Schroder Income: update from the manager, August 2022
August 2022 | Chris Salih interviews Kevin Murphy, co-manager of Schroder Income, a deep...
Stock market falls are never a nice experience – seeing your hard-earned savings depleted in value. The temptation is to run to the hills (or cash), but – to cram in an extra idiom – that is basically shutting the gate after the horse has bolted. All you do at this point is crystallise losses.
So often, the best strategy – especially for long term investors – is to sit it out and do nothing. Brave investors may even top up their investments.
James Yardley, senior research analyst at FundCalibre, said: “If underlying investors are selling, fund managers may be forced to sell some of their holdings to meet redemptions. They may still be able to buy some assets they like, but they will have to use money raised by selling other things in their portfolio.
“Fund managers that have large cash reserves, such as JOHCM Global Opportunities, are perhaps in a better position. They can pick and choose what to add to, and potentially take advantage of forced-sellers elsewhere to pick up good investments at lower prices. They will be looking for stocks which have been dragged down unfairly with the rest of the market, whose the fundamentals remain strong.
“Some managers may also be revisiting why they own certain stocks and questioning their original thesis. For example, travel and airline stocks may have looked cheap at the start of the year, but the Coronavirus is clearly going to have a huge impact on some of these companies. Similarly, the decision by Saudi Arabia to start an oil price war may destroy the reason for owning oil stocks.
“Multi-asset fund managers will no doubt be very busy potentially changing the weights of their allocations, depending on their views and the level of risk in their portfolios.”
David Coombs, manager of Rathbone Strategic Growth Portfolio, said: “We now have two macroeconomic events taking place simultaneously – almost unprecedented.
“The Russians and Saudis seem to be on a path to mutually assured fiscal destruction – let’s see who blinks first. Another theory doing the rounds is that they are in cahoots to destroy US shale by undercutting them substantially and driving American drillers to the wall. This seems unlikely, but who knows, it’s a strange world we’re living in.
“We have a three-phase plan for this period of turmoil: Phase 1 – Rebalance portfolios today, selling bonds and buying equities to return to our target weightings. Our focus will be on mega-caps with the strongest balance sheets. We may add one or two stocks from the bench that we have been waiting to buy for some time. We have also added to our oil holdings; their share prices are lower now than in 2015 when Brent Crude was $25.
“Phase 2 – if stocks continue to fall we will increase our allocation to equities again, focusing on the above.
“Phase 3 – On the second or third legs of market falls we would start adding to the more cyclical and smaller companies that we own (remember that we only buy companies with a market cap over £3 billion, which is FTSE 100 territory).
“We have been holding cash for nearly two years waiting for a correction. So here we are funnelling our cash into equities. It feels uncomfortable adding. It always does.
“We’re aware of nervousness and we haven’t seen anything like this for more than a decade. It’s worth remembering from the late 80s to the 00s corrections like these were unfortunately quite common. 1987 was my first one. Typically the strong companies survive and tend to flourish afterwards. It is this fact that will drive our approach for the next few days.”
Baillie Gifford’s Japan team said: “Exogenous economic shocks such as these invariably rattle markets and shake investor confidence over the short term. Our focus has been to re-examine any areas of fragility on a case by case basis. Generally speaking, despite bearing the brunt in terms of a market-wide sell-off, Japanese corporates and consumers remain in an enviably cash-rich position – 55% of the non-financial companies in the Japanese stock market, the Topix, are in net-cash positions, versus 14% for the US’s S&P 500) – hence they should be better-placed than others to weather this perfect storm of subdued consumer demand and disrupted supply chains.
“In terms of portfolio positioning, we have taken a new position in niche skin care business Pola Orbis, a name with a strong premiumisation strategy, which has experienced unwarranted weakness in its share price. Japan is widely recognised as a respectable leader when it comes to skincare. Its major beauty care companies all come with a long, uninterrupted history of research & development, and producing high quality products. Pola is Japan’s fourth largest, focuses on premium skincare over cosmetics, has a significant cash balance and an ambitious target for expansion within China.
“The team is of the view that Covid 19 is being successfully contained in China and therefore to have exposure there no longer presents a significantly higher risk. This position has been funded with a partial reduction in semi-conductor business Disco following a period of strong share price performance last year. Finally, we also switched some funds from Toyota Motor to Denso, reflecting our perception of greater growth prospects for the latter (which is more exposed to car electrification) and a more compelling valuation case.”
Matthew Page, co-manager of Guinness Global Equity Income, said: “We made two changes to the portfolio in February, selling our positions in Royal Dutch Shell and WPP and replacing them with Medtronic and Pepsico. While RDS and WPP are quality companies, they are not as robust as they have been historically. They offer optically cheap valuations, which we felt were attractive at the start of the year when global growth expectations and earnings expectations were improving. However, we had to reassess these positions in light of the current environment and a weak set of results from WPP.
“The overall effect of these changes has been to boost our exposure to consumer staplers and healthcare and reduce our exposure to energy and consumer discretionary. It has boosted our exposure to US companies, while reducing our exposure to European companies.
“These changes have been driven by bottom up analysis of names in our universe of 500 quality companies with at least 10 years of >10 % Return on Capital every year, rather than top down macro considerations, and where we see an opportunity to buy good companies a lot more cheaply than was possible a few weeks ago.”
Artemis Income’s managers added: “Our average holding period is six years and our focus is on sustainable cashflow and fundamentals. Whilst mindful that there may well be even more dislocation, we do believe that this environment will provide us with some good opportunities – in line with our long-term investment horizon. We are looking to use the sell-off as an opportunity to improve the income credentials of the portfolio.”
Kevin Murphy, co-manager of Schroder Recovery and Schroder Income funds, concluded: “We don’t know where share prices will settle over the coming months. No one does. However, we will act as we always do, going wherever the value is in the market. Buying things that others find uncomfortable, and often buying things that others currently believe are tainted. As those negative perceptions and issues alleviate, share prices rebound.”