Editor’s note: We’ve asked a group of the region’s leading wealth managers to respond to this question: “The coronavirus has led to the first bear market in more than a decade with widespread uncertainty remaining. How are you positioning client portfolios in this fraught environment?” In today’s online feature, a group of advisors give a preview to the main feature, which will appear in the upcoming Summer issue.
Tony Muhlenkamp, Muhlenkamp and Company
As I remind my daughters, life is always fraught with uncertainty. As professional investors we exploit uncertainty to benefit our clients. As value investors we know you can turn a good company into a bad investment if you pay too much for it (just as you can turn a good house, a good car, etc., into a bad purchase if you pay too much for it) so we are always looking to buy growing, profitable companies for less (hopefully much less) than they are worth. We only get the chance to do that when prices come down, and we only get the chance to buy good companies CHEAP when prices come down a LOT. Which is the very definition of a bear market and exactly what is happening today. This is also the first bear market my children’s generation has seen, which makes it even harder for them to know what to do.
Baron Rothschild, a 19th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.” Things aren’t quite that bad, but that seems to be the current mindset and attitude; so, we are buying more than we are selling in our clients’ portfolios. Rather than selling stocks to raise cash we are using cash to buy stocks. We are positioning our clients’ portfolios to benefit from long-term corporate profitability by taking advantage of short-term price collapse.
Bob Kopf, Smithfield Trust Company
Doug Heuck has always enjoyed my references to Elmer Fudd in assessing financial questions, and I have no intention of disappointing Doug here. You may recall that the illustrious Mr. Fudd, in hunting for “wabbits,” advised his fellow hunters “to be very, very careful out there.”
In the hunt for investment returns, you should, in the midst of the coronavirus debacle, not allow Elmer’s cautionary advice to create paralysis. Instead, adopt (or adhere to) a sound and thoughtful asset allocation plan and then boldly rebalance to that plan, even if the rebalancing calls for more appetite for equities. If your Fudd-like tendencies restrain you, at least rebalance gradually on a systematic and unemotional basis. I am sorry, Elmer, and may all of you have the best of successes in hunting positive long-term investment returns in the face of a highly unusual financial crisis.
Jack D. Kraus, Allegheny Financial
The bigger question is how portfolios were positioned leading into this crisis. You want to build your shelter from the storm before the storm hits, not during. Did clients have enough cash reserves? Did they have four years of potential cash flow needs from the portfolio invested in non-equity positions? Were their bond portfolios high quality and not just filled with credit risk making them more equity-like? Were their equity portfolios well-diversified?
Assuming the answer to the above is yes, then you want to stick to the game plan. Keep the portfolio at target allocations. The discipline of staying at the target allocation forces one to sell higher and buy lower. You will never sell at the top and buy at the bottom, so rebalance along the way. Take advantage of tax-loss selling if appropriate. Stay diversified and do not move into what has held up better or avoid what has gone down more. Do not invest with a rear-view mirror mentality.
Henry S. Beukema III, Guyasuta Investment Advisors
Historical bear markets last, on average, approximately 20 months and result in losses of over 36 percent. The current pandemic bear market has a wider range of uncertainties and outcomes. While the U.S. Federal Government and Federal Reserve have taken unprecedented steps to support the economy, there are currently 26 million people unemployed versus approximately 15 million in the 2009 Financial Crisis. In this environment, equity investors should focus on owning high quality companies that generate sustainable cash flow and earnings, have low levels of debt on their balance sheets, have durable competitive advantages and are well managed. Companies that have these factors can help preserve and protect capital but importantly can also increase their earnings and cash flow as the economy recovers. To add ballast given the high market volatility and economic uncertainty, investors should carry higher cash levels in their portfolios. In addition, cash allows investors to take advantage of down markets and opportunistically add high quality equities to their portfolios.
David Root, DBR & Co.
Fortunately, we advised many of our clients to increase their cash positions prior to the crisis. Our process became more defensive beginning in late 2018 when we saw both economic growth and inflation slowing among other economic factors.
Regarding the current environment, we’ve gone from the euphoria of all-time highs, to the despair of a bear market with 30 percent losses in 30 days. If you find yourself wanting to make significant changes now in the midst of all this, you will be making the wrong move, especially in light of unprecedented Federal Reserve intervention. The stock market is still highly volatile. That said, we are putting together our shopping list of sectors hit hardest where there is opportunity such as staples and small cap value stocks. We are also taking a closer look at fallen angels such as investment grade credit and bonds. These have dropped a level, but still offer higher yields right now and are certainly not considered as junk bonds. That part of fixed income is looking more attractive right now.