Market meltdown
How six KiwiSaver managers coped through coronavirus crisis There were days when the market was 10 per cent down.
Sharemarkets plunged in March as the Covid-19 pandemic spread around the world. They have since bounced back and are edging towards record highs again despite economists predicting a local and global recession. The Herald talked to six KiwiSaver managers about the strategies they used to cope with the drop, how it differed from the Global Financial Crisis and the lessons they learned. Fisher Funds
chief investment officer Frank Jasper
Frank Jasper says the strength, size and velocity of the market sell-off in March caught Fisher a little by surprise. “It was the fastest, 10, 20, 30 per cent sell off in US markets ever.”
Jasper said country-wide lockdowns also meant it differed from a normal economic recession.
“Activity just stopped. It was not your garden variety recession.”
Jasper said its KiwiSaver funds already had a lower level of investment in shares because of its view that equities were expensive. It also went underweight on the Kiwi dollar which helped protect its investments in the riskier environment.
But instead of switching between shares and fixed interest asset allocations Jasper said it focused its attention on picking the right stocks.
Jasper said the attributes it looks for in companies all the time — like quality companies with great management teams, also tended to stand up well during difficult times.
“If you go back to other market corrections quality companies tend to perform better.”
He pointed to a2 Milk, Mainfreight and Freightways as examples.
Jasper said when the market bounced back the stocks that initially did well were also the ones that had stood up better when the market fell.
“Amazon, Microsoft — the market just continued to gravitate to those.” But the rally had become more widespread now. “We are starting to see better performances from cyclical stocks, for example retailers.”
Different to the GFC
Jasper said in the early period of the market melt-down stresses in the financial system did appear but changes made as a result of the GFC meant financial firms were better able to cope this time around.
“That massive source of risk was not there this time.”
Jasper said now the strict lockdowns were being lifted many businesses could get back to normal although the tourism sector faced fundamental change with uncertainty over when overseas visitors will be allowed to return.
“That business has disappeared, but for many businesses if they can survive through this they will go back to being relatively normal.”
Jasper said he had seen a few crises over his investment career and, while there were often predictions at the time that things would change dramatically, human nature often meant less change in reality.
“The further away we get from crises, the less we think about it.”
But one area Jasper believes will change is the structure of investment portfolios with interest rates set to remain very low.
Investors’ expectations of the kinds of returns they might get may have to change as well.
Jasper said the view that equities and bonds were negatively correlated had been shaken up with returns from both dropping at the same time. “A great dynamic that has existed for the last 20 years — that has fundamentally been broken.”
Jasper said that meant exploring other levers and asset classes — even the likes of gold, which he had not considered seriously investing in, in the past.
“We have all been competing around the edges. But I’m pretty sure in a few years time portfolios will be quite different.
“Because if we do the same old thing, it’s not going to do the job for clients.”
Jasper said it was an issue on the radar for fund managers before the crisis. “What this crisis has done is bring it to a head.”
The GFC was a financial crisis. This is a real economic crisis which may lead to a financial crisis. We just don’t know yet.
Mark Riggall, KiwiSaver fund manager, Milford Asset Management.
Milford Asset Management
Mark Riggall, portfolio manager for the Milford balanced and moderate KiwiSaver funds
Riggall says there is no way to reliably predict when a market is going to crash but there were obvious signs leading into the March crash.
“We recognised there was an outbreak in China, the rest of the world was looking on with interest, but the markets were largely ignoring it.”
In fact the New Zealand, Australian and US share markets were all trading at all time highs in February, despite evidence that the virus was not being contained in China.
Riggall says he began thinking about what could happen if it became a pandemic and the kinds of stocks that might be at risk.
“Tourism was obvious. Air New Zealand — we sold all our exposure there.”
Riggall also de-risked the portfolio in general increasing its cash levels to 35 per cent, up from around 10 per cent.
“Initially markets didn’t react. Then they did.”
