Special announcement: COVID-19
Market update
NZ Funds has taken steps to protect clients’ global growth assets from further financial market volatility, while purchasing options to capture gains should a share market rally occur.
This report is to let clients know we have hedged 50% of clients’ share market exposure. Financial markets are struggling to gauge the economic impacts of Coronavirus (COVID-19). As a consequence, we expect an unusually high level of volatility over the next three to six months and we aim to limit clients’ exposure to this.
In the event of a sharp rise in share markets, we have purchased out of the money call options, which aim to compensate clients for being conservatively invested. If markets fall further, clients’ downside will be muted. We anticipate this will allow clients to remain fully invested during this period of volatility without the risk of permanent impairment to their retirement capital.
Financial markets are grappling with pricing in three pieces of information. First, that COVID-19 will spread widely. Second, that even with a low mortality rate, it is likely to lead to a sharp drop in global growth as we travel, shop and spend less. Third, depending on duration, there may be a degree of longer-term economic damage caused by postponing investment in future growth, business closures and staff layoffs.
The Economist cited that a broad range of 25-70% of any infected country’s population may catch the virus. Roughly 80% of cases will be mild, 15% will need treatment in hospital and 5% will require intensive care.
In the meantime, United States based drug manufacturer Moderna Therapeutics has already designed a vaccine and has begun human trials. More vaccine candidates are underway and trials are currently expected to be concluded in nine months. Work on anti-viral drugs, which help the body fight the virus, has also been stepped up.
Portfolio positioning
NZ Funds has hedged 50% of clients’ share market exposure in both the Inflation and Growth Categories. This is broadly equivalent to having 50% of each category invested in cash.
Of the remaining 50% exposure that is not hedged, approximately 30% is invested in New Zealand shares that are backed by well-established local companies, such as ‘gentailers’ which provide strong dividends.
The final 20% is invested in global shares and overseen by two New York based specialist long/short hedge fund managers who have the tools and instructions to seek to mitigate any further downside, should it occur.
To ensure clients are not disadvantaged should financial markets rise sharply, for example on news of the virus being contained, we have acquired call options across the Inflation and Growth Categories. This will enable participation in the share market recovery if it increases by more than 10%.
Should share markets fall further, clients will have half the share market exposure they would normally hold, as well as downside protection from Universa.
Universa owns a portfolio of options which generate significant profits (estimated at between 4x and 5x the investment held with them), should markets decline rapidly by over 20%.
NZ Funds anticipates our current positioning will be short to medium term only. As information becomes more readily available and financial markets have the opportunity to price it in, we anticipate returning clients to a fully invested position.
We believe this to be a better approach than having clients worry and seek to market time – by switching out of growth assets and then back in – without access to tools we have to manage volatility such as both downside and upside options.
This approach should enable clients to continue with their investment programmes in a business as usual fashion, which over the medium to long term is believed to yield the best results.
If you have any questions, please do not hesitate to contact your adviser or the NZ Funds Investment Team. NZ Funds will ensure clients are kept well informed as the world works together as a community to mitigate the impact and keep those who are vulnerable safe.
This report is to let clients know we have hedged 50% of clients’ share market exposure. Financial markets are struggling to gauge the economic impacts of Coronavirus (COVID-19). As a consequence, we expect an unusually high level of volatility over the next three to six months and we aim to limit clients’ exposure to this.
In the event of a sharp rise in share markets, we have purchased out of the money call options, which aim to compensate clients for being conservatively invested. If markets fall further, clients’ downside will be muted. We anticipate this will allow clients to remain fully invested during this period of volatility without the risk of permanent impairment to their retirement capital.
Financial markets are grappling with pricing in three pieces of information. First, that COVID-19 will spread widely. Second, that even with a low mortality rate, it is likely to lead to a sharp drop in global growth as we travel, shop and spend less. Third, depending on duration, there may be a degree of longer-term economic damage caused by postponing investment in future growth, business closures and staff layoffs.
The Economist cited that a broad range of 25-70% of any infected country’s population may catch the virus. Roughly 80% of cases will be mild, 15% will need treatment in hospital and 5% will require intensive care.
In the meantime, United States based drug manufacturer Moderna Therapeutics has already designed a vaccine and has begun human trials. More vaccine candidates are underway and trials are currently expected to be concluded in nine months. Work on anti-viral drugs, which help the body fight the virus, has also been stepped up.
Portfolio positioning
NZ Funds has hedged 50% of clients’ share market exposure in both the Inflation and Growth Categories. This is broadly equivalent to having 50% of each category invested in cash.
Of the remaining 50% exposure that is not hedged, approximately 30% is invested in New Zealand shares that are backed by well-established local companies, such as ‘gentailers’ which provide strong dividends.
The final 20% is invested in global shares and overseen by two New York based specialist long/short hedge fund managers who have the tools and instructions to seek to mitigate any further downside, should it occur.
To ensure clients are not disadvantaged should financial markets rise sharply, for example on news of the virus being contained, we have acquired call options across the Inflation and Growth Categories. This will enable participation in the share market recovery if it increases by more than 10%.
Should share markets fall further, clients will have half the share market exposure they would normally hold, as well as downside protection from Universa.
Universa owns a portfolio of options which generate significant profits (estimated at between 4x and 5x the investment held with them), should markets decline rapidly by over 20%.
NZ Funds anticipates our current positioning will be short to medium term only. As information becomes more readily available and financial markets have the opportunity to price it in, we anticipate returning clients to a fully invested position.
We believe this to be a better approach than having clients worry and seek to market time – by switching out of growth assets and then back in – without access to tools we have to manage volatility such as both downside and upside options.
This approach should enable clients to continue with their investment programmes in a business as usual fashion, which over the medium to long term is believed to yield the best results.
If you have any questions, please do not hesitate to contact your adviser or the NZ Funds Investment Team. NZ Funds will ensure clients are kept well informed as the world works together as a community to mitigate the impact and keep those who are vulnerable safe.
Source: Bloomberg, NZ Funds research, S&P 500 Index (LHS), S&P NZX 50 Portfolio Index (RHS).
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest PDS for the Scheme is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest PDS for the Scheme is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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