Client Communication - 28 February 2020

You have no doubt heard recent reports about the impact that the Coronavirus is having on world stock markets. We are mindful of the impact this can have on your portfolio and we are monitoring it closely. I would like to offer the following comments to explain some of the factors behind the current market movements and to re-iterate our approach to portfolio management.

Markets move in cycles. This is normal; however, we never know when or how severe a market correction can be. Following the herd and selling when markets fall is the way to crystallise losses and lose money.

There is nearly always a catalyst for a market correction. Despite the fact that the Coronavirus is not a structural issue and it will eventually pass, it may prove to be such a catalyst. Since the Global Financial Crisis in 2007 to 2009 major markets around the world, in particular the US, have had an extended period of growth. Ten years is a long period of growth with investment cycles typically being in the order of seven years. The upside of this is that portfolios have performed strongly and delivered stellar returns over recent years.

Our investment approach is focussed on long term wealth creation. We have been aware of the potential for a market correction for over a year now and have been active in recommending more defensive portfolios. We have been here before.

We have done this through our investment selection process and in our asset allocation decisions. Many of the portfolio changes we have recommended over the last 18 months have been for the purpose of moving towards a more defensive positioning. We have included more defensive-style managed funds. In relation to share funds, we have not relied solely on yesterday’s winners. We are very aware that funds that perform well in a strong growth market don’t always perform well during a correction. Value-style managers typically outperform during a correction. We have ensured a diverse allocation with exposure to management styles that fare better in market corrections.

In relation to the fixed interest sector, we have ensured that there is exposure to funds that invest in government and higher-quality corporate bonds. We have looked at all the risk characteristics including the duration of the underlying bond holdings.

We have taken a similar view to the direct share portfolios that we manage. Taking profits by trimming or getting out of holdings when they become overpriced and replacing them with under-priced holdings. Our recommended portfolios are diversified across key major market sectors and are comprised solely of blue-chip stocks with none of the more volatile small-cap or speculative stocks included.

Nobody likes to see their portfolio lose value, even after a period of strong growth. We are aware it can be stressful for clients at times like this. It is important to remember that cyclic movements are a normal but uncomfortable part of investing. Quality holds its value over time. Markets move in cycles, but quality companies will return to profits and regain their share value as markets move to recovery. We do not recommend selling at times like this. We will be calling clients over the next few days. In the meantime, if you would like to discuss your portfolio or our investment approach in more detail please call me.

Date posted: 2020-03-20 | posted by: condell

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