When I spoke with Leigh Himsworth, UK Fund Manager at Fidelity, this week he took me step-by-step through the way in which he has dealt with the coronavirus crisis as a professional investor.
I was really impressed by his logical, keep calm and carry on approach to managing a portfolio through such difficult market conditions and wanted to share it. We could all learn from the cool way in which he has assessed the situation and sifted the winners from the losers.
1. The first thing Leigh did was to buy shares in all the UK supermarkets. Yes, there was the obvious point that everyone had gone toilet roll crazy in the early days of the outbreak. More than this, though, Leigh quickly decided that the likes of Morrisons and J Sainsbury might benefit from a longer-lasting advantage than the one they were gifted by panic buying.
- He realised that the billions of pounds a year that was spent on eating out in the UK was likely to be re-directed towards the big grocery stores. He also calculated that the 2-for-1 offers that have become a staple of this super-competitive market would soon disappear.
2. Hot on the heels of this opportunistic purchase, Leigh then prioritised stripping out any shares which he felt were most vulnerable to the economic lockdown that we are currently experiencing. This largely involved pruning companies with high debts that couldn’t cope with a period of effective shutdown in economic activity. He also turned a critical eye on any companies that might be dependent on finite government support that could be taken away once we have passed through the eye of the storm.
3. The sharp fall in prices then presented the fund with the opportunity to top up on high-yielding stocks. Securing a dividend income of up to 7% could give the portfolio some stability through expected volatility if - and it is a big if, of course - the dividends could be relied on. This is where robust analysis comes in because many of the apparently high dividends on offer in the FTSE 100 simply won’t end up being paid. Avoiding as many dividend cuts as possible is key to this part of the strategy.
4. The fourth step in Leigh’s approach was to identify shares where he considered that the market had already priced in a worst-case scenario, either regarding the destruction of end-consumer demand or, for example, with regard to the oil price collapse. Asset managers are a good example of the former where the impact of falling markets and lower revenues is quick to identify and so quick to show up in share prices.
5. Step five involved looking at the evolution of the health crisis and seeing which parts of the world had gone into it first and which, therefore, could be expected to emerge from it before other regions. Asia is the obvious focus here, with China and South Korea apparently getting the outbreak largely under control even as the epicentre of the crisis moved to Europe. Even within Europe, some countries will clearly recover before others, with Spain and Italy likely to be first out of the blocks. One beneficiary of a resurgent China could be the commodities sector.
6. The sixth stage of the process was to look at which companies might actually emerge from the crisis with an improved competitive position. In some cases these might be unexpected winners; for example, some low cost airlines might do better than bigger legacy carriers thanks to their lesser dependence on business travel (which might not recover quickly if at all), more flexible workforces (more services bought in rather than performed by full-time staff) and supportive second-tier airports which are more dependent on these smaller airlines than would be a Gatwick or Heathrow.
7. The final part of the process is the bit that requires an investor to switch off their screen, go for a walk and think laterally about what some of the longer-term shifts in the global economy might be. Here are just a few:
- Perhaps, our experience of working from home and communicating remotely will change for ever the way we run our businesses. Maybe companies will realise they can do things more cheaply and effectively without a big office full of desks that half the time are empty. To do this will require big investment in robust telecoms and other communications systems.
- And what about the part of the crisis that is under the radar now but could be as important in the long run, the oil price slump. The way in which Saudi Arabia and Russia have taken advantage of economic disruptions to push their own agenda may persuade many governments to reduce their dependence on these giant energy suppliers for good. Coupled with the desire to combat climate change, the next few years could be a golden age for investment in alternative energy sources like wind and solar.
- And let’s not forget healthcare. The really scary part of the crisis has been the potential for our health services to buckle under the strain of the outbreak. No government will want to stand accused of failing to learn the lessons of coronavirus. Spending on healthcare suppliers will in time rise sharply even if there is a hit in the short term as non-urgent operations are shelved for the time being.
Leigh’s final comment to me was worth repeating. He said a chess player never thinks just about the next move. He or she is always looking five or six moves ahead. It’s just the same for an investor. Dealing with a market crisis is as much about thinking through the world after the volatility has passed as it is reacting to the here and now.
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