Whether you are on the frontlines of the fight every day or required to shelter in place, the new reality the Coronavirus has imposed on our day-to-day lives is jarring. We have all had to dramatically adapt the way we work, live and interact with one another over a very short time. If you are following the virus updates on a regular basis, the U.S. is currently on the upswing in both new cases and deaths. However, there is also encouraging data that shows social distancing practices and other safety measures being taken are beginning to have a positive impact on slowing the spread.

As uncomfortable as this current way of life may be on our physiological and psychological well-beings, we have to rely on the medical and scientific community to help us know when things can begin to get back to normal, or more likely, a new-normal. While the Global Financial Crisis of 2008 certainly altered how we each process risk and reward in investment portfolios, this crisis, in addition to further honing those portfolio viewpoints, will most certainly alter the way we conduct our lives going forward.

Even though we cannot forecast the end of the virus or its ultimate impact on the global economy, we also cannot let fear paralyze us. We need to focus on a brighter future and continue to plan for what might be around the next corner. Much like the scientists guiding our country through this crisis, we will be measuring the 2nd derivative of market data (change in the rate of change) to make assessments and provide investment guidance. As it relates to investment markets, evaluating the 2nd derivative of asset price movement involves looking for indications that “less negative” market movements and developments may actually be signaling a “positive” outlook. We make these ongoing judgements since, while the virus may eventually get an “all-clear” from the scientific community with the arrival of an effective vaccine, there is no vaccine for the risk in the financial markets. Market volatility (though normally less extreme) was present before the virus and no one is going to sound an all-clear bell to let us know it’s safe to rebalance and/or make new strategy allocations. In fact, without overtly realizing it, market participants are always assessing the 2nd derivative of asset movement through the lens of new data received. This is why you often hear that financial markets have “priced in” expected outcomes well in advance of their eventual realization.

Our general recommended course of action during these difficult times is to stick with the basic principles of institutional investment, many of which should be detailed in your portfolio’s investment policy. A well-designed policy accurately reflects the portfolio’s long-term goals, objectives and constraints. Within these broad categories are parameters around investment time horizon, ongoing cash flow needs, asset allocation targets, allowable investments, as well as procedures around critical portfolio administration issues such as rebalancing. The formal documentation of these various factors should be clear and readily measurable without excessive effort and/or expense.

These timeless tools are effective considerations for not only weathering the current storm but also helping to position portfolios for future potential success.

  • Reaffirm long-term objectives: During times of market and/or economic stress, it is important to reaffirm and understand the ultimate goals and objectives that the portfolio is trying to achieve. While crisis-based viewpoints may make an objective analysis difficult, it is important to evaluate whether current market conditions have materially altered the portfolio’s long-term goals, time horizon and/or overall risk tolerance. Stepping back from the day-to-day barrage of news will often reveal that these long-term objectives remain sound and that the portfolio remains on track under the current policy. If this is the case, it’s not typically advisable to make significant changes during times of crisis.
  • Reaffirm liquidity needs: Under normal market conditions, cash flow requirements are often factored into a discussion of goals, objectives and constraints. However, during periods of market dislocation, liquidity management deserves its own special focus. Whether meeting ongoing portfolio beneficiary obligations or investment capital calls, it is rarely preferable to source cash flows from depressed assets or assets that are experiencing a liquidity crunch under distressed market conditions. In addition, it is important to assess the potential impact the current crisis may have on a portfolio’s expected future contribution sources (participants, sponsors and/or investment realizations). This type of analysis requires active and ongoing portfolio planning and liquidity management. It is prudent for portfolio fiduciaries to actively involve their investment professionals and utilize their collective insights as part of the planning process.
  • Conduct rebalancing when necessary: Much like the previous two items, a disciplined rebalancing strategy is a well-defined part of a portfolio’s investment policy. Despite a clear definition in a policy, we acknowledge that rebalancing is one of the most stressful portfolio decisions to undertake during severe market movements. This is another area where open discussion and scenario analysis can make these difficult rebalancing decisions easier to stomach. Rebalancing is not a market timing transaction, nor does it have to be an all or nothing prospect. Each portfolio and rebalancing event is unique, so evaluating a variety of potential approaches, such as staging multi-step transactions, can help lead to better results for each situation.
  • Analyze the portfolio’s investment management structure: Experts tend to come out of the woodwork during times of market distress and, if they have something to sell, their guidance can be suspect. Fortunately, in addition to your investment consultant, each portfolio also has its own set of experienced market professionals on staff in the form of the investment managers that you can leverage. A portfolio should engage their investment managers to gather insights to better understand how assets are being managed in the current environment and what these professionals are observing day-to-day in the marketplace. These trusted insights will serve to “turn-down” the general market noise and keep the focus on assessing how the current environment is impacting your portfolio.
  • Assess the viability of new market opportunities: Finally, every item before this bullet was essentially providing opportunities to conduct “triage” on your portfolio (play defense) relative to current market conditions. However, every crisis also inevitably creates investment opportunities (play offense) that aim to take advantage of evolving market dislocations. Like all investment strategies, these new ideas will not be without risk and their expected success may not materialize or be fully realized. However, rather than relying on a “fear of missing out” approach to weighing these opportunities, a methodical evaluation of the portfolio’s current position relative to the previously listed principles is arguably the best way to determine if any of these opportunities are appropriate to consider for your portfolio.

While our “top 5” considerations list is certainly not meant to be an exhaustive list of items to review, there is a common theme that runs through each of them. Namely, it is generally advisable to set aside the necessary time to fully understand the structural elements of your investment portfolio. If this review ever reveals something that doesn’t match your understanding of the way things should be, it is wise to take the time and conduct the analysis necessary to ensure proper portfolio alignment for the future. We are confident a brighter tomorrow lies ahead and these principles will help ensure your portfolio is better prepared.

We would be remiss if we did not close with our sincerest eternal gratitude for the true bravery of the people that are keeping the fabric of our society together every day with their efforts. We are deeply indebted for your valuable contribution during this national crisis. Thank you for what you do.


Important Disclosure Information

The views and opinions expressed are solely those of AndCo Consulting. These statements are not guarantees, predictions or projections of future performance or of any outcome. This should not be regarded as investment advice or as a recommendation regarding any particular course of action.
This document has been prepared for informational and educational purposes only, and is not intended to provide, and should not be relied upon, for legal or tax advice. The material provided herein is valid as of the date of posting and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date.
AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.