Despite numerous warnings of the chaos a global pandemic could bring, including from Bill Gates and the World Economic Forum, most governments have struggled to keep up with events. At a recent virtual conference, the Vice Chairman of BlackRock described the crisis not as a black swan event, but as a “grey rhino”: everyone knew this was possible but did nothing to prepare.
Meanwhile debate is raging about the long-term impacts. Will the huge rescue packages from governments be enough? Will they lead to inflation? Or deflation? Will there be a debt-fuelled crisis? Or will loans be written off? Will there be tax rises to pay for it all? Add to the mix the pre-existing political and economic issues (eg. the US-China trade wars, Brexit negotiations, the build-up to the US Presidential election, tensions in the Middle East) and the outlook becomes very unclear indeed.
Sticking with what we know
We have no crystal ball at Veritas. We have never focused on timing markets or making economic predictions – these are impossible tasks, and this is certainly not the time to start trying. We cannot tell you how this crisis will end, but we can tell you what we’ve been doing to protect and grow our clients’ capital over the long term.
We’ve kept things simple and stuck to our investment philosophy and process. We focus on generating real returns – growing our clients’ assets by more than inflation over the long term. This means investing in companies with strong and predictable characteristics, which will benefit from long-term structural trends, such as the rise of the online world, changing demographics and increasing regulation, regardless of what’s happening at the macroeconomic level. Because of this, our exposure to more cyclical sectors such as mining and banking which have fared worst during this market upheaval, is limited.
Although we didn’t see this particular grey rhino coming, we were ready for it because we use the good times to prepare for the downturns. Before we buy a single share, our companies are strictly judged for certain characteristics: strong balance sheets, resilient business models and a culture which focuses on long-term sustainability. Of these, balance sheet strength is one of the first things we look for during our research process but it’s also something we check time and time again. Eleven companies widely held across portfolios are net cash (i.e. they have more cash than debt) and most other companies held could pay off their debt in just a few years without cutting capital expenditure. History has shown that in times of crisis, the strong usually get stronger.
Culture may be the most difficult of the characteristics to measure but in a crisis it becomes even more relevant. How someone behaves when the chips are down gives a very good picture of who they really are, as demonstrated by many of the companies held across our clients’ portfolios. As well as supporting all employees affected by site closures, toy manufacturer Hasbro is donating toys to 200 Save the Children sites in the US and is contributing to the “No Kid Hungry” scheme which is replacing free school meals during the crisis. Unilever has committed EUR100 million to help stop the spread of coronavirus by donating soap, sanitiser, bleach and food to organisations around the world. The company is also protecting its small suppliers by offering early payment. While this demonstrates a strong commitment to doing the right thing, it also shows which management teams plan for the future.
‘Test, test, test’ may have become the mantra of the World Health Organisation recently but it is something we have believed in for years. We have spent considerable time stress-testing valuations for our companies both old and new, and imagining worst-case scenarios and what these could do to the balance sheet and share price. This means that when the downturns come, we can use them as an opportunity to buy new positions and add to existing holdings where we have strong, long-term conviction. We have been doing exactly that.
Still sitting around one table
While it hasn’t quite been business as usual, technology has certainly got us close to that point. Thanks to quick thinking and a lot of hard work from our Operations and IT teams, the entire company was relocated to 50+ home offices, dining tables and bedroom dressers across the UK and Switzerland by the time the government’s movement restrictions came in.
We are a small, close-knit team and our culture of curiosity, openness and collaboration is central to the way we work. Although we are many miles apart, technology has meant that this culture is still alive and kicking. Our daily investment meetings have taken place as usual: debates have been as lively and informative as ever, meaning we can continue to exercise good judgement and make sound decisions for our clients.
No one knows how long the current situation will last nor what the longer-term impacts will be. But no matter the duration or the outcome, we will stay focused on doing what we do best: protecting and growing our clients’ assets to ensure they meet their long-term inflation plus targets.
Media contacts: cmair@veritasinvestment.co.uk