The first quarter of 2020 has seen the roll out of a crisis unprecedented in living memory. At the start of the New Year, no-one could have predicted that within three months 1.2 million people worldwide would have contracted covid-19 and that three billion people would be living in lockdown. 
Over the quarter, Square Mile’s analysts conducted some 300 meetings and interviews with investment professionals to gather updates on the strategies they manage and insights into their investment outlook.
However, given the speed and pace of change in markets, many of the views expressed earlier in the year are either out of date or redundant. While we remain in this unknown territory, most seem to be advocating a sit-tight approach, but some have clearly started to increase exposure to riskier assets.
However, whilst share prices have fallen it is not yet clear that they have all necessarily become cheaper, largely as earnings will continue to fall. Against this backdrop, we have broken down the views of the managers we have interviewed into three broad categories: equities, fixed income and multi-asset.
Most equity managers in Square Mile’s Academy of Funds are stock pickers and therefore largely agnostic towards macro factors. That is not to say their views are not useful or that some do not have insightful points.
Looking globally, value funds, or more specifically, those with a cyclical overweight, such as to the oil & gas sector have been worse hit this year. This is equally true in the US where the S&P 500 Energy and S&P 500 Financials sectors are down aggressively.
Fund managers that have performed better have been sitting on cash or disposed of risky positions very early in the sell-off. Those that have done nothing and remained invested in quality areas have generally held up well too. Similarly, most defensive global listed infrastructure funds have performed well, but perhaps less so than we would have expected them to.
In emerging markets, funds which are underweight China have struggled since, perhaps surprisingly, Chinese equites have been remarkably resilient this year. Most emerging markets outside China have suffered, such as oil-reliant Russia and Brazil.
Among the fixed income managers in the Academy of Funds, most were underweight duration going into the sell-off. Treasuries have been preferred over gilts in the main with some managers using TIPs to get Treasury exposure because break-evens are so cheap.
It is fair to say, however, that few predicted the huge short-term moves that have been seen in either market. In general, Square Mile analysts report that managers had started the year with a cautious, defensive positioning in credit, but had started to add risk into their portfolios, albeit at a conservative pace, but were still positioned cautiously throughout January.
More recently, managers do now report that they are seeing more opportunities, with spreads looking more attractive. However, liquidity has been very poor, hence many managers have been reluctant to unload cash or make sweeping changes in these conditions up to now.
Furthermore, whilst the expectation is that monetary policy will support markets, the absence of earnings and GDP growth visibility potentially until Q4 will act as a headwind to valuations.
In terms of multi-asset managers, many were rebalancing portfolios through mid to late February. This saw them adding to equity exposures but maintaining their cautious positioning.
However, since then there has been less portfolio activity, though some have started to build up exposure to risk assets. Broadly speaking, most of the managers that we cover were defensively structured moving into the sell-off, and therefore are in the position to add through to risk. Having said this, many are doing so very conservatively, maintaining their cautious stance.
The Covid-19 crisis is still far from over and it would be a brave manager that would claim to be able to predict how markets and economies will play out over the coming months. It would be fair to say that caution is the prevalent sentiment among managers of all asset classes, though some are certainly willing to take a longer-term view and to start to selectively add to riskier positions.
Chris Fleming is investment services director at Square Mile Investment Consulting and Research. The views expressed above are his own and should not be taken as investment advice.