How we’re investing right now

Focusing on the knowable

At Morningstar Investment Management, we talk a lot about what’s knowable and unknowable, important and unimportant. Right now, COVID-19 and its effects on global markets are superlatively important and unknowable. We could spend a lot of time and effort attempting to forecast or predict what might happen. But, instead, we like to focus on what we do know – what is knowable.  

While we don’t know when markets will regain their highs, when vaccines will be found or when the infection curve will have sufficiently flattened; we do know that over the long term, we’ll find that companies and consumers will behave similarly to how they have in the past.

The effects of volatility on recent portfolio performance

While we have experienced temporary losses, this is to be expected from time to time of any portfolio that invests in equities. Importantly, because of our portfolio positioning, these losses haven’t been crystallised – in fact, we’ve been able to add to our most favoured positions.

We’ve held strong in our view over the past few years that markets have been overvalued, with few compelling investment opportunities. In doing so, we held more cash leading into the downturn. As a result, our portfolios fell broadly less than other multi-asset portfolios and dramatically less than the Australian share market. We were able to do so by heeding Warren Buffett’s advice to be fearful when others are greedy – meaning we spent the last several years of the bull market acting cautiously and working to preserve investors’ capital.

Portfolio changes: A shift from capital preservation to return generation

The second part of Buffett’s advice highlights the need to be greedy when others are fearful. At our core, we’re value investors and this recent volatility has created buying opportunities for us, as we see valuations of certain assets becoming more attractive. Indeed, we’re finding assets that we consider to be good value for the first time in many years. Because of our continued focus on capital preservation, we have cash to deploy into these opportunities where the valuations make sense. While capital preservation remains a key part of our investment process, market conditions have changed. In the past, expected returns were poor and the risk of losing money was elevated. We now believe the risk of permanently losing capital is reduced, while the opportunity to invest and position for future returns is, in many cases, more compelling.

The sectors and investments where we see value – those that we believe are appropriately priced – remain much the same as they did prior to this bout of coronavirus-related volatility. We’re still seeing opportunities in the UK, Europe and some emerging market equities, and we believe that US equities are still generally expensive. However, there are sectors within the US equity market that, due to selloffs, have become more attractive, such as US financials and energy.

We’ve increased our equity exposure and reduced cash and defensive assets such as government bonds.  

Talking points: what should you communicate to clients?

Understandably, clients are anxious. Here are the main points to address.

  • Value investing shouldn’t be confused with conservative investing. We’re not conservative investors who are always going to hold lots of cash. When things look expensive, like they have for the past few years, we’ll hold lots of cash to buffer the portfolios during volatile times. But the further markets fall, the more likely we will be to invest that cash in new opportunities. Should markets fall further, we’ll take advantage of the opportunities that arise.
  • We have increased exposure to equities. As value investors, the recent volatility has created buying opportunities for us, as we see the valuations of certain out-of-favour assets becoming more attractively
  • We are not fully invested. While there are many opportunities out there, the calibration of our positions is important. We still have cash to use if we need to. Should markets fall further we’ll take advantage of the opportunities that arise.
  • We’re shifting from capital preservation to taking advantage of opportunities that we now see in the market. As more people become concerned and exit equities, pushing prices lower, we’ll do the opposite and embrace the opportunities they’re presenting.
  • This may result in a few more bumps. But we believe that being able to buy long-term investments at attractive prices will keep our investors on course to achieving their financial goals.

“It’s not that we like pessimism, it’s that we like the share prices that pessimism brings.” – Warren Buffett



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