Coronavirus Update from Cambridge Partners March 19th 2020
Presented by Richard Austin, Cambridge Partners Managing Partner
Watch Richard’s video presentation below, or read on for a detailed analysis.
These are extraordinary times. It has been just two weeks since we provided our last update, but a lot has changed.
- The World Health Organisation officially declared Coronavirus a ‘pandemic’ on 11 March 2020
- Travel bans have been put in place around the world, schools are being shut and large events cancelled
- Anyone coming to New Zealand, except those from some Pacific Islands, must go into self-isolation for 14 days
- In the US the Federal Reserve cut its overnight rate to between 0% and 0.25%
- Closer to home, the Reserve Bank of NZ has made an emergency cut to the official cash rate this week, from 1.0% to 0.25% (a drop of 0.75%), which will last for at least the next 12 months
Governments in NZ and around the world are putting in place financial packages to help support business. This may help reduce the impact of the slowdown, but it is likely the economic effects of the virus will be widespread for weeks and months to come.
What is happening in markets?
Share markets react to new information and reflect general investor sentiment. As the scale of the effects of the virus have become known, markets have priced in the expected reduction in company earnings and outlook, causing share prices to fall.
As we release this update, the fall in the US S&P 500 from its recent peak in February has been around 30%. While the Dow Jones has fallen 33%. Returns differ depending on each country, but the falls are of a similar magnitude around the world.
It’s fair to say that investor sentiment has turned almost 180 degrees from being very positive at the start of 2020, following nearly 10 years of gains, to one of being fearful and full of uncertainty.
As we know we know markets are driven by both fear and greed, and we are now seeing a high level of fear return to markets.
What effect will the downturn have on my portfolio?
New Zealand is a relatively small economy and as a net exporter, we are exposed to events that happen around the world.
However, our portfolios contain many thousands of underlying investments to ensure we are not overly exposed to any one specific company, sector of the economy or country.
We also have an approach of holding a high proportion of the portfolios in offshore assets. The benefits of this approach are generally two-fold – our clients receive greater country diversification, but also any losses experienced offshore are dampened if the New Zealand dollar falls.
In addition to holding growth assets like shares, our portfolios also hold defensive assets, such as New Zealand and International Fixed Interest. In times like these, the aim of the defensive assets is to reduce the overall effect of the fall in share prices.
For example, a 50/50 portfolio with 50% in growth assets and 50% in defensive assets is down around 13% from the recent peak in February and around 6% over the past 12 months.
Whilst these are significant falls, and no doubt concerning for investors, its less than the 30% fall that equity markets are experiencing.
Should I sell shares and reduce risk?
Share prices react very quickly to new information. A good starting point is to assume that all the information that is currently known about the virus and other events around the world is effectively ‘priced in’.
As new information becomes available – markets react. If the news is negative or worse than previously predicted, markets generally fall, whereas if the news is positive, or not as bad, markets generally rise.
Whilst we cannot predict tomorrow’s news, or events that are yet to happen, we do know that if investors sell in times of market stress such as these, they are much more likely to lose money, than to gain.
Not only have you got to predict the best time to sell, you have to predict the best time to buy. When investors try and do this, or base decisions on the emotions of fear and greed, they sell after markets have fallen, and buy only after markets have gone up. This is a sure fire way to lose money.
As a client of Cambridge Partners, it is also worth remembering the planning process you went through with your adviser, when you initially determined what type of investment strategy was suitable for your needs and objectives.
This strategy was designed knowing that events like this can, and sometimes do, happen. This means if your plans or objectives haven’t changed, your portfolio may still be appropriate for your long-term objectives.
How long will it take for things to recover?
The short answer is that nobody knows.
However, it looks like the next three months could be rough for the global economy, financial markets and investors. It’s likely that we’ll see plenty of profit warnings from companies and some economies in recession.
But at some point, things will get better. In the Northern Hemisphere the summer will arrive, which may take some sting out of the virus and, at some point, a vaccine may emerge.
It’s important to bear in mind that no one waves a flag, or blows a whistle, when the markets hit their peaks or come off their lows. But at some point, markets will recover – and it is normally before we’ve seen hard evidence of the global economy improving.
If we remember the Global Financial Crisis that started in late 2007, the S&P 500 hit its low in March 2009, while the world was still in the depths of recession and investors couldn’t see a way out.
