The ability to ‘keep your head when all about you are losing theirs’ is the key to surviving the type of market crash we have seen this month, according to some of the longest-serving managers in the investment trust universe. 
Aside from bringing an end to the longest bear market in history, the coronavirus pandemic has had a devastating impact on our day-to-day lives, changing the way we work, shop and socialise.
However, the Association of Investment Companies’ communications director Annabel Brodie-Smith pointed out that because nearly half of investment trusts have had the same manager for 10 years, and 18 have had the same one for more than 20, the current turmoil is nothing that many of them haven’t seen before.
For example, Katie Potts, who has been managing the Herald Investment Trust since 1994, pointed out that while this crisis feels unprecedented, this is exactly what all of the previous crashes she has experienced felt like at the time.
“People looked over the edge fearing the collapse of the banks in 2008, but it did not happen – they were rescued, and in hindsight little damage was done to most people’s lives,” she said. “The lesson is, don’t panic.”
Austin Forey, who has headed up the JP Morgan Emerging Markets Investment Trust since 1994, agreed with Potts: “Very volatile markets are always stressful, but we have some experience to draw on in terms of what not to do.
“In a big downturn, one thing to avoid is the temptation to run for cover after the crash has happened: it’s very easy to act pro-cyclically, but you should try to avoid that.”
Hugh Young of Aberdeen Standard Asia Focus said that if you are going to take any action after markets have crashed, it should be to buy more assets at depressed levels. However, the manager, who has been running investment trusts since 1990, warned that one important lesson he has learnt over his 30-year career is not to focus on price alone at times of crisis.
“Valuations attached to some companies may be justifiable, if possibly still too expensive, given the headwinds they face,” he said.
“For other companies, it could be a good entry point for patient investors. For Asia Focus’s portfolio, we’ve identified opportunities around the region where share prices are attractive and the management, balance sheet strength and business model are also compelling.
“Importantly, they’re in good shape to weather the challenges ahead and capitalise on opportunities to take market share.”
Potts said that anyone tempted by cheap valuations should look carefully at debt before taking the plunge. She had been holding a high cash position before the crash, due to concerns over the amount owed by consumers, governments and businesses – in particular, she described the amount of leverage in private-equity owned companies as “eyebrow-raising”.
“I hope that a silver lining will be the reminder that it is better to have companies funded by equity than debt,” the manager continued.
“Generally, leverage in quoted companies is non-existent or modest, and shareholders are well able to invest further capital in solid businesses that have short-term requirements. The quoted market should be a relatively safe haven, albeit some sectors such as travel and leisure will be challenged.”
Despite the oft-repeated quote from Baron Rothschild that “the time to buy is when there's blood in the streets”, many investors don’t feel comfortable putting money into markets when they are seeing the sort of fluctuations that have become commonplace over the past month. However, Forey said there is no shame in simply doing nothing.
“Don’t force ideas or feel that you have to be finding something to buy and sell every day: concentrate on what makes a difference,” he continued.
“Work out what you’re trying to do and don’t let market cycles or performance cycles drag you off course.”
Peter Spiller, manager of the Capital Gearing Trust, agreed with him, saying: “I have experienced a number of bear markets. They do come to an end, so avoid despair and stay calm. Precise timing is more problematic, and usually impossible.”
Having headed up the Capital Gearing Trust since the start of 1982, Spiller is the longest-serving manager in the investment trust universe. He also knows a thing or two about capital preservation – the trust has lost money in just one financial year since he took charge.
Source: Capital Gearing Trust
However, while he entered this period with a defensive position, he has added to equities that are trading at a large discount to their long-term value and look well-placed to survive the current turmoil.
The manager has done this with one eye on what will happen once the crisis is over.
“If the analogy to war means anything, it is that wars always produce inflation; do not be misled by the weakness in the CPI that we expect in the next few months,” he added. “Inflation-protected assets still have an important role in any long-term portfolio.”
This is a view echoed by Potts.
“The scale of money being printed necessitates low interest rates for a long time, and as the virus recedes, an inflationary boom with rising asset prices seems highly probable next year,” she finished.