Reflections on un“COVID”ing March 2020

By Trevor Garvin

March was truly an exceptional month for me as I’m sure it was for all of you. It was a month that as a fund manager, brought many challenges, and much stress and anxiety as I and my fellow team members spent hours watching CNN, SKY and Bloomberg TV channels daily to keep abreast of the news and markets. But the catastrophic events also caused me to take a step back and seek periods of peace.

I needed time to reflect on investment insights gained, but also, on a personal level, to identify those things that were important to me and to contemplate the permanent changes in our society that Covid-19 would perhaps create. These reflections provided me with some welcome perspective, and I want to share some of my thoughts with you here.

The privilege of having a permanent job

I have watched daily as the jobless claims in America have risen to all-time highs. Over a three-week period, 18 million people applied for jobless claim pay-outs. In the previous month, this figure was 300 000. Economists estimate that about 85% of those claims are temporary as staff have been put on furlough, whilst the other 15% are likely more permanent. The UK has shown a similar pattern.

In South Africa, several of my close friends have also been materially affected. One was forced to close his entertainment and gaming venues completely for five weeks, whilst another in the dry-cleaning industry, – servicing the hotel and hospitality sectors, which have completely shut down over this period -- has lost 85% of his business. One does not have to look far to find many other similar stories. Waiters, cleaners, store assistants have been put on furlough in the thousands.

I quickly realised how privileged I am to have a role that is labelled an “essential service”. Being able to work remotely and continue to manage peoples’ hard-earned savings is a responsibility that I take seriously and one that has taken all my attention and effort. At the end of the month I was fortunate to get paid my monthly salary and was able to pay my bills which puts me in a privileged position compared to many others.

It is easier to point fingers than to be in the hot seat

Over the past few weeks I have found myself watching both the UK and US governments daily press conferences. The White House press conference happens every evening around 11.30 pm SA time, and is my final COVID-19 update before going to sleep. I have watched many hours of Donald Trump and his senior virus pandemic advisor Dr Anthony Fauci (Director of the United States National Institute of Allergy and Infectious Diseases) communicate to the American nation their thinking and tactics. In a similar way I have watched Boris Johnson and his medical scientists tell their story to the British public. I have also caught snippets of the Italian, French and German leaders within their countries.

As these global leaders handle the COVID virus for their countries, in my own world I have been trying to manage the range of unit trust funds under my responsibility, along with my fellow team members. These funds cover both the South African and global equity, bond and property markets. Over the past three weeks, I have had to give numerous client feedback sessions on the funds, their performance, how we see markets and what changes to asset allocation we have made or are thinking of making. Without doubt this is part of our role as a fund manager and clients have every right to ask questions and understand our thinking.

What often strikes me however when I’m watching the news reels, is how people are generally very opinionated in hindsight – but often don’t have too much to say looking forward. I’ve come to respect that it is much easier to be a critic and point fingers than it is to be the world leader or politician having to make tough decisions that affect peoples’ lives and whole economies, based only on the available information at that moment. One hopes that they will make optimal decisions using the expertise to which they have access, but the reality is that some will be correct, and others will prove to be wrong. That is also the way of investment markets and the decisions made by investment managers.

Nothing beats liquidity

During the Global Financial Crisis (GFC) in 2008 I learnt a few invaluable lessons as a fund manager. One of the most important of which, was how vital it is to hold investments that are liquid.

By liquid I mean investment instruments or funds that have daily dealing terms with minimal or no risk of gating/side-pocketing during times of market stress. Illiquid assets (private equity funds for example) can enhance performance until markets are under stress and liquidity dries up. I often say, “things are fine until they are not fine”.

A good example of this would be certain property funds that hold predominately “bricks and mortar” properties, with a portion in listed REITS and cash. In times of market crisis, the cash and liquid REITS portion gets used to pay out redemptions very quickly. Fund managers are then forced to gate the funds due to their inability to sell properties or avoid selling at substantial discounts. The result is investors then lose their ability to sell their holdings should they wish.

