a more digital world; healthcare businesses which serve an ageing population; or electronic payment services firms reaping the rewards from the growth in e-commerce.
As a result, we are now seeing many managers putting together specific baskets of stocks aimed at tapping into these theme Finally, many active managers in the Academy of Funds have struggled over recent years as passive managers have flourished, but this may well be set to change. Active managers should now be well placed to exploit the current market opportunities and while passive vehicles are blanket buyers of indices, active managers can be discerning when selecting securities. It is comforting to hear that those whom we have recently interviewed are taking full advantage of this.
Alex Farlow, Head of Risk Based Solutions Research, SquareMile
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