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Hedge Clippings | Friday 20 March, 2020
Hedge Clippings' first mention of the emergence of coronavirus was back at the end of January, less than 8 weeks ago. Since that time the situation has gone from concerning through to alarming, panic, and now to a change in the world as we know (or have known) it. More has probably been written and spoken on the subject of COVID-19 than any other topic since World War II - and in fact Angela Merkel, the German Chancellor even stated earlier this week that it was the greatest threat since 1945.
Last week we referred to "the curve" and the need to slow the rate of infection to allow the medical system to cope with the coming avalanche of patients. The reality is that governments, both locally and overseas, need to get ahead of the curve when implementing policy and restrictions on population movement, and social interactions, and adjust economic policy to suit - and on the run as required.
Personally we would hate to be a politician, particularly at the current time when, whatever one does, there will be those who disagree with you because they don't like you in the first place, those who think you are not moving ahead of the curve sufficiently, or those that say you're being alarmist and moving too fast.
In all reality, COVID-19 itself, and the medical, social and economic situation it brings with it, is moving so rapidly that it is almost impossible to keep pace. As we noted in last week's hedge clippings, "whatever the situation was last week, or even yesterday, the reality is that it will have changed significantly not only by next week, but by tomorrow".
That in itself was probably an understatement as the situation seems to change by the hour, or certainly by the day.
Without being alarmist, what seems clear to Hedge Clippings is that the government's approach should be "whatever it takes" and "whatever it costs". Whilst encouraging to see that the Australian Banking Association's (ABA) Anna Bligh says that all small businesses hit by the pandemic will be able to access a six-month deferral of all loan repayments, the reality is that the government is going to have to provide financial support at both the business and the household level for those whose revenues had been decimated but whose costs - even if cut to the bone - remain above their income.
How this is done structurally remains to be seen. It has been suggested that HECS type arrangements could be put in place, which just might well work. In all this, the concept of a budget surplus is probably now a further 10 years away, but in reality that's not important. Neither really is the "R" word - Recession, which as we have stated before is almost inevitable. The questions now are how long it will last, and how severe it will be.
At the current time, of course, many eyes are on equity markets and, given the extreme volatility they have been experiencing, thus the performance of funds. Today's an up day on the ASX, but that could change by close of trade, and again on Monday.
What is clear from the perspective of managed fund performance is that funds which happily benefited from the strong markets of the past couple of years, without recognising the need to invest with an eye on the future to protect investors' capital in the inevitable event that the market changes direction, have suffered.
Protection comes in all shapes and sizes, and those strategies that are inevitably performing better are those such as Long Short or Market Neutral, or those funds which can hold variable levels of cash. Those benefiting (in other words, providing positive returns) are the true alternatives such as managed futures, global macro, or long volatility funds, aside of course from fixed income and credit.
Last week we mentioned the discussion we had with Alex Pollak, CIO of the Loftus Peak Global Disruption Fund. This week we have followed that up with a brief five-minute video interview (remotely, and therefore at an appropriate distance) recorded yesterday with Alex, entitled "Defensive Investing in a Disorderly World", which you can view here.
Over the coming weeks and months Hedge Clippings will be focusing attention on the theme of "Defensive Funds in a Disorderly World", including further interviews and articles to provide investors and their advisers with insights into how these managers are thinking and implementing their investment strategies.
Given the rapidly changing world in which we now operate, these manager interviews and insights may hit your inbox more frequently than your normal weekly edition of Hedge Clippings. Depending on your situation, you may either have more time to read or view them, or less if your inbox is already overflowing with COVID-19 updates.
Whichever, in the meantime, stay safe.
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