The lessons learnt in 2008 were priceless. Post the GFC, we have ensured that all our funds only hold daily dealing, liquid instruments and unitised funds that are listed on various exchanges. All funds can be bought and sold daily, with minimal chance of being gated. Some holdings may trade at a discount to their net asset value, but one can still liquidate them when required. As such, we have managed to get through March with no liquidity issues, while being able to rebalance our portfolios. Sadly, I have watched from a distance as several funds over the last month have had to gate and close for redemptions due to poor liquidity management or a mismatch between the liquidity of the assets held and the dealing terms of the fund.

Losing traditional diversification benefits in times of uncertainty

One of the best ways to build an investment portfolio is to follow a strategy of diversification. This is the reason that holding more than a single equity (research shows that between 20 – 30 stocks are about optimal) is preferred and why in most balanced portfolios we invest across various asset classes – namely cash, equities, fixed income and listed property.

We try and spread across these asset classes from both a domestic and global perspective. One of the main reasons for holding different asset classes is that traditionally they behave differently at different times and market conditions. Very often, when equities fall, bonds will hold their own or rise, thereby cushioning the portfolio. What we saw in March however, particularly in South Africa, was that ALL asset classes fell – equities were down around 13%, listed property down 37% and fixed income down 9%. In fund management terms – we would say that all asset class returns were positively correlated (two or more variables moving in parallel with each other). There was thus no place to hide and capital losses were widespread – even in cautious, low risk type funds. 

There is no doubt that the positive correlation we saw across asset classes was linked to the level of uncertainty in markets due to the COVID-19 pandemic.  No one knows how long it will take countries to win their respective battles against the virus spreading, how long until a vaccine is developed or what the full economic impact will be – and this creates an increased correlation between asset classes. Only when the future becomes more certain and the market can price in more definitive outcomes and data, will we see volatility reduce and asset classes reverting to their traditional roles of providing diversification. I feel we are still a while off reaching this point. Therefore, we expect that large daily market moves will remain common in the next few months, as investors constantly process the new information and environment on a daily basis.

Some things will never be the same again

The rate of advances in technology has been staggering over the past few decades. It has literally changed the world and the way we interact. The mobile or smart phone has allowed all people access to information and the ability to communicate. COVID-19 has been the first pandemic of this proportion in 100 years - since the Spanish flu of 1917, when it is estimated that between 20 – 40 million people perished. As was the case then, I feel that COVID-19 has changed some things forever. Peoples’ attitudes would have already changed over the past month. Their behaviour, value systems, needs and desires, their willingness to tackle certain problems – all of these have been affected by what they experienced in the month of March.

I am certain there will be many more things that will change in the next few years. Business travel will without doubt be transformed – more meetings will be held via Skype, Microsoft teams, Zoom or other digital platforms. Conferences will be set up for virtual attendance instead of thousands of people sitting in a room. The traditional office format will change – with many staff working from home and with flexible working hours. As Amazon disrupted retail shopping centres, I think COVID-19 will be the start of an office disruption – the need for office space will reduce as on any given day a percentage of staff will be working from home.

A change in travel habits will have a material knockdown effect on the airline, hotel and hospitality industries which will need to possibly adapt their business models. Food retailers will need to look at how they offer their fresh fruit and vegetables – where people pick it off the shelves and touch the food. Restaurants will need to assess their models and special layouts.

The global sports industry, that generates billions of dollars every year and provides a much-needed outlet for fans around the world has been brought to a standstill. Wimbledon has been cancelled, the US Masters postponed, and we only pray that Liverpool, my beloved English Premier League team still get to hold their league winning trophy up high for the first time in over thirty years. All we can do is we wait and see how these large sports events will be “relaunched” and again, if they need to ensure different levels of spatial seating between the fans or implement health checks when entering stadiums.

