Weathering the COVID-19 market rout
It is already old news that global equity markets fell precipitously in March on expectations that the COVID-19 pandemic would trigger a global recession. The S&P 500 Index in the US recorded its fastest-ever bear market correction, falling 20% in just 20 days. Industrial commodities and oil were casualties as the Russia-Saudi Arabian oil price war added to the panic.
In South Africa, the FTSE/JSE Capped All Share Index also plunged while the listed property sector lost a third of its market value. Even the All Bond Index fell 10% as investors sold emerging market investments and scrambled for safe-haven assets such as gold and US Treasuries.
The sudden reduction in demand for goods and services served to compound South Africa’s structural problems. Moody’s finally joined Fitch and S&P in downgrading SA debt to sub-investment grade (also known as junk). All three major ratings agencies expect the country’s solvency metrics to deteriorate. Indeed, Fitch has already downgraded SA debt another notch into sub-investment grade. The rand is now one of the worst performing currencies this year.
Foord could not have forecast the global pandemic. But we were aware of the global expansion’s late stage and the high-risk environment, especially with many global share markets at or near all-time highs. We did expect increased volatility, with some prospects for a correction. The catalyst that sparks such events is usually something that very few people see coming.
Foord’s funds performed exceptionally well
The market declines have been painful for investors. But Foord’s multi-asset portfolios performed better than most through the market rout. The box-and-whisker chart below shows the spread of returns achieved in March by funds listed in the ASISA unit trust categories of Foord’s asset allocation funds:
· SA Multi-asset Low Equity Category (stable funds): Nedgroup Investments Stable Fund (managed by Foord since its start in 2007)
· SA Multi-asset Medium Equity Category (conservative balanced funds): Foord Conservative Fund
· SA Multi-asset High Equity Category (balanced funds): Foord Balanced Fund
· Worldwide Multi-asset Flexible Category (unconstrained all-country funds): Foord Flexible Fund of Funds.
Each box-and-whisker chart shows the spread of returns of the funds in each sector. The boxes denote the second and third quartile returns and the whiskers denote the first and fourth quartiles. Some sectors have more than 200 funds! The net returns of Foord’s funds are shown by the large red/purple dots.
Let’s briefly look at the High Equity sector which contains all the balanced funds. We can see that most balanced funds achieved returns in the wide range of -18.0% to -2.5% in March. The outlier dots show that one fund produced +1.0% and another -19%. Foord Balanced Fund declined by 5.7%, meaning it is in the middle of the upper quartile and outperformed more than 75% of all balanced funds last month.
Foord Conservative and Nedgroup Investments Stable Funds also achieved this feat. Foord Flexible Fund was the best performing of Foord’s asset allocation funds, remarkably falling only 2.0%. We can see an extremely wide range of return outcomes for other funds in this sector given the very diverse strategies some managers employ.
Source: Morningstar Direct
This is an excellent outcome for Foord’s funds. It shows the risk management employed in the portfolios and is the result of the cautious positioning we’ve been communicating for some time. But it importantly also follows on a period of outperformance through stronger markets in 2019.
We did not achieve this result by taking risky bets, for example selling out of equities because we thought a pandemic might eventuate. Extreme actions like that often end disastrously. Instead, the fund managers used astute asset allocation, option strategies, proper diversification and careful avoidance of the investments which we thought might be particularly vulnerable in a market sell-off.
The good relative performance is thus mostly explained by:
· A low weight to investments most exposed to the weak South African economy and which were hardest hit in the market rout, for example, financial shares and listed property
· A preference for quality global investments which were cushioned as the rand plunged
· Judicious use of hedging strategies in the Foord International Fund, which was a star performer amongst its peers
· A low weight to the expensive US markets and preference for more attractively priced Asian investments in Foord Global Equity Fund
· Portfolio insurance in the form of physical gold (via the Newgold exchange-traded fund) which gained during the market stress and weak rand
· A high weight to liquid cash and bonds which outperformed most share investments.
Today, the COVID-19 infection is in the millions of confirmed cases in 195 countries and territories. Deaths are approaching 100,000. Governments have quarantined one fifth of the world’s population. All these statistics will inevitably worsen in the coming weeks.
Quarantines and travel prohibitions will slash global economic output in the first half of 2020. There will be recessions. These will cause millions of job losses, especially in service industries. Governments and central banks have responded with massive liquidity and fiscal packages. But there will be many corporate failures and personal bankruptcies.
Some countries dealt with the pandemic faster and more efficiently than others. They have seemingly arrested the infection rates. But they are now finding it difficult to properly open their economies without re-importing the virus from countries behind them on the infection rate control curve. Such are the realities of a highly interconnected global economy.
It seems clear to us that a three-week lockdown is probably not long enough to control the COVID-19 spread in South Africa. But we also think that a three to six-month lockdown is more than most economies (and societies) can withstand. History will judge whether the virus itself or mankind’s response was most damaging to society.
There are still very high levels of uncertainty in the forecast investment horizon. As such, we will continue to exercise caution. The investment strategy is focused on quality companies while maintaining a high degree of diversification and liquid investments. We have added to some quality companies that we already own on price weakness. We have also added some new quality names to the portfolios, but only at the margin.
I urge you to stay invested; your investments are in safe hands. Opportunities now opening for long-term investors in the Foord unit trust funds will not be squandered.
I wish you and your loved ones good health.