As economic uncertainty continues to weigh on markets due to the impact of the Covid-19 coronavirus, investors are increasingly looking for ways to mitigate risk and look for the opportunities when markets turn.
And therein lies the challenge for active managers, particularly those with a multi-asset brief.
“Despite the radical changes our society is currently experiencing, and come hell or high water, our job as portfolio managers is to manage assets in as diligent a manner as possible,” said Vincent Ropers, co-manager of the £47.5m, five FE fundinfo Crown-rated TB Wise Multi-Asset Growth fund.
“The good news is often during the bleakest periods in stock market history lie the best opportunities.
“This means as we navigate choppy waters, we are also ensuring our investments remain well-positioned to benefit from the recovery.”
Below, Ropers consider three asset classes that could help investors through the current crisis in markets.
Gold
Gold has long been hailed as a ‘safe haven’ asset with the precious metal usually becoming a go-to asset in times of stock market crises.
Compared with equity markets, gold has held up much better during the coronavirus sell-off. The S&P GCSI Gold Spot index has made a return of 22.71 per cent since the start of the year a considerable outperformance compared to the MSCI AC World index which has posted a loss of 12.13 per cent during the first quarter.
Performance of indices YTD
Source: FE Analytics
“As an asset class, remains very attractive to us,” said Ropers. “In volatile times, particularly when even government bond markets stop functioning, it remains one of the few areas where investors can find cover.”
As a “non-yielding asset” gold benefits from the ongoing pressure on yields from bonds, he added: “reducing the opportunity cost of holding gold versus bonds”.
But one of the main features of gold at the moment is a hedge against inflation, which after weeks of monetary and fiscal stimulus being pumped into the economy to offset the coronavirus impact could lead to higher inflation.
“Despite these characteristics, gold is only up modestly year-to-date in US dollars,” said the manager. “The main explanation seems to be that investors are forced to sell their most liquid assets to cover losses elsewhere, and the gold market is extremely liquid, making it a prime source of cash.”
He added: “Looking back at previous crises, such a performance pattern in the early stages of a downturn is not completely unusual. In 2008, for example, gold was weaker from the Lehman fallout until the end of October, before starting a three-year 150 per cent rebound.”
One strategy Ropers said the multi-manager fund does hold is the $429.3m Merian Gold & Silver fund, managed by Ned Neylor Layland.
The Merian fund provides exposure to the precious metal through mining stocks and direct exposure to the two precious metals.
Ropers said that gold miners have become “very profitable” after years of cost-cutting and have also become more profitable as gold prices have risen.
Private equity
One asset class that Ropers feels could be a “source of concern” is private equity, due to the high levels of debt in the sector coupled with relatively high valuations.
As such, the TB Wise Multi-Asset Growth managers have reduced the fund’s private equity exposure from its post-Brexit peak of 20 per cent down to just 5 per cent.
And if he has invested in those strategies it’s been in managers who choose non-cyclical businesses benefitting from recurring revenues.
“A lot of the underlying companies are also likely to be beneficiaries of social distancing thanks to their use of technology,” Ropers said, as the world is forced to work from home and rely on technology more than ever.
One recent allocations to the fund is the £377.5m Oakley Capital investment trust, a private equity strategy investing in three main sectors: consumer; technology, media & telecommunications; and, education.
Equities
The asset class which has taken some of the biggest hits during the coronavirus crisis is the one that Ropers believes will unveil the “quality managers who avoided the riskiest of companies”.
Ropers said one such example is AVI Japan Opportunity Trust, overseen by Joe Bauernfreund, a good example of a quality manager making the correct risk assessments.
“Japan was close to the source of the virus before being affected itself in January/February, and its companies are seen as highly exposed to the global economic cycle,” he explained.
However, manager Bauernfreund invests in companies that can increase shareholder returns through improved corporate governance.
“Even in the worst-case scenario of the world economy coming to a complete halt, these companies would be good investments without making any profit, as they could be stripped out for cash,” said Ropers. “We believe that such companies will survive the current crisis and will be rewarded by the market for doing so.”
Nevertheless, investors should make sure they know what they are investing in, something that Ropers understands only too well as a multi-asset manager.
“We have been impressed by how those have reacted to this crisis, diligently analysing their portfolios, adjusting their positions when required and sticking to their process,” he explained. “If we have done our work properly, we shouldn’t need to make many changes to our portfolio ourselves as we know our clients’ money is in good hands.
“Finally, the recent sell-off has reminded us of the power of diversification, not only by asset classes but also geographically. As Covid-19 progresses from East to West, the experience of our Asian managers is very different to our European ones for example.”
Performance of fund vs sector & index over 5yrs
Source: FE Analytics
Managed along with veteran investor Tony Yarrow and Philip Matthews, the TB Wise Multi-Asset Growth fund has made a total return of 23.73 per cent over the past five years, outperforming its IA Flexible Investment peers (11.00 per cent) and the Cboe UK All Companies index (1.83 per cent). It has an ongoing charges figure (OCF) of 1.18 per cent.