Lessons on investing through a pandemic

At the Virtual Briefing, a panel of investment experts from BlackRock, JANA, IFM and NAB, observed that the impact of the COVID crisis has been extremely varied and, at times, mind-boggling. Infrastructure assets such as airports and certain GPD-linked assets suffered massively, credit markets became quite illiquid, and fixed income’s ability to beat inflation is looking questionable.

These findings from the expert panel resulted in a number of valuable lessons for super fund trustees and investment teams responsible for managing people’s money during a crisis.

Equity market optimism is not uniform

BlackRock’s Chief Investment Officer, Mike McCorry, remarked on the significant rally in global equity markets since bottoming on 23 March, commenting that equities “have been optimistic” but “far from uniform” in their recovery.

Highlighting that technology companies have spearheaded the rally while service companies remain in strife, he pointed out that the expression “a rising tide lifts all boats” (made famous by John F. Kennedy and used extensively in investment circles), doesn’t apply in the current situation.

According to McCorry, the winners and losers from the crisis will continue to play out for another six to twelve months, leaving investment professionals and risk managers with a lot to think about. One of those things being how much optimism has already been priced into the market. “We’ve seen some phenomenal runs in tech companies…have they already priced in all the good news?” he asked.

Another thing to consider is how quickly we can get back the new normal. McCorry said it is possible to see a sharp recovery in asset prices if businesses are able to stay afloat during the lock-down period and there is no permanent damage to the economy. “Unlike the GFC, global economic activity hasn’t actually been contracting, it has been deliberately frozen”, he said.

Defensive assets were not as defensive as we thought

John Coombe, Head of Consulting and Executive Director at JANA highlighted that some infrastructure investments, such as airports and certain GDP-linked investments, were written down quite hard during the COVID crisis.

This is very different to the global financial crisis (GFC), where unlisted assets and infrastructure held up quite well as defensive assets.

This has implications for super funds, especially those that have increased their weightings to infrastructure since the GFC. Coombe suggested that it may be time for super funds to revisit how they look at infrastructure investments, particularly the mix of infrastructure, within their portfolios.

Infrastructure assets must be diversified by revenue and value drivers

Marigold Look, Executive Director, Infrastructure at IFM, mirrored Coombe’s comments about some infrastructure investments being adversely impacted by the COVID crisis, highlighting that even within sub-sectors the impact has been varied.

On this point, Look stressed the importance of constructing a well-diversified portfolio of infrastructure investments. “That’s not just diversity across geography and sub-sectors, it’s really about the key revenue or value drivers” she said.

Take toll roads for example. Despite their volumes being dramatically hit while the community has been in lock-down, Look pointed out that the intensity of the impact has depended on the traffic mix. “Toll roads with a greater proportion of truck or freight related revenue have been more resilient compared to toll roads that have been largely commuter based,” she said.

The nimbler the better when it comes to managing currency hedges during a crisis

Jamie Bonic, Director Markets at NAB spoke about the collapse of the Australian dollar in March when it hit a low of 0.5510 cents after trading at 0.6683 cents only ten days earlier. “We rarely see a move of that significance,” said Bonic. “It’s certainly the biggest move that we’ve had in more than a decade.”

This put an enormous strain on liquidity for those that had significant hedges in place during this time.

According to Bonic, the investment teams that fared the best during this period were those that had internalised the decision-making process for currency and didn’t need to wait for investment committees. This allowed them to respond quickly with techniques to help smooth their currency exposures.

Bonic finished by saying that he hoped super trustees and investment committees didn’t shy away from currency hedging as a result of the liquidity challenges that arose during the crisis, saying currency is an important part of portfolios and needs to be managed.