It has been a tough few weeks in the investment markets, with lots of excited commentators predicting doom and gloom. Year to date, the wider equity markets are down around 16%. Our active approach to managing the CareSaver Funds has resulted in our Growth Fund down just 2.1%, our Balanced Fund down 1.1% and our Conservative Fund up 1.5% over the same period. This is a significantly better outcome than both markets, and other KiwiSaver schemes. We have also outperformed others since our inception date (31st July), see chart below.
The coronavirus issue has been unsettling markets for over a month, but what does it really mean for investors? Investors don’t like uncertainty, and that is what the coronavirus is bringing. How bad will it get? How many people will be affected? Will an effective vaccine or treatment appear? How will the global economy be affected? What will this mean for the companies we invest in?
The World Health Organisation has declared the current crisis a pandemic. This means different things to different people, but essentially it means the infection can spread easily from person to person in multiple regions, without an effective means of control. It does not imply how severe the outcome for individuals are, but we already assume that around 2% of those infected will die, and that older people are much more at risk than younger.
Markets care about the pandemic because of the effect it will have on economic growth, and in turn on the profitability of companies. No-one really knows the answer to this yet, but it is safe to assume that in the near term, growth and profitability will be significantly lower. It is very sensible for an active manager (like us) to reduce our investments as markets are falling.
But there are some things that we do know. Despite the short-term risks, investing for your retirement is a long-term game, and market corrections are always followed by market gains, even if we don’t know exactly when those corrections will end. Active managers who respond to crises effectively will give their investors superior returns. Having money put aside to invest when markets fall, really will give you superior returns, as the cash we hold can be reinvested in the market at lower levels.
So what have we been doing at CareSaver to manage these coronavirus risks? A few things:
First, we invest in ethical companies – these have proven in the past to have less downside than the wider market. For instance, we have no fossil fuel companies, which is by far the worst-performing stock market sector this year (down 44% year to date, while the broader market is down 16% year to date.)
Second, we have a defensive bias to our portfolio with investments in real estate companies and utility companies (these usually go down less in falling markets).
Third, we have cash put aside – we will re-invest this when we have a better understanding of what the coronavirus might lead to. For example, in past outbreaks (like SARS), the market usually starts to recover once the growth rate in new cases peaks. This appears to have happened in China, though outside China we still appear to be in the exponential growth phase.
Fourth, we use our currency positioning to protect our assets. When markets are under stress, the NZ dollar usually falls in price, which improves the value of our foreign assets.
This is what active managers do. We’re an ethical active manager which means we do all that, and choose better companies to start with.
Don’t stress, stay invested.