A lot has been said about the risks doctors and other health care professionals have faced to help combat the spread of coronavirus (COVID-19) – and rightfully so. In an effort to alleviate some of the uncertainties that may be occupying your minds, we wanted to tell you how we've been managing your portfolios in the wake of the outbreak.
You have seen what has happened to stock markets around the world and it's understandable that you may be concerned — we strongly encourage you leave the market concerns to us. We deeply appreciate your confidence and we take the responsibility of managing your hard-earned assets very seriously.
There are a number of actions we've taken on your behalf.
In this blog post, I'd like to talk about some of the headwinds facing capital markets and some of the steps we've taken to strengthen your portfolios during this tumultuous time.
The spread of COVID-19 created uncertainty for equity markets
The bad news is that equity markets have fallen since February 19, experiencing the fastest and deepest drop recorded in market history. Fixed income returns have been moderately negative over the same time period. That said, bonds have done their job, as expected, to reduce overall portfolio volatility by not declining nearly as much as stocks.
As the global business cycle was showing signs of stabilization prior to the market decline, we were initially positioned for accelerating economic growth. We were positioned with some additional equity risk, but not so much as to reduce your chances of achieving your financial goals should markets collapse. We have since moved swiftly to shift portfolios and individual funds to a more defensive position.
Adjusting for the latest conditions
At the end of 2019, we were slightly overweight equities overall. We have since reduced that allocation and are now more than 7% underweight equities relative to the benchmark in one of our balanced portfolios, which under normal circumstances, has a long-term, strategic asset allocation of 63% equities and 37% fixed income and cash.
Our current underweight to equities is close to the position we held during the 2008-2009 financial crisis where we aimed for a 10% reduction in equities overall (which successfully protected client value in our managed portfolios). It's interesting to note that most of the team members involved in implementing that decision are the same people responsible for the active decisions we've made recently.
These movements did not happen overnight. We have taken quick but measured steps at every junction, taking into account all the latest information, to bring us to our current positioning. Since the end of February, we've been taking concrete steps to help shelter your portfolio and position it to weather a global economic recession.
We have materially reduced our stock exposure in portfolios by increasing our cash and bond holdings. In some of our stock-based funds, we've increased the amount of cash that we hold. In others, we've moved into more stable, consumer-staples holdings, like Costco Wholesale Corporation, which are more likely to maintain their value, even during a market downturn.
For more information about our previous updates, here are some of our earlier posts:
- Containing coronavirus: Short-term market conditions have changed (Published February 28)
- Market update: Oil price shock and continuing coronavirus uncertainty (Published March 10)
- Soothing the economic impact of COVID-19: Coordinated central bank policy and more (Published March 18)
Since we've published those portfolio updates, we have additionally assessed all of our actively managed funds to look at how they might perform facing further market declines. Where we were not satisfied that the long-term strategy was enough to preserve capital, we have modified our positioning to ensure greater performance in a declining market. All told, we believe we have repositioned our active funds, including our liquid alternative funds, to be more defensive than would be typical, under more normal circumstances.
Analyzing the signs
Going forward, we expect to see additional significant government policies created in response to the ongoing situation. Such efforts are already underway. Around the world, both monetary and fiscal policy (central bank policy and government spending) are heavily supporting the economy.
Oil prices remain an uncertainty after the Organization of the Petroleum Exporting Countries (OPEC) failed to come to an agreement with Russian producers to continue production cuts. Starting in April, Saudi Arabia and other OPEC nations will have no production limits. Both Russia and Saudi Arabia have vowed to increase production and lower selling prices in the coming month.
Our research also shows us that conditions in bank funding and credit markets have weakened, despite aggressive moves by the U.S. Federal Reserve and other central banks globally to prop up liquidity.
Furthermore, economic data out of China shows that the initial impact from extreme policy decisions made there were greater than thought, with retail sales and industrial production contracting much more than anticipated.
As a result, we are watching the following more closely:
- Policy reactions, including monetary and fiscal stimulus, travel bans and customs restrictions.
- High frequency market and economic data, including credit spreads, U.S. yields, exchange rates, commodities prices, consumer sentiment, purchasing managers indices, world airline and tourism volume, and supply chain impacts.
- Company earnings, labour markets, gross domestic product forecasts and revisions.
Against this backdrop, we are assessing recession risk, region by region. We look at the impact each element is having on equities, bonds and on currencies. We are also always carefully analyzing risks and our portfolio allocations. This is what led us to further reduce our target for equities and increase our allocation to safer, fixed income securities in your portfolios.
It may take considerable time for stimulus to result in sustainable, better results for investors, but we do believe that stimulus is in place for a global economic recovery – the bad days will not last forever. We expect that asset prices will recover when the fear of COVID-19 subsides. Our sub-advisor partners even tell us that the indiscriminate selling in equity markets as of late, has provided them with a number of opportunities to acquire excellent companies at bargain prices.
In their words: “We have acted resolutely where the investment rationale of a holding has been compromised, but also seized the opportunity to add to positions or acquire new ones when they satisfy our stringent investment criteria."
As you work hard to protect and care for Canadians across the country, we are working hard to manage your assets so you can still achieve your long-term financial goals. We hope this provides you with some comfort during these challenging times. As always, we will continue to assess the current situation and outlook and make any necessary adjustments if needed.
If you would like to discuss current events, your portfolio, or just want to touch base, please reach out to your MD Advisor*. They would be happy to hear from you.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).