The COVID-19 pandemic has killed thousands, upended daily life, halted the economy and shattered asset valuations. While a pandemic may be new to most of us, market volatility is not. Shocks like these remind us why we rely on our investment principles and how important it is to have portfolios that are aligned with our clients’ overall plans and goals. This crisis has also sharpened our focus on what we do best: advising clients on which building blocks can help weather the storm, finding securities that are not reflecting their fundamental values, and identifying trends that will drive growth in the future. To help shed light on the current market environment, we’ve outlined below the key investment themes and “megatrends” that have emerged.

Durable trends for the coming years

 

At the beginning of the year, we were focused on three megatrends that we thought would drive growth into the next decade: digital transformation, healthcare innovation and sustainability. While the COVID-19 shock brought macro volatility back to the forefront, we believe these trends will drive growth into the next decade. The pandemic, if anything, is likely to accelerate these trends around the world. The digital economy is flourishing, healthcare innovation will provide the ultimate solution to the crisis, and sustainability issues such as food supply and pollution have also been exposed.

Megatrends

Digital Transformation
 

  • Underappreciated opportunities in tech companies with significant scale-up potential can deliver double-digit earnings growth
  • Growth in new applications and use cases across industries for artificial intelligence (AI) and big data technologies will be a core driver of revenues
  • Enabling-technologies such as 5G are paving the way for future, yet-to-be-launched “killer apps,” including remote surgery, augmented reality and autonomous driving

Healthcare innovation
 

  • Confluence of healthcare data and AI is accelerating the speed of innovation in healthcare
  • Breakthroughs in gene-based technologies are leading to innovative solutions to treat and maybe cure diseases in ways that weren’t possible before
  • Regulatory approvals of these new treatments are expected to rise, and peak sales from these treatments are yet to be reflected in company and industry valuations

Sustainability
 

  • A more sustainable future will be a defining movement of the decade
  • Efficiency increases and cost improvements in clean energy technology are making it not only a sustainable choice, but also economical, driving increased adoption
  • Consumer preferences and government focus on moving to a circular economy will spur yet-to-be realized opportunities in packaging, recycling, food and water technologies, and more

 

Please reach out to discuss these topics in further detail. We stand with you, ready to help, offer advice and share our best thinking.

 

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Navigating volatility

 

Volatility across asset classes spiked in March to levels not seen since the great financial crisis. The COVID-19 shock was a stark reminder that proper diversification and downside mitigation are critical to investment success. These strategies are designed to diversify risk exposures and have a keen focus on protecting capital during drawdowns.

Pillars

Peserving capital

Downside mitigation is just as important as upside capture

  • If investors alternate 50% gains with 50% losses, they end up destroying capital. That’s why diversification and downside protection are critical to investment success. We are focused on using active managers that have a proven track record of mitigating losses on the downside while participating in the upside.

Diversification

Traditional solutions are losing their buffers

  • The classic “portfolio” is often thought of as a mix of 60% equities and 40% fixed income. The equity portion provides capital appreciation, while the fixed income portion provides protection when growth slows and equities lose value. When growth slows, interest rates tend to fall and bond prices rise. Now, bond yields are at their lowest levels in a century. This means that the price for traditional protection is high. Investors should expand their tool kits to consider assets such as hedge funds and gold.

Focus on quality

Target well-run companies with resilient earnings

  • The COVID-19 shock offered a reminder of a simple investing principle: When the going gets tough, investors move toward quality businesses. For example, large cap stocks have outperformed small cap stocks during downturns, and companies with more onerous debt burdens have underperformed. Another perspective on “quality” is the prospect for growth. Companies with clear and attractive future earnings trajectories are less susceptible to short-term disruptions in revenues and earnings.

Please reach out to discuss these topics in further detail. We stand with you, ready to help, offer advice and share our best thinking.

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Locating value in dislocated markets

The COVID-19 shock also created a rush to the exits in many assets. Many investors sold what they could, not what they wanted to. This creates opportunity for those with capital to take advantage of assets that are trading at levels that do not reflect their fundamentals or our view of the future.

Pillars

Capital advantage

Those who can provide capital in times of stress have the upper hand

  • Participants with excess capital have an edge over those who have to scramble for cash. In other words, those with capital can demand a premium to lend excess cash to participants who need the money. Further, investors who sold what they could, not what they wanted to, caused assets prices to decline much more forcefully than was warranted by fundamentals. Taking advantage of these dynamics could offer compelling returns.     

Outside the box

Explore opportunities for nontraditional returns

  • Investing can be about buying assets at low prices and selling them at higher ones, but there are much more consistent ways to earn compelling returns. For example, exchanging volatility for downside protection and attractive coupons can be an effective strategy. 

Winners and losers

Identify opportunities that may be overlooked

  • The market has started to differentiate the assets that should be able to weather the storm from those that can’t. However, opportunities may arise if investors hastily sort potential winners into the losers’ basket. Some examples include certain sectors that are traditionally more consumer-driven and cyclical in nature, such as homebuilders, select financials and media companies.

Please reach out to discuss these topics in further detail. We stand with you, ready to help, offer advice and share our best thinking.

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