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