Taking the bear by the horns

QuayStreet Asset Management, 10 June 2020

Finding opportunities in volatile markets

The prospect of negative interest rates for the first time in New Zealand history will likely force many investors to rethink and possibly reset their asset allocations in the wake of the Covid-19 crisis.

“It looks very much like New Zealand is following Japan” says QuayStreet Investment Manager, James Ring, who adds that those who typically roll over 90-Day Bank Bill rates or rely on fixed term bank deposits now face a dilemma because “you're not going to get much joy from bank deposits any time soon.”

While investors have also enjoyed “a free lunch” over the past few years with rising equity, bond and property markets, fellow QuayStreet Investment Manager, Andrew South, says the landscape currently looks completely different.

Those who bought into passive strategies such as index funds, which offered low fees and a market return may want to consider the merits of active portfolio management in the current volatile environment. “It’s a chance for active managers to shine” says Andrew.

One temptation will be to replace money in the bank into equities that are expected to pay stable dividends, but Andrew says you’ve got to be careful moving money into equities. “The caveat is buyer beware, because dividend yield is only part of the total return a company gives you. This strategy obviously has a lot more risk of suffering potential capital losses.”

Andrew adds - “Markets are finely balanced with the pendulum swinging wildly between bearish and bullish outlooks. While bulls are embracing the comfort blanket of fiscal and monetary stimulus, the bears see a huge valley to cross before any form of normality returns. It is that volatility that provides opportunities for active managers. As fund managers, it is our job to navigate through all this noise and to stick to our knitting by owning quality companies that we think have good structural growth, good governance and good balance sheets.”

As Manager of International Equities, James has been casting his eye over global markets for more than three decades and says “what we do, more so than ever, is look around the world and chase productivity.” While New Zealand and Europe have been disappointing on this measure, and a lot of ‘old economy’ companies are suffering, James says current investment opportunities are mainly found in developed markets such as Japan, Israel and of course China, which cannot be considered as an emerging economy anymore. We are focused on companies that produce great products and services and are “facing the right way” in terms of digitisation.

We are looking at Silicon Valley's companies. And the US, whether you love it or hate it, still has most of the best companies.

Likewise, Andrew points to companies with good economic moats in the markets they operate in. “Everything points towards long term growth in those kind of sectors” he says.

Not that QuayStreet is getting ahead of itself. While Governments worldwide are hoping a discovery of a Covid-19 vaccine will allow the world to return to normal, James says “we're not positioning our portfolios for a return to where we were twelve months ago in terms of growth. We're taking a far more measured approach.”

That approach is reflected in the March 2020 FundSource performance survey which recognised that most QuayStreet portfolios were well positioned with high levels of cash going into the downturn. Because the upward cycle had gone on for so long, the investment team anticipated that the world was going into a significant slowdown or some sort of a mild recession “so we were relatively defensive in positions” says James.

Not that QuayStreet’s offering of ten investment products is totally devoid of risk. “We have all bases covered for investors across the risk spectrum and different lifestages” says Andrew, who points out the importance of understanding the lifetime of investing, from the accumulation phase to the spending phase. “We offer products that can provide options across those different phases.”

What’s more, unlike many default providers or core fund managers who have very tight product ranges, Andrew says “we can be more nimble and more flexible in what we're doing which actually makes quite a difference in volatile times, as we have seen in our performance numbers recently.”

And consistent with his long-term view of investment cycles, James is already looking over the horizon to a time when inflation returns. “When that happens is a very big call” he says, “but it's something that we will probably be faced with at some point in the future and that requires a completely different investment portfolio to the ones that are currently being constructing around a more deflationary environment.”

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