Aaron and I recently attended an intensive fund managers presentation day in Auckland, where 16 fund managers did presentations on an aspect of investing and then did a promotional spiel for their investment funds.
It was a really good day, with lots of interesting and useful information. Funnily enough, there was very little real alarm in the fund managers world around Coronavirus!
One of the managers spoke about “a trend vs an event” and I thought that this was a really useful statement that was worth expanding on.
Let’s start with the easier of the two.
An event is a “thing (singular) that happens or takes place, especially one of importance”. (Oxford dictionary)
Obviously, Covid-19 is an event.
We had SARS in 2003, which was a similar event in nature. It originated in China close to Hong Kong, and while it had a lower spread rate than coronavirus, it had a fatality rate of close to 10%.
The S&P 500 initially fell by 16.2% but after 6 months from the outbreak in April 2003, the S&P 500 was up by 14.59%.
When Ebola struck in March 2014 (with a 28% fatality rate), the markets fell just over 9% but after 6 months from the initial outbreak the markets were up by 5.34%.
When ZIKA struck in January 2016, the markets fell 6% but 6 months later, the S&P 500 was up by 12.03%.
The only medical outbreak event in living memory where the market had not fully recovered at the 6 month mark was HIV/AIDS (June 1981), where the S&P 500 was down by – 0.3% at the 6 month mark.
AIDS had a 100% fatality rate at that time, and a phenomenal amount of stigma around it.
An event-driven investment strategy would involve taking advantage of temporary investment mispricing. It requires expertise and immediate action to take advantage of the event.
As the fund manager said, an event is also an opportunity to stop and examine your current strategy, as an event can bring things to light that you may not have considered.
One of the big issues that this Covid – 19 has highlighted is the importance of having a diversified supply chain.
It has been quite astonishing to me that some of the worlds largest companies (like Apple) have thrown all of their eggs in one basket and assembles nearly all of its iPhones in one place!
Similarly, it also shows the weakness of selling all of your product into one market, instead of having a diversified sales strategy.
On the other hand, a trend is a “general direction in which something is developing or changing” (Oxford dictionary)
Trends are more important to investors, as they create opportunities for long term future growth, or they can create “stranded assets” which are of little or no value to the person who owns them.
Some of the interesting positive investment trends of the moment include disruptive technology (such as artificial intelligence, energy storage, robotics), genome sequencing and sustainable impact investing.
Some of the interesting negative trends of the moment include fossil fuel shares. There is potentially a growing trend underway for sovereign pension funds to withdraw their investment from fossil fuel shares, which has started in Europe. The NZ Government has announced that default KiwiSaver providers are not allowed to hold fossil fuel shares in the default KiwiSaver funds from 1 July 2021. Another negative trend is the ownership of tobacco company shares. Many large superannuation funds in Australia are now bowing to investor pressure and divesting themselves of tobacco shares. When there is a large sale of shares taking place, the lower demand eventually reduces the price.
Trends can create or permanently destroy investment wealth. Events usually do not create or permanently destroy investment wealth, unless they were bad investments to start with.
The key take out from this is, when the markets are having a tantrum and the media are running around screaming that the sky is falling, ask yourself – is this an event or a trend? If it is an event, sit it out.
It will have a short term impact on your investment but in a few years, you won’t even recall it. If it is a trend, make some further enquiries about whether your investment is favourably or negatively positioned around the trend.
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.