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Diary of a Fund Manager - New Normal- 23.03.20

In this week’s Diary news from the front line of change as we grapple with our new reality, working remotely, why details matter more than averages and some thoughts about what the other side might look like.

Last week I commented that the previous week would seem normal compared to the one ahead. And so it was. Markets continued to fall as those in need of immediate cash sold whatever they could. Equities, bonds and gold all went down, albeit by varying percentages. Investors are starting to differentiate by quality. Risk is now seen to be about permanent loss of capital rather than short-term volatility.

Plan A is being implemented; minimise the infection rate, mobilise medical resources and, for governments, provide a lot of support. This is the agenda for all of us.

Government and central bank support has, as predicted, graduated from billions to trillions. Liquidity is being pumped into the financial system which continues to function reasonably well, although exchange traded fund prices are diverging from net asset values. Various packages are being launched to support business as normal activities are suspended either by choice or instruction.

Impressive as these moves are, I suspect that more will be needed as all strive to ensure that the foundations are in place for recovery – whenever that might be. Talk of a V-shaped recovery in the second half of the year has been replaced by an extended U where the duration of the slowdown is up for debate, to some predicting an L. That is no recovery in the foreseeable future. Governments are implementing ‘whatever it takes’ policies in order to ensure that this immediate recession doesn’t turn into a depression.

This is a diary and so I should, as usual, record what I have been up to. Over the last few days Quilter Cheviot has steadily moved to remote working. Although a challenge to all as we change working practices, the business of investment continues. Our IT support team definitely deserves a medal.

Although at the moment all are prioritising health rather than wealth, investors will eventually return to wealth. That’s how markets work at times of extreme stress, turning on the darkest day. Conference calls have replaced meetings, saving huge amounts of time by the way, whilst the thirst for information is almost unquenchable. Speaking to companies, brokers, strategists, and clients is a priority. We may be physically separated, but having colleagues, whether research analysts or fellow fund managers, is invaluable. There is a lot to take in as comments and opinions flood in from everywhere, including from Diary readers for which many thanks. People, industries and countries are all reacting differently to this unprecedented event.

Much has been made of the need for governments to coordinate, but I suspect that solutions will be more local. Countries with extensive, publically funded, support structures, such as the Scandinavians are better placed than those with less, like the US. As a result the US will have to spend a bigger proportion of GDP to support the system than Europe. In addition, the social structure of some countries will be stronger than others when stressed. Fragile or robust applies to many things as we will find out in the coming months.

Talking with external specialist fund managers has been enlightening. Certain hedge fund strategies are working well and it was good to hear some optimism. Trend followers are doing well as are those invested for higher volatility. No one thinks they know the answer, but the importance of diversification and liquidity were recurrent themes. The ability to change is a vital component of all good investment strategies. As they say, a stopped clock is right twice a day, but is absolutely useless.

Amidst all of this, markets are differentiating between good and bad, risky and less risky. For example the FTSE 100 index of our largest companies fell by 3% last week, whilst medium/smaller indices were down by 13%. In fixed interest markets, unrated high yield bonds are falling more than those issued by governments. The US dollar has been strong as many seek sanctuary. The Federal Reserve is doing all it can to recycle dollars to other countries in order to keep the wheels of commerce turning.

Looking back is for another day. At the moment dealing with today takes priority with what next a close second. Thoughts about the other side of this event are a moveable feast, but will eventually matter. A weaker dollar, stronger China, less globalisation, shorter supply chains, bigger government, a reallocation of capital to what really matters could all be part of our future.

Best wishes to all.

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