However, six months later the S&P 500 had rallied 53% – anyone who was sitting on the side lines waiting for firm evidence of the improvement, missed out.
The message here is that abandoning your longer-term investment strategy and reacting to your fears, may hurt your portfolio’s overall performance.
Is there anything I should be doing now?
If you are feeling concerned or anxious – that’s OK and perfectly normal. We encourage you to reach out to your adviser.
There is a heightened level of uncertainty and anxiety at present, but what we do know is that, at some point, markets will recover. However, what we don’t know is exactly when.
In interim, there are some practical measures you could consider:
- If you are regular taking money out of your portfolio, then consider reducing the amount you are withdrawing, or suspend withdrawals for the next few months.
- While it may seem perverse, if you are holding cash in your portfolio, the fall in markets, does represent the opportunity to re-balance into growth assets at these lower prices.
- Work with your adviser to review your current investment strategy and objectives against the outlook for your portfolio.
We also encourage you not to let fear drive your decisions and sell after markets have fallen.
It is a difficult time right now, but we know from experience that you’re much more likely to lose money than to gain, if you try and time the low and high points in markets.
How will the virus affect Cambridge Partners?
Last month as part of our Business Continuity Plan we conducted tests on our processes in the event we had an outbreak of Coronavirus in the office. This included how we would communicate with clients and manage the effects within the office, along with maintaining business as usual.
We’re pleased to advise that our tests were successful and with laptops, mobile phones and secure internet connections we are confident that we will be able to continue to operate at close to normal capacity if we are required to work elsewhere.
We are very conscious of all the health warnings and have advised staff to stay at home if they are feeling at all unwell.
Meetings are still being held in the office and we are monitoring the appropriateness of this daily.
We aim to continue to provide updates as the situation develops. But if you have any questions or concerns, please reach out to your adviser or one of the team.
Suddenly Single – Financial Advice for Women in a Life Transition
It is sobering to think that around 80% of women will die single, compared to only 20% from men.
These statistics reinforce the need for any woman who finds themselves unexpectedly in control of their finances – whether by choice or unhappy circumstances – to have access to unbiased, expert and empathetic financial advice.
In this brief video, Cambridge Partners’ financial adviser, Pip Kean, shares some of the issues faced by women who find themselves suddenly single.
A Market Update on the Effects of the Coronavirus
Presented by Richard Austin, Cambridge Partners Managing Partner
Watch Richard’s video presentation, or read on for a detailed analysis.
The world is, as we are, watching with concern the spread of Coronavirus (COVID-19). Uncertainty is being felt around the globe. It is unsettling on a human level as well as from the perspective of how investment markets will respond.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry amongst governments, companies and individuals about the potential impact on the global economy. Earlier this week the OECD predicted that global GDP growth could now be 1.5% in 2020, which was half the rate it was predicting before the outbreak.
But what should you do regarding your investments? As always, we lean into the evidence to determine our advice.
Looking back to recent pandemics, particularly SARS, helps provide context.
There are no definitive timelines for when SARS started and stopped, but broadly speaking the virus was active over an eight month period between November 2002 and July 2003.
It was certainly an unusual time. For anyone travelling overseas in that period, they may recall individual health screening at country borders. At the time travellers felt unsettled, but people continued to go on with their lives. Business and commerce still functioned.
Interestingly, our model portfolios performed well over that eight month period. Despite SARS and increased global uncertainty, our portfolios were up between 4% and 5% after funds management fees. One year after SARS was first observed, our model portfolios were up between 6.8% (for an 20/80 portfolio with 20% in growth assets and 80% in cash & fixed income) and 11.6% (for a 98/2 portfolio with 98% in growth assets and 2% in cash).
If investors had chosen to sell out of their investments, it would most likely have been a poor investment decision, given the subsequent performance of markets.
It may also be worth noting that SARS had a mortality rate of approximately 9.6%. How is this relevant? Well, perhaps it isn’t, but the Coronavirus has a mortality rate currently hovering around 2% and doctors are predicting it will ultimately be less than 1%.
Whether that makes it less scary than SARS might be a moot point, but regardless, markets treated investors well through the SARS outbreak and there is no reason that the same won’t happen through the Coronavirus outbreak as well.
