How has the coronavirus affected your day-to-day work?
Clearly from a portfolio perspective, things have been very volatile. And when things are volatile it means that there’s more thinking about where you’re allocating cash flow and where you take cash flows from. You have to be nimbler in terms of your asset allocation. But volatility can create opportunity and therefore you want to be able to move the portfolio to seek out those opportunities and move towards the asset classes that seem to be dislocated and cheaper relative to others. So we’ve been doing a lot of that, more than we probably ever have, in terms of thinking about tilting the portfolios to new opportunities.
What have you been buying/selling?
The first point is that from a risk perspective, we’ve been really trying to diversify the bond portfolio by moving out of the usual suspects like Euro bonds, US treasuries and UK gilts, and into countries like New Zealand, Sweden, Korea. The last thing you want to be is exposed to one single central bank risk in an environment like this.
More recently high yield has started to look more interesting. It’s pretty much the largest spreads that we’ve seen. Clearly, defaults are likely to increase if we have a full on economic shutdown. But we think given the amount of liquidity that’s coming into markets, defaults shouldn’t be as high as the market pricing suggests.
Also we are looking at tilting the portfolio more towards credit as spreads have widened. You’ve got the support from the Federal Reserve really trying to help that corporate bond market which just makes it a little bit more attractive.
> See also: Sterling high yield bond funds survive first coronavirus liquidity test but defaults loom
What has been your biggest contributor to performance since the coronavirus took hold of markets? What has been your biggest detractor?
I think the diversification of the equity portfolio relative to other competitors has been the biggest beneficiary. Our weight to the US is a lot lower because we like to spread across different regions. At first that was really hurting us, but since the downturn started on 19 February, emerging markets have fallen less than developed markets, driven by China. There’s also been huge growth in Japan over the last few days, so having significant parts of our allocation in Japan has really cushioned some of the falls over the period.
In terms of biggest detractor it’s probably the trading we’ve just done – going into high yield. We think it is an opportunity. We went in probably about a week and a half ago, which was maybe a bit too early. But we’re going to continue to add to that position because we do think it’s a sensible way to take risk in this environment particularly when you can benefit from being a liquidity provider in the market.
Do you have any behavioural mechanisms in place for navigating the market volatility?
We have set up some guidelines on what would make us positive on risk:
– Firstly we want to see the reproduction rate (R) of the virus peak. The average R of the of the virus is around 2.6 people. Essentially what countries need to do is get an R below 1 because as soon as each person is infecting less than one person, then the number of cases starts to fall.
– We want to see economic data as being sustainably positive. Obviously this is not realised economic data but high frequency data of what’s happening in the real economy. In China, for example, that could be things like real time data on coal consumption and emissions in the cities.
– And the last point is, we want to see this complete capitulation from the market, and in particular, retail investors really piling out of funds. We have seen that a little bit in the middle of March but I don’t think we got to the point of extreme pessimism and extreme capitulation.
The other thing we do, that I think is really important when you have these events, is ‘prepare don’t predict’. We don’t try to predict exactly what’s going to happen. Instead we’ll assign probabilities to certain things happening and then we’ll look at the portfolios in each of those environments, and adjust them if we’re uncomfortable with the way they perform. This really gets you away from the behavioural bias of putting so much weight on your base case.
What feedback have you had from clients since the coronavirus sell off?
I’ve had a number of client calls and I’ve got more lined up this week. I’m going to do these, what we’re calling, ‘fireside chats’ where we’re going to do a Q&A and really just talk through where we are in portfolios and allow clients to express their concerns.
But honestly, since the falls in markets, I’ve had a number of clients contact me saying they are actually very happy with the way the funds have done and how they’ve performed in line with expectations, if not better than expectations. We have still seen positive flows into our funds so that’s a sign that we’re doing something right.
How does this compare to other market sell offs that you’ve managed money through?
The 2008 global financial crisis was more of a drawn out sell off. It almost went from October 2007 to March 2009. This on the other hand has just been so quick. The magnitude of the sell off probably isn’t that surprising but the speed of it has really meant that investors have really struggled to react.
I think the other big difference here is that central banks and authorities have acted a lot quicker than they did in 2008. Unlike then the central banks are all speaking to each other. The dollar swap lines, for example, that’s a sign of coordinated monetary policy. And also it’s clear that fiscal policy is really important as well in this downturn.
Also, in 2008 there was quite a prolonged period where we were wondering whether the whole banking system was going to collapse. The difference now is banks have got enough cash, they’ve got enough liquidity. It’s just whether we can encourage them to lend it to the businesses that need it the most.
How has coronavirus changed your outlook for inflation and what does this mean for your positioning?
Right now we’re positive overall on medium term inflation. We like to hold index-linked global bonds, especially Tips and indexing bonds in Europe because we do think that all the monetary and fiscal stimulus will eventually be inflationary.
How do you find working remotely during volatile markets?
We’re a really big team and we pride ourselves on having discussions and being able to discuss different asset classes with our experts in-house. And I’ve got to say not having that fluid conversation has taken some adjustment. I think the way to get around that is to not constantly send emails or chat on Skype or Bloomberg. It’s actually picking up the phone and speaking to people because that’s how you get a real insight of what their thinking is.
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What have you enjoyed most about working from home?
I can have breakfast, lunch and dinner with my children and actually have a quality conversation with them.
Recommended reading/shows to binge watch while social distancing?
I’ve been watching a lot of the old Manchester United games because they’ve got a lot of them on repeat. So I’ve been remembering times when Manchester United were good and not as painfully woeful as they are at the moment.
Justin Onuekwusi is head of retail multi-asset funds at Legal & General Investment Management