Most importantly, governments will have learnt important lessons and they will need to ensure they are fully prepared for future possible crises – from further pandemics, to nuclear war, to social upheaval due to income inequality, to natural disasters like floods, fire, droughts and famine. Society may be more forgiving now, but a second time round there will be less tolerance. Governments will need to think materially longer term on certain issues and not just till the next election. They will need to ensure adequate amounts of stockpiling of emergency equipment, of cash reserves and budget surpluses and encourage people to have “emergency” savings for periods like we are now seeing.

Taking one’s civil liberties for granted

It always strikes me how we take many things for granted, until we no longer have them. This covers many aspects of life – from loved ones, hobbies, relationships, travel, friends and most importantly, health. Indeed, now with more than 60% of the world’s population, or approximately 4 billion people, in some sort of “lockdown”- we can no longer just go for a run at the gym, walk across to a neighbour for a chat, socialise with close friends at a restaurant or have business dealings in the traditional sense. It’s been a big shock to the normal we were all used to.

However, it never fails to amaze me how quickly humans adapt. We have seen how everyone has taken to virtual communication platforms, ironically showing how in some ways one can be significantly more efficient in the way one does things. Technology and its massive advancements has allowed business to function remotely and the financial system to largely function. I think going forward businesses will be changed forever in terms of staffs’ ability to work from home, flexible hours and the way we undertake long distance meetings and presentations. Mainly however, we will never take for granted any longer the social concept of “freedom of movement”.

Every cloud has a silver lining

In South Africa the government not only curtailed movement by car or public transport, but also banned the sale of alcohol and cigarettes. For me what has been interesting is the now publicly released data of the number of car accidents on the roads, trauma cases in hospitals and shootings and stabbings. They are all down between 65% and 75% for the past three weeks. 
This is a significant reduction across all fronts – and one that is pleasing to see as I am sure it has resulted in many fewer grieving families. Overcrowded roads with the constant increase of cars on it due to a growing population, poor driving habits, and the abuse of drugs and alcohol all contribute to the level of road accidents and domestic violence that we have become accustomed to seeing daily. Across the country in all major cities, hospital trauma units have had to deal with far fewer incidents of alcohol fuelled stabbings and injuries. The Minister of Police, Bheki Cele, also announced this past week materially lower crime statistics across the country – with people being forced to stay home and off the streets.

Sadly however, the level of home-based emotional trauma, abuse and gender-based violence has seen an uptick. There has been, in some areas, an increase of 110% year on year – not only in South Africa, but most countries around the world. This is clearly a global problem and one that cannot be tolerated. The solutions are not easy but need to be tackled as a matter of urgency.

Will COVID-19 help speed up climate change policy?

It has also been fascinating for me to see various documentaries on the daily news bulletins, as well as several articles published in financial magazines, showing satellite pictures of large cities around the world. These pictures show you the “before” and “after” levels of air pollution and smog over these cities – particularly those that have large areas of manufacturing or mining. I include my lovely Cape Town in this example. It is clear to see how in the space of just three weeks the air has become much clearer and there is less pollution – perhaps it’s just me and my imagination – but how many more insects you see scuttling around and birds tweeting in the trees.

I am not so naïve to think that the world must stay in economic lockdown, but rather what I would hope for is that politicians and leaders of industry realise that this global pandemic has perhaps given them the perfect opportunity to speed up reform in terms of alternatives to the use of coal as a source of energy and rather look towards the more natural and cleaner sources of wind, solar and hydro for energy. The effect of car exhaust fumes is also significant in urban areas and the faster we move to hybrid vehicle usage the better. I am no expert on climate change – but what is clear for me is that anyone who was perhaps questioning the negative impact that large amounts of pollution were having in densely populated urban areas must now surely be convinced that this is the case. Nothing is more beautiful than breathing in a lungful of fresh, clean sea or mountain air.