Riggall says as the markets moved down through March he began to realise the huge support of central banks and governments.
Bond yields rose sharply. “That is where central banks stepped in to buy bonds.”
That sent yields lower and stabilised the market.
“Once that was stabilised that was a tick in the confidence box.”
Riggall says combined with the fiscal stimulus from Governments it got more confidence to add a more exposure to its portfolios.
Riggall says this melt-down was different to the GFC.
“History doesn’t repeat itself. This is different, this is an impact on the real economy.”
It hit people on the street first through the lockdown and was now being seen in job losses.
“The GFC was a financial crisis. This is a real economic crisis which may lead to a financial crisis. We just don’t know yet.”
He said in the GFC governments were forced to bail out banks, but there was an expectation that this time around banks be part of the solution to keep lending.
Some assets classes like real estate investment trusts had not performed as they had during other down-turns.
“Normally in times of crisis these are safer assets.” But this time around with no one shopping and workers locked out of offices investors saw them as a much greater risk.
Despite the markets bouncing back Riggall says it is too soon to call the end to the coronavirus issue.
“Although we’ve had a v-shaped recovery in financial markets, that is not the end of the story. We remain cautious, some assets are not priced right because of huge potential shocks like unemployment.”
But he says KiwiSaver investors should stay the course because they are investing for the long term.
“KiwiSaver is long-term investment for most people.”
Juno KiwiSaver
Mark Devcich, chief investment officer for Pie Funds, the manager of Juno KiwiSaver.
Devcich says when the virus began to emerge in January it turned to its “risk off play-book”.
That strategy was a combination of three things — increasing the fund’s cash levels, putting on market hedging so that if the market fell it would benefit and taking off its currency hedge in anticipation of a weaker kiwi dollar.
“We did it [market hedging] a bit early, in January. Unfortunately the market kept going up.”
But then as the virus spread from China into Korea and Iran the market hedging started to pay off, says Devcich.
He moved the fund’s cash holding to as high as 50 per cent in its growth fund compared to its normal level of around 20 per cent with the aim of reinvesting the money when the market got close to the bottom.
Its third strategy was to reduce its currency hedging. Devcich said it took that decision because in times of increased investment risk the New Zealand dollar tends to fall [against the US dollar] as money moved into more safe haven currencies.
The move meant its investments in overseas based shares and bonds rose in value as the Kiwi dropped.
At an individual stock level Devcich said it also tried to identify the winners and losers pouring money into e-commerce stocks that would benefit from more people working from home — technology stocks, meal-kits and food delivery businesses.
“We already had those in our portfolios. We just increased our investments in Amazon and Microsoft and added Hellofresh [a German company which is a rival food delivery business to MyFood Bag].”
Companies that it took a negative view on included those connected to travel and ticketing for live events as well as financial businesses.
“When people get concerned about the economy financials tend not to do well.”
Devcich said the Covid-19 crash was short and sharp compared to the GFC which played out over a 15-month period.
He was still at university when that hit the markets. “This was much more severe and recovered much quicker.”
He says that’s because central banks and governments around the world went a lot harder than many expected pouring money into the system.
“What we missed a bit was how much money pushing into the system stopped the contagion risk. As soon as the US Fed put money in, the market started to come back. The financial crisis was a slow grind down. This was much greater volatility. There were days when the market was 10 per cent down.”
Devcich says the fund got back into investing in April missing the bottom which hit around March 23.
“There were a couple of things we could have done better in hindsight. We saw it very early, but we should
Mark Devcich, Juno KiwiSaver
What we have seen is immense levels of support from central banks who learned lessons from the GFC.
Nix Craven (left), senior manager research, Booster
have hedged the position better. We should have bought put options instead we sold futures.”
Devcich says the key lesson from it has been how sensitive the markets have been to monetary policy, even though the economic outlook remains dire.
“When it seems like it is going to get much worse, that seems like the best time to buy. It is darkest before the dawn.”
