As the Coronavirus’s impact on global markets becomes more unsettling by the day, firms that had previously thought that they’d been positioned to avoid its impact are now seeing the true implications of what some are now calling a global ‘pandemic’.
Take Guinness’s Asian Income Fund, a star performer which can be read about here, found itself in the rare position of trailing its index, the MSCI AC Pacific ex-Japan by a percentage point, being down 4.5 percent in January.
It’s worth noting that the fund, managed by Edmund Harriss, has achieved greater annualised returns since inception than both its index and its sector peers, averaging 10.8 percent in sterling terms although Mr Harriss seemed unsure about the validity of the data on the virus. The firm said in an update: “We have treated the figures coming from Hubei/Wuhan with some scepticism: we believe the number of cases there to be far higher than reported.”
It’s highly unlikely that the fund will engage in any knee jerk reactions to the outbreak until the true nature of the scale of the issue comes to light. With a high conviction style typical of the firm, which despite holding just 36 stocks is also diverse, any turnover will probably only be made once the dust has settled.
The firm’s Global Equity Income Fund, managed by Dr Ian Mortimer, is also feeling the strain of the Coronavirus outbreak. Speaking to Fundeye last week, the markets were selling off as investors went into full risk-off mode. Again, the fund found itself in the rare position of trailing its benchmark, the MSCI World, by 0.54 percent although was ahead of 75 percent of its IA sector peers.
The firm said in its update: “Exogenous shocks such as this are impossible to predict. They are the ‘unknown unknowns’ or ‘black swans’. They are events which are unpredictable and often unprecedented. We know neither when they will happen or how they will proceed.”
In an almost prophetic way, the firm signalled that the Federal Reserve would cut interest rates by 50 basis points days before it did on Tuesday, as the US is one of the rare central banks to have any room to manoeuvre with rates (the ECB’s rate is currently at -0.5 percent).
While to Coronavirus is representing a real shock to the global supply chain that is perhaps the key reason that many companies are struggling, Guinness’s focus on quality companies with strong balance sheets may well pay off in such an environment. Staying away from companies that have excessive debt means its holdings should be able to ride out this shock until business returns to normal.
Given this focus on companies with large cash reserves, or free cash flow, coupled with an investment horizon of around five years, means that its holdings should be able to maintain its dividend strategy regardless of what is hopefully a short-term shock. Managers adopting a value approach, holding companies which may have great growth prospects but less robust balance sheets, could be in for a far bumpier ride than those preferring quality names such Unilever, Diageo and Roche (held by Dr Mortimer).
