In Business Environment

The last month has been one of the most dramatic in recent market history, and looks to be the precursor to extremely difficult health and economic conditions for quite some time. There has been a flood of breaking news, dire predictions, and experts who contradict each other. I normally spend most of my day monitoring markets and reading research, trying to proactively assess risk and opportunity, and adjust portfolios appropriately. However developments are worrying, and you will no doubt already be reading and watching material that adds to your stress and uncertainty. I want to outline how we are working hard to mitigate developing risks, and what we can do to reduce anxiety.

Without being dramatic, it is clear that the focus now needs to be on reducing risk, clear thinking, and protecting what we have. This is what we are doing to adapt our portfolio management:

  • Raising more cash
  • Diversifying even more
  • Reviewing our assumptions
  • Modelling alternative scenarios
  • Erring on the side of caution

As the threat of the Coronavirus increases and society is forced to manage contagion, both socially and economically, it is important to provide insight into how our business is adapted to cater to your needs:

  • Virtual offices
  • Staff health
  • Enhanced communications

Raising more cash

At times of market dislocations, liquidity becomes a problem. While we have been relatively conservative in our overall portfolio positioning, we plan to raise a further 10% cash in all our clients portfolios. In addition, we will de-risk this cash across multiple money market funds and bank accounts. We can do the former, but suggest that you do the latter, to protect against technical or sentiment issues that lead to specific product provider issues.

The reasons not to stampede for cash entirely are:

  • Markets locally and abroad have fallen between 20-30% over the last month, which normally suggests a rebound of 25% over the next 12 months, and a 3 year annualised return of 16%
  • Strategic asset allocation is set to match your financial situation, risk tolerance, and long-term asset class returns. These do not materially change from year to year, and it pays to stick to a fundamentally sound process. However risk perception is extremely variable, especially now as we are all able to access the latest virus stats, political announcements, and mushrooming industry of virology experts.
  • Our process allows for a standard tactical adjustment for 5%, 10%, or 15% from Strategic Asset Allocation, depending upon the financial situation, risk tolerance, and medium term expected returns of each client.
    • 5% for less financially independent clients, with less capacity to withstand a tactical mistake i.e. sell to de-risk as equity markets bounce 15-25%
    • 15% for clients with a more secure financial position, and the market experience to appreciate the risks, and be prepared to take on timing risk

Diversifying more

Our approach has always been based upon well diversified portfolios, populated with sensible fund managers and well run companies. In normal markets, I think our asset and manager selection is capable of handling fairly volatile conditions, with sensible risk and opportunity decisions devolved to smart people. These are not normal market reactions, and the chance that the depth and extent of this sell-off is too high to merely sit it out.

We have balanced and flexible funds as the core of every portfolio, because this provides the ability to change asset allocation considerably within individual funds, and across the collective as a result, without tax consequences.  All our fund managers have shown an ability to proactively reduce risk, and take opportunities when they arise over meaningful time frames, and we monitor their positions to ensure that they remain true to form. Where we see behavioural aberrations, we will reduce or withdraw capital.

Over the last year we have increased cash holdings, maintained a well-diversified spread of managers and strategies, and tactically switched to reduce exposure from funds that we perceive to pose elevated risk in uncertain times.

Reviewing our assumptions

We pay close attention to valuation and expected returns, as calculated by various fundamental-based models, market pricing, and strategy pieces from large institutions. At the start of the year, the consensus was for moderate global GDP growth, buoyed by USA and China, with equity markets managing to deliver reasonable returns, despite a slowdown in earnings and the potential for multiple contraction. Clearly these expectations have changed.

We were positioned for a less positive environment, but need to review all our assumptions to identify where we might still be too sanguine about specific risks, and in a worst case scenario, exposed to extreme risk.

We are looking specifically at credit, debt, and liquidity within fixed income, companies, and funds. As always, it pays to look at multiple scenarios, and apply sensible probabilities to outcomes.

