WealthCo March 14th, 2020
Although WealthCo portfolios have been designed to diversify beyond the public equity markets we are not fully immune to what is happening in global stock markets as a result of the spread of the COVID-19 virus. With 30-35% of our client’s allocations directed to stocks traded on public markets it is more important than ever to asses both the risks and opportunities this event presents.
A decline of greater than 20% from the high is technically referred to as a “bear market”. The last bear market was between 2008 and 2009 lasting almost a year. However, as we all know now, that was a structural bear market caused by fundamental issues within the markets relating to how credit rating agencies measured risk, how banks were capitalized, and was ultimately precipitated by a real estate collapse. The current sell-off, by contrast, is based on uncertainty, is demand-driven, and fuelled largely by fear. This fear provides opportunities for those who can deploy capital “cash” in a strategic manner.
Our public equity portfolio managers entered March with somewhat higher than normal cash weights across all our portfolios (or pools). Their portfolio construction is a fundamental bottom up analysis of individual public companies. Their cash weight is a function of their belief that the valuations of many of their target companies were slightly higher than optimal. Cash provides “dry powder” at moments when the market’s fear-versus-greed arrow cranks into the red (fear). As the downturn has progressed, they have been opportunistically adding to existing positions.
With a well-thought-out and coordinated public health response, governments can intervene to “flatten the curve” and lessen the burden on global health care systems. Countries and citizens will soldier through the coronavirus Covid-19 threat, and as the scope of health risks are better understood and eventually brought to heel, the stimulus injected by governments may spur the recovery on the other side of this crisis. Examples of economic stimulus include the US Federal Reserve’s emergency inter-meeting 50 bps cut to interest rates, and injection of more than $1.5 trillion of temporary liquidity into Wall Street.
The wounds to the oil industry will take longer to heal. Fortunately, our portfolios tend to be very “carbon light”. We will persist in applying the same diversification strategy across our entire portfolio that has assisted us in weathering this storm better than many others who had a much higher exposure to the public equity markets. While we respect (and share in) the financial burdens, inconvenience, and physical risks the current crisis brings, we will look for opportunities in capital markets surfaced by this fear-based dislocation.
We believe that volatility in the capital markets will continue to be the theme for the remainder of 2020 but patience and a strategic approach will lead to opportunities and long term positive results.
WealthCo Asset Management utilizes the pooled investable assets of our client base to make singular investments in opportunities not traditionally accessible to the general public. By providing access to opportunities once out of reach for individual investors, we have evened the playing field with the institutions that have capitalized on the value created through strategic diversification.
In addition to greater access, our investment philosophy broadens strategic diversification across multiple asset classes addressing key concerns for investors, including but not limited to: Cash Flow Management, Interest Rate Mitigation, Legacy Protection, Corporate Tax, Strategies, Personal Tax Strategies, Preservation of Capital, Reduced Volatility.
To learn more about what our Investment Philosophy can do to help reach your goals and objectives please feel free to give us a shout - we're always open to the conversation.