Important bulletin from KMG Investment Committee 30th March 2020
Please note the conclusion which is relevant to your portfolio
Our Investment Committee will be meeting every other week for the foreseeable future as the virus crisis evolves.
The following graph shows how well KMG’s funds have performed relative to market indices. Clearly nobody’s performance has been great in the short term, but over a medium term of 12 months it shows that our asset values have remained strong. Against a backdrop where many asset managers have produced poor performance our globalised, thinly spread, diversified portfolios have given us a defensive edge and allowed us to perform much better than the market and many in our peer group.
As always, KMG is keen to look forward and therefore our meeting concentrated on the future.
Two of our client representatives on the Committee gave some interesting insights into some opportunities that exist. The first is in the development of online mental health support, and the second came from the advertising industry which we expect to evolve and develop beyond our wildest expectations, especially as there will be a dramatic fight for market share when the crisis abates.
Julian Jessop, whom many of you will have met at our seminars, gave us a very useful insight into how debt may have to be forgiven. As an example, airlines will probably ask government to write off their debt and at the same time there is the (although unlikely) possibility for “Covid-19 bonds” to be issued by governments, paid for by central banks. This could be a significant tool for reinvigorating the global economy when the virus subsides.
On a more sobering note Andy Heath, our Chief Investment Officer, observed that there is a lot of misinformation in the marketplace and therefore we need to be very careful about over-interpreting information and clinging to positive stories. There will be many false dawns as the world tries to open up and then probably has to close down again, partially or in full.
Working from home presents a host of benefits as well as difficulties, all of which will contribute to enormous social change and create some phenomenal investment opportunities while at the same time destroying many traditional ways in which we have lived our lives. The threats and weaknesses of these new ways of working will take time to filter through but we must be alive to these tremendous challenges and adapt.
The social consequences of the pandemic in terms of isolation and mental health, social disorder, lack of attention to the elderly and sick, and other illnesses such as cancer going unnoticed or untreated could easily overwhelm health services and outnumber the direct virus cases. This makes predicting the outcome of each country’s approach to the pandemic incredibly challenging.
Andy Heath also pointed out some over-sold assets including infrastructure funds, healthcare and essential services corporations. These companies have been over-sold as a consequence of the desperate need for liquidity in certain sectors but once the world settles down these are the sorts of companies that will start to perform as the world moves on to the next phase and a new way of life. We hold many of these assets.
In the short term the challenges for markets are around supply chains. We must keep enough people employed to look after our hospitals and care services, supply food to our shops and energy and water to our houses.
One view of the virus from a client in the pharmaceutical industry (to whom we are grateful for sharing your thoughts) is the speed at which the virus mutates meaning that it is very difficult to get ahead and develop a vaccine. By the same token, the speed at which the virus spreads and infects is also a new phenomenon. At the moment the feeling is that any vaccine is still at least 12 to 18 months away and that any vaccine, like the flu vaccine, will need to be given to the global population year by year as the virus constantly mutates.
The same client agrees with us that the world has no choice but to flatten the curve over the next six months and to develop ventilators, drugs and treatment that can help people through. These will buy time and help to keep as many people alive as possible. By mid-summer there may be test kits for everybody to find out whether they have had the virus, currently carry the virus or still need to be infected. This will make it much easier to decide who can go back into the workplace and how we can start to unravel the lockdown.
There are no solutions now, but we felt you should be aware of all of the discussions that we are considering in relation to managing our investment portfolios. Sadly, we suspect that the oil-price falling towards $10 a barrel may be brilliant news for economic recovery in the long term but terrible news for climate change. By the same token, relaxation of isolation rules may be taken too complacently thus leading to another epidemic and isolation period.
For those of you infuriated by Donald Trump remember that he is the representative of the gloriously stupid, ignorant and those living in denial. At least by listening to Trump we can learn what these people think and how they are likely to act. The world can therefore work towards managing human ignorance to cope with the crisis more quickly.
We are coming to the conclusion that the pandemic may last significantly longer than anticipated and with so many unknown outcomes to factor in we are becoming less positive about the future trajectory of the global economy. Testing the population of the world is going to be unbelievably challenging and until this gets a long way down the road it will be virtually impossible for society to move back to any sort of normality without the death rate increasing dramatically.
The next challenge is the development of medicines and ventilators which will help patients get through the virus and survive. At the moment the supply chains and information around this key component are extremely vague.
The unintended consequences of isolation and lockdown are yet to manifest themselves, but we are beginning to worry about the possibility that a significantly larger proportion of the global population will be affected as a consequence of the lock down, rather than the virus itself; and this is likely to create extremely challenging social consequences on the world as a whole.
Markets have risen in recent days on the back of massive fiscal stimulus from central banks around the world and from major governments, but this does not hide the fact that you can print as much money as you like and you can relieve people of as much debt as you can, but in the end if there simply is not the humanity, airlines or infrastructure to keep the supply chains running then the consequences will start to manifest themselves. Just look at the incompetent way in which we have not been able to predict or manage the supply of ventilators around the world.
In conclusion, and taking on board so much uncertainty, we have decided to capture some of the recent recovery in markets for several reasons:
First, to ensure we can cover up to two years’ income for those who need to draw on their funds.
Second, to create liquidity for those who may need to call on funds for unforeseen emergencies.
Third, to reduce volatility in the portfolio.
Fourth, to create cash for buying opportunities if (and probably when) markets fall again.
We are therefore moving 10% of the portfolio to cash so that we can remain fully invested through the crisis even if the pandemic takes two years to unravel. This will allow you to have enough cash within the portfolio to meet income or capital needs without worry. We feel this is a practical way to create peace of mind for us all in times of extreme uncertainty.
Time is of the essence as things change daily. With our discretionary mandate we will implement this change as soon as practically possible with the various platforms.
Should you wish to discuss any of the above points, as always, please do not hesitate to contact us.
The KMG Team