Navigating the first 3 months of COVID 19

22 May 2020

By Ronan Kearney, Director at Altium Investments

In August 2019,Altium Investments were appointed to the mandate for the DMS Verbatim Multi-index Funds,  a fund range with an excellent track record over many years of delivering consistent returns for investors.

One of the guiding principles of the long-term strategic asset allocation for these funds, is that the best way to win in the long term is by ‘not losing’. That is to say that managing downside risk is key to long-term fund performance. As you can see from the graph, which is correct to May 20th 2020, despite the worst financial crash in living memory, investors in Portfolio 3 & 4 have enjoyed positive 1-year returns, and the higher risk Portfolios 5 & 6 are close to positive over 12 months. This article will set out how that was achieved.

The impact of the COVID 19 epidemic is really unprecedented in its nature, as it has impacted the World economy and markets in a manner unlike previous financial or political crises.

As markets progressed through Q3 and Q4 of 2019, believing that valuations were getting a bit adventurous, we started to build cash inside the funds during this period. At the start of February 2020, the Multi-index funds had significant cash and money market holdings. Looking at Portfolio 3, we can see how the cautious philosophy of ‘winning by not losing’ has played out for investors.

Source: Morningstar 01/01/20 – 23/03/20

The benefit of sticking to the long-term strategy of the funds was clear as markets rapidly fell. The funds were insulated to some degree by the sensible long-term asset allocation of the Verbatim Investment Committee, and the additional cash position protected the fund by an additional 4%. At this point in March the investors were nursing some losses, but certainly nowhere near the decline of Global equity markets.

As equity markets fell, and Central Banks started to wield the power of their balance sheets, the question was how to deploy the reserve cash in the best way to help investors recover the losses they had made.

Source: Chicago Board of Exchange

A technical analysis of the markets was important to determine when markets may be likely to head upwards. The Chicago Board of Exchange publishes Volatility or VIX index that is derived from options on the index and shows implied volatility for the next 30 days. From the graph above you can see that the VIX (red line) peaked as the Standard & Poors reached the bottom of the trough on March 23rd. 

As investment managers, this is one important signal amongst others that there may be an opportunity to re-invest in the markets. As the VIX continued to decline, we added to holdings in factor-based US and UK equity funds. This decision added some additional performance benefit to investors since March 23rd up to May 11th (date of publication).

Source: Morningstar 22/03/20 – 11/05/20

As we look to the second half of the year in 2020, the economic outlook is deeply uncertain. One element that we have identified is that different countries have had markedly different experiences with the virus. Some European countries have been virtually untouched, others have suffered significant and tragic losses. The performance of Global market indices that we invest in will be impacted to some degree if individual countries are forced to re-enter lock down. We will be carefully watching for signs that the virus is re-emerging.

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.