As at February 27th, most of our model portfolios had been only modestly impacted by the increased market volatility experienced. Year to date, the approximate performances of our model portfolios ranged from +0.3% for our lowest risk portfolio (a 20/80 portfolio) to -7.0% for a 98/2 portfolio. For many, a better indicator may be something closer to a balanced 50/50 portfolio which is currently showing a year to date return of -2.0%.
The media are doing their best to paint a picture that markets are crashing, but these sorts of returns, whether Coronavirus was an issue or not, are not out of the ordinary for portfolios containing allocations to higher risk assets.
Of course, SARS hasn’t been the only global health scare to hit the headlines in the last 20 years. The following table highlights a few of the higher profile pandemics in recent history. We have identified an estimated start date for each of these pandemics and then looked at the subsequent performance of a balanced 50/50 model portfolio over the next three months, six months and twelve months.
The results may surprise you…
|Model 50/50 portfolio returns:
After 3 months After 6 months After 12 months
Source: Consilium. A 50/50 Portfolio has 50% allocated to growth assets and 50% allocated to cash and fixed income.
Within the first few months, the performance of markets and portfolios can be mixed. During SARS, which was the first global pandemic to emerge in quite some time, the early reaction of equity markets was quite negative. During the Avian Flu outbreak a few years later, it was relatively flat.
What is even more striking is that markets within six and twelve months from the start of each of these outbreaks, regardless of their perceived severity, generally rebounded strongly.
What will happen in the weeks ahead with respect to the Coronavirus outbreak?
The truth is that no-one knows. Markets today are reflecting heightened uncertainty in the form of lower prices. As soon as there is new information (good or bad) this will also be priced in. When the tone of the news flow gradually changes from contagion to containment, and eventually cure, then market risk and uncertainty should reduce, which is likely to be positive for risky assets.
While this heightened uncertainty may be uncomfortable for investors, don’t be surprised if the Coronavirus can be added to the list of issues that might make an investor think about selling, our general response is that it’s unlikely to be a good idea to sell investments. Although we can’t see into the future, we can observe the past and we have witnessed the best recommendation is to stay focused on the long term and maintain your strategy.
What’s Your Financial Personality?
Russ Alan Prince, one of the world’s most published authors on the topic of private wealth, has put together this list of nine financial personality types.
We all fall into one of these categories, regardless of how much we are worth. But the majority of the seriously rich among us fall into just three of them.
Read through this list of personality types to find out what category you fall into (or ask your nearest and dearest if you dare!). Then see if you can pick which three belong to the super rich – answer at the end of the article.
21 per cent Family Steward: Focus on taking care of the people they love. They care about education, their children becoming hard-working and successful and passing on an inheritance.
17 per cent Phobic: Doesn’t like investing, doesn’t want to learn about it or understand it. They like to delegate and have trust.
13 per cent Independent: Wants financial freedom and flexibility to do what they want, when they want. Money is just a means to this end.
12 per cent Anonymous: Very private people who don’t like sharing their financial position. Confidentiality is everything.
10 per cent Mogul: Enjoys the power, influence and control that money can give.
8 per cent VIP: Enjoys the possessions and social respect that comes from money. Prestige is important.
8 per cent Accumulator: Saves more than they spend, doesn’t show their wealth and might live below their means as money makes them feel more secure.
6 per cent The Gambler: Wants to beat the market and likes the excitement. It’s all about the returns.
5 per cent The Innovator: Likes things that are technically clever, new funds, and trading methods. They veer to complex strategies.
The three personality types you were looking for were family steward, the phobic and the independent. But, more importantly, which personality type were you?
Ten Years On From The GFC – What Have We Learnt?
The GFC (Global Financial Crisis) is widely considered by economists to have been the worst financial crisis since the Great Depression. Its effects were so wide-spread and profound that even Queen Elizabeth, whose personal fortune had fallen by more than $50 million, demanded economists explain why they hadn’t seen the crisis coming.
Around the world blame was distributed far and wide – lax regulations, too much regulation, excessive debt, irresponsible lending, complex financial products, compromised ratings agencies, an over-reliance on mathematical models, and just plain old greed were all cited as culprits.
But aside from a temporary seizure in short-term money markets, global share and bond markets performed as you would expect at a time of heightened uncertainty. Prices adjusted lower as investors demanded a higher expected return for the risk of investing.