Modelling scenarios

We have access to historical precedent during various crisis via Bloomberg and other systems, as well as experience in the markets during my career over the last 30 years. All market disruptions are different, and its impossible to predict pathways and timelines accurately, but there are certain aspects that are consistent:

  • Prices react fairly quickly, and discount a normal outcome
  • Investors react differently, as they have different capacity to sit through drawdowns, or correctly identify opportunity
  • Panic can lead to mispricing, illiquidity, and unexpected regulatory responses
  • It pays to overweight risk

Erring on the side of caution

What matters during unusual market conditions is the return OF capital, rather than the return ON capital, and liquidity when you need it. A move towards the vanilla, in terms of markets, institutions, and companies, is far better than excitedly being greedy when others are fearful. I have been in the markets for 30 years, and know of very few successful investors who are not emotionally impacted by negative news and prices, resulting in a strong desire to exit indiscriminately. Absolute performance becomes more important now i.e. limiting losses, rather than relative performance i.e. losing less than the index. Cash may not compete with equity and bonds or inflation over the long term, but it smooths portfolio fluctuations, and provides the sustainability to emerge relatively unscathed when markets recover

Clan Capital

Working from home

As of last week, Zubeida is based in her home office, isolating with her family. I am working from our offices at our home. Both families have implemented significant lifestyle changes to create a secure and sustainable home/office environment, and are in a position to operate efficiently within changing circumstances.

We have always been able to operate remotely and independently:

  • Secure network, with cloud based resources, disaster plans, and integrated communications
  • Platform access and market data via Bloomberg and other systems enables us to monitor and respond to market developments or client requirements wherever we find ourselves
  • Whilst we have our own individual contact details e.g. email and cell phone, we have attempted to communicate with all clients via our shared email info@clancapital.com as this enables both of us to be aware of client needs and progress. Please try and utilise this email address, but phone Zubeida on her cell, as I am now the receptionist in a 1 person office

Staff health

We are serious about social distancing, washing hands, cleaning surfaces, and making sure we are not responsible for inadvertently passing on the virus to our clients

  • Both Zubeida and our family sent domestic staff home, with full pay and additional food & medical support
  • Prepared for lockdown regulations
  • Instituted family health disciplines, including sanitisation, building immunity through healthy eating and vitamins, and digital family socialising

Enhanced communications

As this situation develops, we plan to provide a lot more insight into how we go about our business, what we are focused on, and what we are thinking. We simultaneously need to take health recommendations seriously, and adapt how we communicate. This message is being sent by individual email, but for many of our communications we will utilise Mailchimp to reach our clients more efficiently, and enable you to decide what type of communications resonate, and what is adding to noise without value to you.

In addition, we will ramp up posting and information via the various communication platforms we run to provide slightly different levels of detail. These include:

I am in the process of developing a schedule for regular content which explains our process, our thinking, and market developments. As you will see, much of our social media platforms have been very quiet, but this will change to deal with isolation. Please sign up, or contact me if you need assistance.

Finally

I would like to thank you for placing your trust in our decision making, and ability to protect your capital. It has not been a comfortable few weeks, despite being prepared for market weakness, as prices have moved very quickly, and the extent of the virus contagion and economic impact leads to a massive range of potential outcomes and difficulties.  

I am in the process of providing a personalised report to all our clients, with an update on performance, positioning, potential risk, and actions to be taken. I would appreciate you using info@clancapital.com if you have a strong desire to materially reduce your exposure or be on the lookout for investing into weakness, as I am loathe to take material positioning changes outside the parameter I outlined above.

In the meantime, the things that you can control are:

  • Social distancing, sanitisation, securing specific medical requirements, and basic food supplies
  • Reviewing your discretionary spending, debt levels, and liquidity requirements
  • Trying to build a news and social interaction that provides credible information regarding the virus and markets, connecting with family and friends, and making space for positive news and people in your day

We would like to review each client in terms of:

  • 12 month cash flow requirements, so that we can ensure liquidity and diversification of that liquidity
  • Risk tolerance and tactical asset allocation parameters, so that we implement exposure changes within expectations
  • Medical precautions including medical aid, hospital plans, life and disability insurance, wills and beneficiaries
    • Its important to note that we refer clients to external parties for specific expertise such as legal and insurance
  • Communications preferences

Please look after yourselves, and do as much as you can to help others avoid the virus and get through these tough times

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