Booster
Nic Craven, senior manager research
Nic Craven says the Covid-19 market crash has reinforced his view on how to manage investments through volatility — by using discipline and diversification.
“Over the last three years we have been building our investment in direct investments. That has been deliberate to add to our diversification.”
Craven said the recent fall and bounce back showed listed markets can behave irrationally from time to time.
Unlisted assets like direct property ownership and stakes in unlisted businesses can also fluctuate in value but that fluctuation isn’t able to be seen as easily without a public market for the assets.
Asked how it valued unlisted assets at a time like this Craven said it came down to having confidence in the sustainable earnings of the assets.
“It is pretty evident unlisted assets behave differently.”
Craven said investments in productive land hadn’t seen the same issues as the rent abatements that commercial property owners had taken.
It also used hedging to take advantage of the falling Kiwi dollar and had focused on businesses with solid underlying cashflow heading into the crash.
“That has always paid dividends.” Those companies had also been relatively supported by shareholders, Craven said.
It had focused on businesses which provided essential services and products like toilet paper.
Craven said one of the lessons it had taken out of the crisis was the upside from its decision to work through a network of financial advisers.
He said those advisers were able to provide support to members worried about the market and reduce the amount of switching between funds that could result in the crystallisation of losses.
Early on it was doing regular blog updates to support members of its scheme which he hoped had put it in context.
“For many people it was the first time they had seen this volatility.”
Inside its portfolios Craven said it had crystalised some of the gains from its global share investments and had been active in supporting a number of capital raisings.
Craven says a lot now depends on the depth and length of the recession.
“It does come back to a focus on businesses that are well positioned to see that through.”
While the GFC was an event which hit the financial system Craven says this has been a supply/demand shock.
“What we have seen is immense levels of support from central banks who learned lessons from the GFC.”
Alongside that has been the fiscal support from governments to help businesses get through the temporary shock to their revenue. “That support has been in excess of what we saw during the GFC. That has been a key driver in the recovery as well.”
From here Craven says it is a matter of remaining adaptive.
“New Zealand seems to have done a very good job.” But now New Zealand also has to cope with how it will be affected by the rest of the world, he adds.
FANZ
Graham Duston, chief executive
Duston says the first thing it did when the market began dropping was to hold more cash in its portfolios than normal.
“We focused on liquidity.” Duston said it was concerned there would be a lot more financial hardship claims on KiwiSaver funds than normal.
It did see an initial flurry that has since tailed off but as the wage subsidy period ends he says it could rise again. The fund operates a model where it allocates money to other managers to invest on its behalf.
Duston said it had purposely chosen big fund managers like global giant Blackrock instead of small boutiques.
That meant if it needed to get its hands on $10m in a hurry there wouldn’t be any issues.
Duston said it had closely monitored fund flows in the industry, as a bit of a canary in the coal mine, but it seemed to have held up well.
The thing that did surprise him was the switching activity with the number of members who moved from balanced and growth fund options into conservative.
“I found that disappointing. The problem for those people is a lot would have turned an unrealised loss into a realised loss.”
Duston says it was the first time it had seen that behaviour so widely. During the GFC balances in KiwiSaver were very small and most would have seen a positive return on their funds after contributions and the member tax credit were included.
He remains worried about liquidity in KiwiSaver pointing to issues in Australia where some industry superannuation funds have seen a run in withdrawals as their members came from the hard hit hospitality industry.
In New Zealand KiwiSaver funds aren’t industry specific meaning members have a wide range of occupations.
But Duston points to the increase in some KiwiSaver funds investing in illiquid property assets in recent years. “It is probably just the start of the trend, particularly as there is pressure on returns. I hope it ends well,” he says.
For now its extra cash is fully invested back into the market. “We have come through in reasonable shape.”
But he says challenges remain for the industry in terms of how much risk members are prepared to take on to get a certain level of return to fund the lifestyle they want in retirement.