In mid-January 2020, China was announcing confirmed human to human contact of Covid-19, locking down Wuhan province and building temporary hospitals. While many investment managers carried out daily operations, some had their eye on China.
Nucleus Wealth was one. It is a small active manager in Melbourne with an international focus. The call was made in late January. They dumped their clients' investment holdings and started moving to cash.
Thereafter, all hell broke loose. Covid-19 cases were being found around the world. The numbers were increasing rapidly. Those who weren't fast enough to hoard toilet paper had to ration it.
Airlines were grounded. Forrest Gump and his wife contracted the virus. Every country in Europe was in lockdown. Then most of the world. The US suddenly had the highest number of confirmed cases in the world. Panic was everywhere.
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Pick your favourite equity index around the world. If it was down less than 30% by the third week of March, congratulations. It did better than most.
The real congratulations were due for Nucleus – 90% of their holding was in cash. They could sit and watch. Time to ponder their next move.
In contrast, many other investors had to hold their nerve. Scan any internet investment forum around mid-March – It was chaotic. Panicked investors switching to cash after big losses, assuming bigger losses were to come.
Others were more confident in their selling – deciding it was safer to Covid-19 play out. They planned to sit in cash until the dust cleared. When they received the signal, they would be back in.
But do you know the only thing more distressing than watching the market tumble while you are in it? Watching the market fly upwards when you are not in it.
On March 23, the bottom was in and the mother of all reversals started. The Dow Jones in the US saw a 23% increase in just four sessions. At the time many assumed it was the natural reaction to one of the most violent sell-offs in history.
Word spread out about Nucleus Wealth, and their head guy, Damien Klassen's big win. Klassen was receiving quite some media attention – a few columns here and there and being quoted on the crash.
The Australian newspaper said, "Nucleus is one of the smaller institutions that sold out near the top. But to really get it right Nucleus, like so many others, must decide when to re-enter the market. But given that Klassen sold at the right time, his views on the future have special interest."
This stuff fed into the undying myth that resurfaced in the media: active managers would be the ones to shine during the crisis. But as time went on and markets fueled by unprecedented liquidity there was a problem. The conviction that leads someone to sell out prior to a global pandemic doesn't just disappear. It continues to form their future outlook.
The Australian newspaper published a follow-up article in May 2020 on Klassen's story, and it said, "Back in January, Damien Klassen of Nucleus Wealth believed the market was far too high and he sold most of the funds' equities. He then watched the market fall sharply and was seen as a hero among fund managers. But now Klassen faces another moment of truth because the market has recovered to levels not that far away from where he sold."
And the recovery kept going. US, Aussie and NZ markets are nearly back to where they were at the start of 2020. All the benefits of that hugely successful call are close to being erased.
In some ways, you feel sorry for Nucleus and Klassen. Nailing big calls like this can make or break careers and funds. Despite there being no reliability in calling market movements, the media laps this stuff up.
There are years of free media publicity for being the person that successfully calls a significant market event. To be clear, Klassen is not one of those people who come out like clockwork each year and says the market is going to crash. He merely saw the danger and put his money where his mouth was. A few months later the benefits have mostly been erased.
This is the real lesson here. The lack of an initial market reaction to the initial Covid-19 outbreak in China surprised us. The ruthlessness of the market sell-off as the virus spread to Europe surprised us. The euphoria of the recovery surprised us even more. We admit some of the recovery seems a bit ahead of itself. Therefore, our job is not to second guess the market movements.
What we think will happen is irrelevant. We don't exist to second guess the future with client portfolios. Portfolios are built with a variety of asset classes to support long term goals and plans. They are rebalanced based on market targets or weighting changes. They take into account various scenarios to ensure there is no need to panic and if someone is drawing down, spending is accounted for it the short term.
They will surely be more problems ahead – we haven't seen a stable period in world history yet.
How markets react to events is always tough to know. If we react to them, it creates a decision-making chain. As you can see from this real-life example, it's hard enough to be right once and it's near impossible to be right twice.
So, we will stick to the diversification, long-term investment goals, identifiable risks factors and staying the course.
Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, A Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
This article is prepared in partnership with Mancell Financial Group, Australia. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz