Fund managers are having to review their strategies and economic assumptions on a daily basis, as the unusual nature of COVID-19 means history offers them no precedent for how to handle the crisis.
Kej Somaia, co-head of multi-asset solutions at First Sentier Investors, said the economic and stockmarket effects of COVID-19 were ‘fundamentally different’ to anything that occurred in markets before.
Much has already been cited about how this crisis is different to 2008-2009’s Global Financial Crisis which was caused by a highly-leveraged banking system, affecting the demand side of the economy.
“The key difference this time is the changes in the economy are fundamentally different in their speed and magnitude and depth and we’ve had to speed up our own process,” said Somaia.
“We have to review our economic climate assumptions much more regularly – even on a daily basis – not every six months as we would do normally.
“So, instead of looking for qualitative similarities, we look at the world more statistically for times of high turbulence, because that’s what has been common to all crises. This statistical overlay provides more insight and we think is a smarter way to understand correlations and inform us about volatility, or risk more broadly.”
He said the combination of dynamic and neutral asset allocation used in multi-asset funds allowed them to react to the changing conditions in markets. Neutral covered the traditional bonds and equities while dynamic was implemented through synthetic securities.
“This means we can adjust risk settings through DAA, without having to touch the direct securities. This has allowed us to reposition portfolios without needing to step into markets experiencing liquidity issues.
“We’ve been taking a defensive stance – we’re at about half of our usual exposure for equities, as defined by our NAA. Maybe equity markets will look through the short term – but in reality we think we’re going to see negative results by large number of corporates in coming months, with some of their earnings falling by 45% or more.”
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