Welcome to the recap of our Covid-19 weekly webinar – we hope you and your family are safe and well.
On Thursday 2 April, our Investment Solutions specialists Rupert Watson, Head of Asset Allocation, Deb Wardle, Portfolio Manager, Alternatives, and Garvan McCarthy, Head of Alternatives Europe, hosted a webinar on the latest investment implications due to coronavirus.
There are encouraging signs that Italy may have reached the peak in its Covid-19 cases, as containment efforts and lockdown measures take effect. Nothing can be guaranteed, but there is hope the rest of Europe may follow the same pattern, but with a lag of a week or so – depending on the approach to lockdown.
In the US, however, the story is somewhat different, with an alarming surge in new cases. The world’s largest economy was slow to lockdown its population – still failing to do so in some areas – leading to a rapidly rising number of new infections and deaths.
Outlook for the economy and markets:
Focus on alternatives
We believe including alternatives in an institutional, long-term portfolio helps diversify risk factors across your holdings. This can help create a robust portfolio that is more resilient to challenging markets, such as the current one.
We have been diversifying our portfolios for some time, with a range of alternatives, including hedge funds and private market strategies.
Note the following aims within our use of alternatives:
Allocating to alternatives does have its challenges, however as some hedge funds, for example, are not as hedged as they might sound, and are therefore not immune to the type of markets we have seen recently.
It is important to forensically check whether the investment outcome you receive is the one you expected in this or any other scenario, and compare all manager returns to their peers, rather than the general market.
Investors in private market assets will have to wait for the regular valuation schedule to see how their portfolios have been affected. For Q1 valuations, this will likely be in May, Q2 valuations will likely be in August.
While not being marked-to-market insulates these assets from some initial public market volatility, it is certain that these assets will not be immune to the impact of the Covid-19 outbreak.
We can look at the 2008-9 financial crisis for context – and to find opportunity:
Private Market strategies in focus
Private equity – Working capital and cash flow will be crucial over the next few months. We expect to see a continuation of capital calls in the near to cover portfolio company financing needs and to pay down any fund level credit facility borrowing. We believe there will be lower distributions as IPOs and exits are delayed. In our view, there will be significant opportunities to put capital to work in the secondary market in the quarters ahead.
Private debt – With the severity of the crisis, we are of opinion that a wave of defaults is likely to lie ahead, with some sectors likely to be more impacted than others. We think investors could find cushioning through diversified portfolios and via holding senior tranches of issuances.
Infrastructure – This crisis will be a test for an asset class that has become increasingly popular since the last global crisis. Impact on the asset will depend on the sector, meaning potentially wide dispersion of outcomes.
Real estate – Rental growth will be significantly impacted, with significant disruption in the sector. But low interest rates environments are usually positive for this asset class, so there may be opportunities.
With all private markets, we believe - and undertake - a consistent allocation approach to build up our client portfolios over time.
Market volatility is here to stay, in our view, at least until the Covid-19 virus is contained globally. We expect there to be investment opportunities arising from the current market dislocations.
We believe managers with a long-term view – especially those in private markets – may have the opportunity to weather the current storm to help dampen overall risk and achieve their financial goals efficiently.