The fragility of life

My personal level of anxiety spiked the day I saw on SKY news that Prime Minister Boris Johnson had been admitted to hospital and then transferred to the intensive care unit – ventilators on the ready. What struck me was how just the day before he had circulated a video clip of himself in self isolation at Downing Street, setting out government policy for the days ahead. Just 36 hours later he was in the ICU with his life in danger. How fast things turn. One cannot take anything for granted. Up until that point I felt confident that should I catch the dreaded coronavirus, I would quite easily overcome it being relatively fit and young – but it then hit home that one never really knows. Everyone reacts differently, and health can quickly deteriorate. Do not ever underestimate one’s own health and the joy of life.

Human ingenuity

When thinking about the fragility of life, what gave me much hope was watching daily the collective power of human ingenuity. Humankind over thousands of years has always found a way to tackle adversity, adapt and transform itself to be able to survive for the next chapter in its history. Now is no different.

It has been really fascinating watching how across the globe the scientific and pharmaceutical industry has in such a small space of time put so much resources into research, analysis and of course work towards developing a COVID-19 vaccine. Progress has been swift in many sectors, and the FDA (US Food and Drug Administration) has sped up its approval processes significantly. There is also amazing research being done in Europe, Israel and Asia – with all countries sharing information and analysis.

On a more practical level, we have seen how industry has also played its part. Massive automobile manufacturing plants have been adapted to produce ventilators that are in desperate need whilst textile and clothing factories are now churning out protective face masks. It has been incredible watching how society is able to adapt and in a short space of time – the will of humans to survive is certainly very strong.

Empathy

My final reflection which has taken up a lot of my thoughts this past week, is on the tough living conditions during this lockdown of millions of my fellow South Africans. Those South Africans in the townships, crammed in their dwellings, sharing one tap and one running toilet amongst 500 people. I watched several news reports on both global and domestic TV channels, quite critical on how people were not sticking to social distancing guidelines and were leaving their homes to walk around. This resulted in the South African National Défense Force being called in to be quite forceful to implement government policy. Several incidents of violence and abuse by troops on civilians was reported. I fully understand the difficulty to maintain social distancing in crowded urban living spaces and across the public in general there is ongoing confusion about COVID-19. The same can be said for people around the world in similar situations – in India, Bangladesh, Brazil and China. I think our government, and others, will need to be more innovative when it comes to trying to contain the spread of the virus in high density, low income areas. People cannot be treated inhumanely and be expected to remain cramped indoors 24 hours a day.

One of the biggest problems I feel that the world is facing, before COVID-19 and even more dramatically afterwards, is the degree of income inequality that we find in society. The combined wealth of the world’s 10 richest people is more than the poorest 4 billion people in the world. It is often in times of hardship and challenges like we currently face that the poor struggle even more and we need to ensure that we show and give the empathy and care that they need and deserve. I have witnessed an outpouring of generosity over the last month across all walks of society – both rich and poor.

Concluding remarks

There is a deluge of information and daily news on the current COVID-19 and related matters. One battles to differentiate very often between facts and fake news. I certainly find myself now monitoring how much I watch, and I choose my sources of information that I feel I can trust.

It has been a month of so many things. Trying my best to manage investors savings to the best of my and my team’s ability, lying awake at night wondering what the correct asset allocation move would be and at which appropriate moment.  Trying to understand the way various assets have reacted, drawing on my previous 24 years of investment experience and mistakes that I have made has been all consuming. Overall, we got through the storm okay, certainly battle scared but ready to face the months ahead.

On a personal level, what these three weeks of lockdown has provided me with, is time to think. To think about the people that I work with, and how amazingly they have all risen to the challenges of remote working. To think about our clients and investors who are each dealing with their fears and anxieties differently. I have spent many hours thinking how the world may change after this period, how trends and habits will be affected, and very specifically how we can improve the lives of the economically downtrodden. Mostly, I have had time to think about the fine line between life and death – something I will not take for granted in future.

I hope this has given you some interesting perspective and I invite you to please contact me or my team at any time to discuss any thoughts or concerns that you have. Meanwhile, we will continue to provide regular updates and communication during this uncertain time.