And it wasn’t long before the markets started to see a reversal – By the end of 2009, the New Zealand market rebounded by more than 19% after a near 34% decline in 2008. Australia’s S&P/ASX 300 index performed even better, returning to almost the same levels as before the GFC.
Emotions are hard to keep in check during a crisis and there can be an overwhelming compulsion among investors to “do something”. But, as it turned out, those who listened to their advisors and stayed disciplined within the asset allocation designed for them have done considerably better than many people who capitulated and went to cash in 2008−2009.
An investor who had begun investing in the New Zealand market at the start of 2008 would still have experienced a 7.6% annualised return by the end of 2017. Using a global balanced strategy of 60% equity and 40% fixed interest, the return was 5.4%p.a.These results show we can do ourselves a favour, both materially and emotionally, by accepting that volatility is a normal part of investing and by sticking to a well-thought-out investment plan agreed upon in less stressful times.
This blog has been taken from an article by Jim Parker of Dimensional. Read the full story here
Putting the recent market volatility into a longer term context
In the first three weeks of January 2018 alone the S&P 500 crossed ten new record closing highs in 13 days of trading. Then, in February, the index lost all its gains from 2018 in a few days. Over the next 7 months it built up gains again, and then lost all them over the course of three weeks in October. What’s going on?
Let’s remind ourselves how markets work.
Prices went down because some investors decided to sell. But for every seller there is a willing buyer. The aim of the buyer wasn’t to lose money. The buyer bought because they felt that the discounted prices offered them enough return to justify the risk.
Markets bring optimists and pessimists together by finding a price at which they are both willing to trade.
This is our shorthand way of saying at least half the market participants transacting in the last few days thought it was a good time to buy. Not everyone believes the sky is falling, even if the sensational headlines promote such a view.
But what about our investors?
For our clients with a 50/50 portfolio, we recommend a seven-year time horizon at a minimum, and most have a 20 or 30 year time horizon. In other words, any of our investors that are planning to spend money out of their portfolio this year or next year probably have that money sitting in bonds and cash, not in shares.
So, the portion of the portfolio suffering the most from this recent volatility is the portion that an investor has almost no chance of spending or using any time soon. That’s important, because it means that, whilst it’s not particularly comfortable to see volatility like this, it has little practical implication on their portfolio or current lifestyle. For most of our clients, we hope they’d look on this current situation with a level of disinterest.
For clients that are regularly purchasing assets in their portfolios or via KiwiSaver, this is fact a positive development, because they’ll be able to buy more shares with their same regular savings contribution and that will help grow their long-term wealth.
And let’s remember, when we as investors agreed to purchase shares, we accepted this would generally lead to more volatile returns. However, it’s volatility such as this that gives shares their wonderful return characteristics. Without temporary dips such as this most recent one, shares would have the returns of cash – which would not help us reach our financial goals.
Shares are volatile. The chart below shows the quarterly return of a portfolio 98% invested in shares. It goes up and down a lot; there’s no way around it.
The chart below, however, shows the growth of wealth this same portfolio has produced since 1991. While the volatility was uncomfortable, it produced large growth despite the Asian financial crisis, the tech wreck, the Global Financial Crisis and anything else you want to throw into the last 20 years or so.
The critical point to remember in all this is the outcome that long term investors get to experience. It’s that share markets, on average, go up more than they go down, and that consistent exposure to these markets is a key driver of long-term wealth creation.
We know the markets can be volatile in the short term, but this is already factored in to our long-term strategies. The worst decision investors can make is to react to short term volatility in a way that jeopardises the achievement of their long-term plans.
If you are still concerned, we want to talk. Give your adviser a call and we’ll be happy to talk through the recent changes to your portfolio in the context of both your short and longer term goals.
Our thanks to Ben Brinkerhoff from our associate company, Consilium, for this great article.
Now and Then
You are more likely to recognise the stairwell than the person here! That’s because it’s from the set of The Big Bang Theory – one of the longest-running and most popular sitcoms on our screens today. Its Executive Producer Dave Goetsch reflects here on how much his attitude to investing has changed in the last ten years. One of the biggest differences? Finding a good financial adviser.
I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing.
Seeing all the recent headlines about the sudden downturn in the stock market has transported me back to February of 2009, when I was close to despair. It’s striking how different I feel now.
In February 2009, the stock market was down around 50% from its high, and everyone seemed to feel like the sky was falling. I was familiar with this state of panic because my relationship to the financial markets was that I didn’t trust them.
