Market volatility: a Q&A with fund managers—Sharesies New Zealand
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Market volatility: a Q&A with fund managers

Explainers

With all the volatility in the share market recently, we decided to have a chat with the NZ fund providers on Sharesies to find out how they respond to market dips, and what advice they have for investors during these times.

17 March 2020

6 min read

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Pathfinder Asset Management

As a fund manager, how do you respond to market dips?

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Paul Brownsey (Head of Investment Strategy)

We’re an active manager, so we’re always re-assessing our reasons for having invested in particular companies or markets. We ask ourselves the following questions:

  • Has something fundamental changed?

  • Is there some information available that we haven’t assessed correctly?

  • Do we need to exit a company or reduce risk?

It’s also very important not to react emotionally to market turmoil and change the way we make decisions. We have a very strong and organised process which has worked well in good times and bad times. Working as a team to stick to that process is vital.

What's your advice for investors during a market dip?

Take a deep breath, and go for a walk. See for yourself that out in the real world, companies are still doing their thing. Construction companies are still building. Electricity generating companies are still generating electricity. Supermarkets are still selling food. Telecom companies are still charging you a monthly fee to use your phone. People are still paying their Netflix subscriptions. Because share markets are down, it doesn't mean your investment will end up at zero. It won’t.

Here’s an example. Let’s say a week ago you were about to buy a new iPhone for $1000. You go back today and it now costs $800. How do you react? Mostly by saying “awesome, I just saved 200 bucks!”. What if you were looking to invest $1,000 into Apple shares last week. If those same shares now only cost $800, shouldn’t your reaction be the same? It’s still a very good company. If it's still making a similar amount of money as it was before, then it must be better value now.

If you have extra money to invest, down markets are good. You'll get better long-term returns when you invest at lower levels.

How are you protecting investors’ investments during this time? How do you respond to new information that comes through?

Every day we ask ourselves—is there any new information that means we should change our view? Is there a potential risk we aren’t thinking about? Do our current investments represent the best exposure based on our understanding of what is happening in the global economy? We have lots of tools to help us make these decisions.

The types of companies we invest in are important. Companies with high ethical standards usually perform better in down markets than companies that care less about the environment or their societal impact. We've already seen that over the last two weeks, our ethical portfolios are performing better.

We also invest in companies with defensive characteristics—like property and utilities. These companies also tend to go down less in falling markets. We're sitting on cash in all our portfolios. We have up to 30% of our funds sitting in cash right now. When we think the outlook favours it, we'll invest that money at these lower levels. Remember that hindsight is a wonderful (and useless) thing. But it does often tell us the best time to invest was actually the time we were most scared to do so.

Smartshares

As a fund manager, how do you respond to a market dip?

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Thomas Bentley (Client Director)

Market dips are a normal part of investing in shares. Over the long term, shares have proven to be the highest returning asset class. We don't anticipate that this will change.

What's your advice for investors during a market dip?

If you're already invested, we suggest you remain invested. There's no need to panic. If you have some money sitting on the sidelines, now might be a good time to think about investing that extra money. Whether you're buying a new pair of winter boots or shares, it's always better to buy in a 10% off sale.

How are you protecting investors’ investments during this time? How do you respond to new information that comes through?

Our exchange-traded funds (ETFs) are mostly passive. We don't take any specific measures to protect capital. This is because evidence shows that in the long term, being fully invested in the market produces a better outcome for investors than trying to time the markets.

AMP Capital

As a fund manager, how do you respond to a market dip?

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Greg Fleming (Head of Investment Strategy)

At AMP Capital, we have scope to assess any opportunities we have to increase value for investors. We check that the holdings we have are representing the index as accurately as possible, and haven't become too dislocated given the degree of selling activity that affects the market during a market dip. We also begin planning straight away for how we'll take advantage of market correction and stabilisation.

What's your advice for investors during a market dip?

It’s recommended that you don’t react to negative movements happening in international markets—unless you need cash because you're investing for the short term, or have to defend a specific wealth level. You’re better off holding your investments during a market dip, instead of selling your investments at disadvantageous prices.

Another thing to keep in mind is the incentives of people giving advice and spreading news in the media. Brokers, for instance, may have an interest in getting investors to sell, because they’re paid a commission for this. News websites have an incentive to generate “clicks” by stating news in the most dramatic terms. It's important to be mindful of these drivers.

How are you protecting investors’ investments during this time? How do you respond to new information that comes through?

We use the tools available within a given fund’s investment guidelines to focus on quality, financial robustness, medium-term recovery, and long-term gain. During a market dip, there’s usually a great deal of inaccurate and exaggerated commentary present in the media. We’re highly active in getting to the bottom of all concerning news that can affect the market. This allows us to make decisions based on the truth.

Pie Funds

As a fund manager, how do you respond to a market dip?

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Paul Gregory (Group Head of Investments)

We can think about and do a lot as an active manager. But we focus hard on two things:

  • Protecting investor capital as much as possible from the downside;

  • and getting ready to pounce on opportunities among beaten-up companies before any sustained rebound gets underway

What's your advice for investors during a market dip?

First, don’t panic. Investing is a long-term game and it’s likely your goals are long-term if you’re invested in equities. Don’t be swayed from your goals by newspaper headlines. If you’re really worried, or if you have less than five years before you need the money, then you might want to reconsider the risk of your investment. Your investment provider, or an advisor, should be able to help you with this.

How are you protecting investors’ investments during this time? How do you respond to new information that comes through?

We protect investor capital by raising cash, or hedging ourselves against sharp market falls. We respond to new information by first making sure we think it's new information. Often, it’s noise or old news in a new costume. If it's new, we decide whether it changes our view about what’s happening in the markets. That changes our overall stance from defensive (with more cash and hedging), to aggressive (shutting down hedges and deploying our cash reserves to buy beaten-up companies).

A big thanks to the teams at Pathfinder, AMP Capital, Smartshares, and Pie Funds for sharing their knowledge with us!


Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.

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