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Michael Clough | 6 April 2020

Some things never change

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In many ways, life has changed so much in recent weeks. Our usual routines suddenly seem distant memories. In other ways though, some practices haven’t changed at all. The ongoing management of our portfolios and two key components which underpin this, asset allocation and manager research, have continued uninterrupted. Of course, the way we carry them out has changed. With asset allocation, we are no longer sat in one room together, rather all participating through video call and with manager selection, we are no longer meeting managers in person but instead through voice or video calls. Whilst several of our updates recently have considered our asset allocation thoughts, we haven’t yet covered our approach to manager selection.

Keeping on top of our managers in times like this is crucial. Two questions are key. Firstly, have they performed as we would expect and if not, why not? Secondly, what changes have they made to their portfolio and why? For the first question, let me give the example of one of our quality equity managers, Evenlode. Given their philosophy we would expect them to protect capital more successfully than the broad market. Whilst they have performed in line with expectations, had they not, we would be scrutinising their portfolio to understand why. For example, were they carrying more cyclical risk, or economically sensitive positions than usual, and why was that? Exploring the second question gives further insights into the behaviours and style discipline of our managers. Let me use the example of RWC, one of our UK equity value managers. Recently they have been focussing on ensuring the balance sheets of the companies they own are sound and their businesses can survive this period, when markets are pricing many of them for significant financial distress. We would much rather hear this than see them hastily chase more value opportunities that naturally arise after big sell offs. Furthermore, if they have been initiating new holdings, do they fit their philosophy or are they investing in higher risk positions we would not typically expect? Importantly we do a lot of the work on the way in before investing in our managers and that means we typically don’t get many surprises in times such as these.

We have made some changes to portfolio asset allocations in recent weeks, but in recognition that we are just weeks into an episode that is likely to draw out over several months at a minimum, we have not yet moved risk up in size. That said, our underlying portfolio exposures will also move because we use active managers. As their portfolios evolve, so do ours. Of course, this makes ongoing monitoring essential. Whilst there are individual differences, broadly speaking we have witnessed managers putting cash to work in recent weeks. It has been encouraging that most of our managers have not been making wholesale changes to their portfolios. A common message has been the desire to fully stress test and reassess the balance sheet risks in all companies. Even value managers, whose opportunity sets have broadened greatly, have made minimal changes in aggregate.

We started working from home on Tuesday 17th March. Since then we have conducted calls with approximately one-third of all our managers. As long term investors, we have built up strong relationships over the years with managers. Such relationships help in periods like this, not least through one on one access to managers in a time when everyone is wanting updates. Regardless of extensive due diligence before investing with any fund manager, it is crucial to continue questioning and challenging them for reassurance. It is also important to regularly monitor risks and exposures in their portfolios, as our multi asset construct depends on each of them fulfilling their role as expected. Conversations are also important for information on markets which they study day in day out. We will be conducting many more manager meetings in the weeks to come. That will always continue to be part of our routine regardless of where we sit.

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