They were always going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it—sinking into a depression, knowing there was nothing I could do.
What a difference nine years make. I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing. I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do. I’ve learned that I can have a great investment experience if I just accept a few simple truths.
I have to understand the uncertainty of the market. The stock market, as measured by the S&P 500 Index, has returned about 10% per year over the last 90 years,1 but there are very few individual years in which it has ever actually returned that amount. In fact, how many of those 90 years do you think the S&P 500 was up more than 20% or down more than 20% for that year? The answer is 40. Astounding, right? I wish somebody had explained that to me decades ago. Then I would have known to look at stock market returns in terms of decades—not years, months, days, or hours. I would understand that so many of those articles and cable news pieces are just noise, designed to keep an audience obsessed and unsettled.
I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing.
In order to be a long-term investor, you have to have a long time horizon. This can be hard to remember when you’re being assaulted by noise, but if you can stay strong, the results are stunning. By results, I don’t mean the investment returns, which hopefully are good. The return I’m talking about is how I feel every day. I worry less—not just about the future, but also about the present. Of course, I know that there are no guarantees when it comes to investing, but I feel like I’m going to be okay. I have a plan.
There’s no way I could’ve done this without a financial advisor. I needed someone who could not just talk me through what my asset allocation should be, but also help me work through how I felt about investing and what exactly I could do to change my perspective.
I was a mess nine years ago. Now, my outlook is totally different. The markets haven’t changed; they still go up and down. The difference is, I don’t anymore.
Thanks to our Associates at Dimensional Fund Advisors for the use of this article.
Many Happy Returns
The holiday season encourages media retrospectives about financial markets. It’s fun to match these up with what people were saying a year before.
In December, 2011, the publication Barron’s told investors to “buckle up”. The consensus prediction of its panel of 10 stock market strategists and investment managers was for the US S&P-500 to end 2012 some 11.5% higher at about 1360.1
“That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway,” the writer said. “Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past.”
There was so much for forecasters to get right – a negotiation of the Euro Zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election and the challenge for emerging economies to sustain high economic growth rates.
Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high and a number of countries that share the single currency are unable to pay their debts. The US presidential election gave way to worries over the so-called “fiscal cliff”, while Chinese exports have been hit by the slowdown elsewhere.
In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron’s panel forecast of the S&P-500 reaching 1360, which the magazine said was ambitious, is now looking conservative. The index was 4% above that level by mid-December. What’s more, some of the strongest performances have been in emerging and frontier markets.
Annualised returns for the past three years of 20 developed and 20 emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in New Zealand dollars.
Among developed markets, three members of the 17-nation Euro Zone – Belgium, Germany and Austria – were among the top performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.
New Zealand was one of the top performers this year driven by better than expected growth and Haier’s bid to purchase Fisher and Paykel. What is perhaps more amazing is that New Zealand has had the highest 3-year returns (9.4%) of any country in the developed world… by a big margin. Further, the United States is number 3 (5.7%), just behind Denmark (5.8%). Show me the media outlet that predicted this?
And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India and China, the real stars in the emerging market space these past three years have been the south-east Asian markets of the Philippines, Thailand and Indonesia.
There a few lessons from this. First, while the ongoing news headlines can be worrying for many people, it’s important to remember that markets are forward looking and absorb new information very quickly. By the time you read about it in the newspaper, the markets have usually gone onto worrying about something else.
Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from what the market has already priced in.2
Third, if you are going to invest via forecasts, you need to realise that it is not just about predicting what will happen around the globe, but it is about predicting correctly how markets will react to those events. That’s a tough challenge for the best of us.
Fourth, you can see there is variation in the market performance of different countries. That’s not surprising given the differences in each market in sectoral composition, economic influences and market dynamics. That variation provides the rationale for diversification – spreading your risk to smooth the performance of your portfolio.
So it’s fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It’s far better to let the market do the worrying for you and diversify around risks you are willing to take.
In the meantime, many happy returns!
By Jim Parker, Vice President – Dimensional & Ben Brinkerhoff, Head of Partner Growth at Consilium NZ Ltd
1. ‘Buckle Up’, Barron’s, Dec 19, 2011
2. Jim Davis, “Economic Growth and Emerging Market Returns“, Dimensional, August 2, 2006