How many fund managers went into the GVC (great virus crisis) with the portfolio they would have liked to be holding? Not many. And not even poor Warren Buffett.
In his downbeat online shareholder meeting last week, he told investors that he had spent much of March and April selling his huge stakes in the US's four biggest airlines (United, American, Delta and Southwest) on the basis that "the world has changed" and holding them had been a "mistake".
Unfortunately, it has not been the only mistake the world's one-time greatest investor has made recently. Thanks to holding much of Berkshire Hathaway's portfolio in out-of-fashion value stocks in an age of growth obsession, its shares have underperformed for a decade.
They are up 126 per cent in the past 10 years. That sounds fine — until you look at the S&P 500 index, which is up 140 per cent.
On the plus side, the fact that even Buffett has been caught with the wrong portfolio as the music stopped should come as some reassurance to many others in the same boat.
Anyone who went into the GVC having been convinced — as I was — that it was nearly time for a great switch from growth into value, from technology to the physical economy or from relatively expensive US stocks to cheaper, high yielding UK ones has had an unpleasant few months.
For an example of just how unpleasant, take a look at the Temple Bar Investment Trust (which I hold). Its managers had positioned the fund in cheap UK shares, which had appeared to be poised for a post-Brexit uptick — or so we thought.
Temple Bar went into March with the worst possible portfolio (its top 10 holdings included BP and Shell). Its shares are down more than 40 per cent in the past three months. Ouch. This is not to say, by the way, that the wrong portfolio is always the wrong thing to buy.
Get a big enough discount on an investment trust and the wrong portfolio can still be a perfectly reasonable buy. There is still some of that kind of opportunity around in the niche areas of the investment trust market — but overall discounts have closed significantly since the low in March when they hit 20 per cent. The average is now back to more like 8 per cent.
Still, there are outliers — funds that went into the crisis in the perfect place. One is the Equitile Resilience Fund, which was able to say in its last note to investors that its manager had "made no significant changes to the composition of your portfolio during April".
Instead, managers are convinced that Covid-19 will simply accelerate the trends they had in mind when they chose the fund's holdings. Our new interest in hygiene over privacy will help out Visa and Microsoft as we shift to a cashless economy. Our shift to homeworking — one of the few changes that I think will last longer than the pandemic — will help US gaming specialist Nvidia (one of Equitile's top holdings), not to mention Microsoft, Apple and Alphabet, which are all in the portfolio already, as well as the semiconductor business as a whole.
Starting from here, the managers might even be happy to have had LVMH in their portfolio: spending on luxury goods is already recovering nicely in China and they expect an element of carpe diem spending as the rest of the world reopens (although the more slowly lockdowns are lifted, the less likely that becomes).
Collectively, the fund's holdings fit nicely with a slightly overused bit of advice from Canadian hockey legend Wayne Gretzky, whom Buffett likes to quote: "Skate to where the puck is going, not where it has been."
The Equitile fund rose 33 per cent last year, and is only down 8 per cent this year. Add it all up and I think that were Equitile able to start again they would, I think, be happy to start from much the same place.
There are others. The managers of the Scottish Mortgage Investment Trust, which I also hold in my own portfolio, would probably say the same thing (its shares are up a slightly absurd 15 per cent year to date). So would those of the Blue Whale Growth Fund (up 2.6 per cent so far this year) and Fundsmith (also in my portfolio, and flat year to date).
Note that these funds are all pretty US heavy. Perhaps their managers have been keeping another well-known Buffettism more in mind than most: "Never bet against America."
They may all find their time of trial is yet to come of course. The stocks they hold are expensive and if the bears are right, the real bear market has barely begun.
However, the really interesting question now is whether some managers might use this environment to start from scratch — because now might be a great time to do so.
Retail investors are hugely engaged. All the platforms are reporting sharp rises in activity and there has been an interesting inflow of cash into equity funds (£2.6 billion last month, according to fund settlement firm Calastone).
At the same time, while the recovery from our sudden bear market has been extraordinary in its speed and scale, there will still be bargains about.
So far the opportunity has been pretty much ignored by the investment industry (which makes sense — fund launches usually mark the top, not the bottom, of the market).
Regardless, boutique management firm Downing is having a go with the launch of two new funds. The Downing Unique Opportunities Fund, managed by Rosie Banyard, will invest in companies across the size spectrum in the UK and has a long-term buy and hold strategy.
The Downing Global Investors Fund will take positions in around 150 companies catering to the still-growing global middle class population. By the end of the decade, fund manager Anthony Eaton expects that two-thirds of the world's middle classes will be located in Asia.
I can't tell you how well either of these will do, but they both have well-regarded managers — and come with the happy advantage of starting with a delightfully blank slate.
Written by: Merryn Somerset Webb
© Financial Times