In stormy conditions experience counts

QuayStreet Asset Management, 17 April 2020

‘Don’t panic’ has been the Government’s catch-cry when it comes to supermarket shopping, and the same motto should apply to investment despite the havoc being wreaked on financial markets by the COVID-19 pandemic.

Investment Manager for QuayStreet Asset Management, Andrew South says that if investors are in a fund with the right level of risk for the long haul, then switching in a panic could mean that they act at the wrong time.

However, Andrew says the decline in sharemarkets may have prompted investors to reflect on whether they are in the ‘right product’ or ‘right fund’ and whether their risk tolerance was appropriate in the first place. All of which highlights the need for good advice. “Always seek advice if you don’t know what you’re doing, that’s the golden rule of investing.”

QuayStreet’s Investment Manager for International Equities, James Ring has been through five major market meltdown events in his long career and says “this would be the biggest” because of its reach into every aspect of the global economy.

Despite the turmoil, James says that the banking system “is fine” thanks to concerted efforts by the world’s central banks and governments to quickly understand the magnitude of the problem and provide immediate monetary and fiscal stimulus.

Indeed, James points out that the US Government’s US$2 trillion dollar stimulus package was “way bigger” than President Roosevelt’s ‘New Deal’ package in the 1930s, and he gives the Federal Reserve “ten out of ten” for the understanding and speed of its response.

“What makes this one different” says James, “is that the end point is unknown. Many service sector businesses with low margin, high cash flow and few assets are “suddenly under pressure. If the economic lockdown continues, they have no staying power.”

The real question is “how long”, which is why Andrew says the QuayStreet investment team is constantly looking for robust and sustainable business models. Right now, the focus is on company balance sheets in terms of serviceability of loans, earnings projections, dividend payments and market pricing to determine which businesses will come through the other side. “We’re sticking to our strategy in that good business models need only apply to get into our funds”.

We’re sticking to our strategy in that good business models need only apply to get into our funds

Heading into the crisis, QuayStreet had taken a relatively defensive cashed-up approach to the markets says James. “We felt that the world was slowing down and vulnerable to a shock – so the shock’s arrived.” In addition to being more cautious on valuations compared to some other fund managers, Andrew adds that having a skew towards international equities - and being unhedged has provided a “big cushion” for the balanced and international funds in New Zealand dollar terms.

The increased volatility in financial markets also highlights the ongoing need for active and nimble management in uncertain times, says Andrew. “We’re obviously looking at the market every day and you need someone to actively navigate their way through these market conditions - that’s the key to active management.”

You need someone to actively navigate their way through these market conditions - that’s the key to active management.

With a wealth of experience behind them which precedes the 1987 crash, James says that QuayStreet typically adopts a relatively conservative approach and doesn’t tend to turn over assets that often. “Most of our exposure is to large, well-diversified companies that have the ability to weather these sorts of storms.” Nevertheless, he says “we’re very quick to respond to significant changes and will act with speed when we believe we should.” Having a strong international focus is another strength. “Everybody in our team thinks about and looks at what’s happening around the world and that’s an enormous benefit right now.”

We’re very quick to respond to significant changes and will act with speed when we believe we should.

While the future is largely unknown, the QuayStreet team are already looking ahead, after all says Andrew, “markets do have shakeouts during times like this. It’s about capital preservation today and finding new opportunities for the next up-cycle”. And while James says that often you can only act as things unfold, “our competitive advantage is looking out two or three years and pre-empting the market.”

Diversification is as always critical. Andrew says that QuayStreet’s range of ten funds offers something for everyone and now is the perfect time for investors to reassess the ‘age and stage’ of their portfolios. “It’s only when you get market movements like this that exacerbate your risk tolerance that you suddenly realise that you’re not in the right fund, so we can’t stress the need to seek advice enough.”

The responsibility of nurturing the life savings of baby boomers and “KiwiSavers” isn’t lost on James. “We have an extremely privileged role that we undertake where we’re looking after people’s savings. We believe our experience of past downturns is vital in times like these.”

All you need to know about QuayStreet

QuayStreet Funds can be used as a standalone investment or in combination with other investments. Investing in the funds is easy. You can invest as little as $100 per month or $1,000 as a lump sum and the options are many.

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