Special announcement: COVID-19
Market update 5 - the case for being positive
NZ Funds wrote on 27 March 2020 | Market update 4 - 2020 vision that we all wish we could have perfect foresight when investing in financial markets. However, without some sort of crystal ball, most of us are unlikely to pick the bottom of a market correction.
What has led us to be fully invested within our growth portfolios?
The largest economic stimulus package in modern history together with cheaper share market valuations means we expect a three to four-fold gain in shares over the next three to five years. If we can think beyond the next few months, now is a great time to be invested. This is despite the long road ahead to get the global COVID-19 pandemic under control.
As Warren Buffett famously said during the 2009 global financial crisis (also known as the GFC) “Be careful when others are greedy and greedy when others are fearful”. Over the long term, the value of innovative business will continue to grow despite the short-term pain of a crisis.
The government stimulus packages make us confident of a strong recovery. In the United States, the $2.2 trillion stimulus package in a $21 trillion dollar economy is breath-taking. Furthermore, the $2.2 trillion may end up being just a ‘down payment’ with more fiscal measures to come.
When we think about where financial markets will be in one year, three years or five years’ time, it is hard to bet against the support governments are providing. At the same time, we can buy shares significantly cheaper than they were even a few weeks ago. This is the key driver for NZ Funds becoming fully invested. It is a tragedy that the speed of support given to financial markets was not also seen in some governments’ reactions to the medical crisis of COVID-19.
A lesson from the global financial crisis
During the GFC, financial markets acted with a herd-like mentality. However, for those that looked, opportunities did present themselves. The film ‘The Big Short’ highlighted some of those investment managers who were able to generate returns for their clients despite the market environment. NZ Funds launched its Credit Opportunities Portfolio which generated a return in excess of 100%.
We believe those opportunities exist now. NZ Funds, together with our global partners, have established a Global Themes Portfolio to take advantage of mispriced securities. We are committed to finding opportunities which will generate returns for our clients regardless of what the market does. This is an exciting development and we have already deployed capital. Clients can expect 5 - 10% of their growth portfolios invested in these opportunities.
The two sides of downside mitigation
We successfully mitigated around 45% of the market drawdown year-to-date. While some of our competitors may have been able to mitigate more than NZ Funds, it’s important to compare apples with apples. We were able to mitigate the downside while having 100% of our portfolios invested in growth assets. This compares to many of our competitors who as a rule only have around 75% invested in growth assets.
This is important. It means NZ Funds will fully participate when the market rebounds. As we witnessed at the end of March, this can be as fast and as violent as the selloff. Our aim is to return clients capital to pre-crisis levels faster than our competitors.
We retain options to mitigate further bad news. Downside mitigation cannot be switched on and off depending on when you think there might be a drawdown. In fact, the signals pointing to the current market correction were limited given the ‘sudden stop’, external cause of the crisis.
It is worth noting that a balanced fund with 50% income and 50% growth assets did not stabilise the downturn to the extent that many expected. This means bond prices also fell as concerns over credit increased. While bonds will remain a crucial part of our clients’ portfolios, in times of stress we become more reliant on our downside mitigation manager, Universa, which is up over 700% since the crisis began.
As we have written before - as guardians of your retirement savings - if we were to wait until a vaccine is developed, the market may have already increased beyond its previous highs. Markets do not wait for the all clear signal and with support from governments across the globe, we are confident we are well positioned for the future.
Be kind. Stay home. Stay safe. Save lives.
What has led us to be fully invested within our growth portfolios?
The largest economic stimulus package in modern history together with cheaper share market valuations means we expect a three to four-fold gain in shares over the next three to five years. If we can think beyond the next few months, now is a great time to be invested. This is despite the long road ahead to get the global COVID-19 pandemic under control.
As Warren Buffett famously said during the 2009 global financial crisis (also known as the GFC) “Be careful when others are greedy and greedy when others are fearful”. Over the long term, the value of innovative business will continue to grow despite the short-term pain of a crisis.
The government stimulus packages make us confident of a strong recovery. In the United States, the $2.2 trillion stimulus package in a $21 trillion dollar economy is breath-taking. Furthermore, the $2.2 trillion may end up being just a ‘down payment’ with more fiscal measures to come.
When we think about where financial markets will be in one year, three years or five years’ time, it is hard to bet against the support governments are providing. At the same time, we can buy shares significantly cheaper than they were even a few weeks ago. This is the key driver for NZ Funds becoming fully invested. It is a tragedy that the speed of support given to financial markets was not also seen in some governments’ reactions to the medical crisis of COVID-19.
A lesson from the global financial crisis
During the GFC, financial markets acted with a herd-like mentality. However, for those that looked, opportunities did present themselves. The film ‘The Big Short’ highlighted some of those investment managers who were able to generate returns for their clients despite the market environment. NZ Funds launched its Credit Opportunities Portfolio which generated a return in excess of 100%.
We believe those opportunities exist now. NZ Funds, together with our global partners, have established a Global Themes Portfolio to take advantage of mispriced securities. We are committed to finding opportunities which will generate returns for our clients regardless of what the market does. This is an exciting development and we have already deployed capital. Clients can expect 5 - 10% of their growth portfolios invested in these opportunities.
The two sides of downside mitigation
We successfully mitigated around 45% of the market drawdown year-to-date. While some of our competitors may have been able to mitigate more than NZ Funds, it’s important to compare apples with apples. We were able to mitigate the downside while having 100% of our portfolios invested in growth assets. This compares to many of our competitors who as a rule only have around 75% invested in growth assets.
This is important. It means NZ Funds will fully participate when the market rebounds. As we witnessed at the end of March, this can be as fast and as violent as the selloff. Our aim is to return clients capital to pre-crisis levels faster than our competitors.
We retain options to mitigate further bad news. Downside mitigation cannot be switched on and off depending on when you think there might be a drawdown. In fact, the signals pointing to the current market correction were limited given the ‘sudden stop’, external cause of the crisis.
It is worth noting that a balanced fund with 50% income and 50% growth assets did not stabilise the downturn to the extent that many expected. This means bond prices also fell as concerns over credit increased. While bonds will remain a crucial part of our clients’ portfolios, in times of stress we become more reliant on our downside mitigation manager, Universa, which is up over 700% since the crisis began.
As we have written before - as guardians of your retirement savings - if we were to wait until a vaccine is developed, the market may have already increased beyond its previous highs. Markets do not wait for the all clear signal and with support from governments across the globe, we are confident we are well positioned for the future.
Be kind. Stay home. Stay safe. Save lives.
Source: NZ Funds, Bloomberg, Wall Street Journal 28 March 2020.
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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