Investment strategies faced an unprecedented freezing of the global economy that slashed the value of equity markets by one-third within a few weeks earlier this year.stevecoleimages/iStockPhoto / Getty Images
As markets struggle with the potential of a second wave of COVID-19, money managers are weighing how their investment strategies are holding up against the first wave of the pandemic.
Those strategies were put to the test in mid-February when an unprecedented freezing of the global economy slashed the value of equity markets by one-third within a few weeks.
The broader markets have returned to pre-pandemic levels for now, but investors who panicked and sold may never recover. Disciplined money managers who maintained their own long-term strategies met varying degrees of success in containing the extreme risk.
Here’s a look at how four of them – and their approaches – are holding up:
Fundamental: Barry Schwartz, executive vice-president and chief investment officer (CIO), Baskin Wealth Management
Fundamental investing, also known as value investing, is the most common investment style. Its basic tenet is buy low, sell high.
“Ninety-nine per cent of investors completely forgot that,” Mr. Schwartz says.
Determining the value of a stock in an economic freeze isn’t easy. It starts with comparing its current trading price with the company’s earnings expectations – something corporations were not able to provide as business came to a halt. Mr. Schwartz’s way around that was to rely on pre-pandemic earnings guidance.
”A three-month shutdown of a business you’re planning to own for 10 years doesn’t really have an impact to the calculation of the business’s value,” he says.
Some of Mr. Schwartz’s clients have not yet fully recovered from the pre-pandemic high, but most are up for the year because many their portfolios had significant holdings in technology and health care, which recovered quickly. He expects the best companies in the best sectors will continue to be the strongest performers as the economy ramps up.
“It’s best just to focus on owning the best companies you can and holding on,” Mr. Schwartz says, adding that the meltdown has also provided opportunities to buy more quality companies at low prices.
“Corrections and recessions are part of investing, and your best returns come from the investments you make when markets drop,” he says.
Technical: Jeff Parent, vice-president and CIO, Castlemoore Inc.
Technical investing also has huge challenges in a global economic freeze because the approach seeks to chart trends from past market activity using moving averages. No technical analysis can foresee a pandemic, but Mr. Parent says the market rally ahead of it was signalling a change in direction.
“Patterns are often repeated. One of the big patterns are reversals in trends. Technical analysts would’ve sold if they were following that guideline,” he says.
As a result, he entered the Feb. 19 pre-pandemic high with almost half of his portfolio in cash. That helped buoy the other half to eventually exceed that high and post a year-to-date advance of 8 per cent.
During the lows, his technical analysis showed a firm upward market trend and buy signals appeared for individual stocks.
“The buying opportunities were right around the third week of March,” says Mr. Paren, who still has 20 per cent of his portfolio in cash, ready to do more buying on further dips.
“Right now, the trends are all positive, so it’s bullish. There’s no real signal of a reversal or downward move,” he says.
That’s not to say a second wave of COVID-19 won’t knock markets back down, but Mr. Parent says unlike fundamental analysis that anticipates market activity, technical analysis adapts to current market conditions.
“In technical analysis, the mental fortitude to make changes is the most required element to be successful,” he says. “We’re not leaders in calculating values. We react.”
Quantitative: Brian Acker, president, chief executive officer and chief investment strategist, Acker Finley Inc.
Quantitative investment models come in many forms, but generally rely on advanced mathematical modelling, computer systems and data analysis to determine the probability of a stock’s value going up.
Mr. Acker focuses his quantitative analysis on individual company balance sheets.
“Our secret sauce is that we can calculate what that balance sheet would produce in terms of earnings if it can just maintain state,” he says. “A balance sheet either grows as earnings compound or, if losses mount, it contracts over time.”
Like fundamental analysis, a quantitative approach requires clear and up-to-date corporate financial statements.
“We download earnings estimates literally every night and calculate the balance sheets,” he says.
Also like fundamental analysts, Mr. Acker was able to bridge over the uncertainty when corporate earnings dried up.
“I have no idea what the earnings estimates are, but I still have last quarter’s balance sheet and I know that’s fixed. We can’t be off by much,” he says. “The balance sheet doesn’t change very often, so we can basically go through these cycles.”
As a result, he managed to steer client portfolios back to pre-pandemic levels by picking up bargains.
“What the market realized instantly as it was cratering is the earnings for some companies weren’t that bad,” he says.
Whatever works: Diana Avigdor, portfolio manager and head of trading, Barometer Capital Management Inc.
The are many investment strategies. If they work, Ms. Avigdor has probably adopted them.
“We’re a style-agnostic active manager,” she says. “We’re not value, growth, [growth at a reasonable price] or anything. We will do whatever works.”
For starters, she employs what’s called “stop-loss management,” which means sell orders are placed on all positions automatically in the event of a drastic drop in price.
“We may love a stock, but if it’s not acting well, there’s a level at which we’ll let it go. We listen to the market,” she says, adding that a reverse discipline applies to stocks that are rising in value.
“We’ll let our winners run. If one goes to $200 and comes down to $180, I may have not caught the top, but I will have a stop-loss in place,” Ms. Avidgor says.
Those stop-loss orders helped cut overall losses in half at the market low, resulting in year-to-date portfolio gains of 5 per cent.
Before choosing a stock, Ms. Avigdor does a top-down analysis on the economy and broader markets.
“We start out by being top-down and the first question that drives us is, ‘Should you be invested?’ If the answer is yes, the next question is, ‘Where?’”
She says the top-down approach shows momentum shifting.
“We have cycled into the financials because they have started to look better,” she says.
The final strategy is a bottom-up value approach that evaluates financial statements from individual companies and compares them with their trading prices.