‘A modest sell-off, not a panic’: Douglass on coronavirus fallout

--  |   14/03/2020 Text size  Decrease  Increase   |  
<p><strong>Glenn Freeman</strong>: And from a portfolio perspective, so I think you're quite fully invested at the moment you haven't moved into cash. How should end investors respond in their own sort of portfolios?</p> <p><strong>Hamish Douglass</strong>: Yeah, well, I'd say moving in and out of cash is very difficult for most people and most people are doing it, reacting after data has come out and they're reacting to the emotion of the time. And most of the time, that is the wrong thing to be doing. As Buffett says, you want to be fearful, when other is greedy and greedy, when others are fearful and selling out because of all of this news and things will probably turn out unless you lock it, that you get back in, when they fall. If you just want to sit this out, it will probably -- you've sold out when the markets have really come off somewhat. And you're probably into it when the markets are above what you sold them out. So, we would advise people not to do that as a general rule. We typically, when we've gone to cash is where we've said we want to reduce our overall market risk because we're predicting something's going to happen and we've got data on it.</p> <p>So, in 2018, we held 20% cash because we knew the Federal Reserve, and they told it we're almost going to increase interest rates. So, we were just predicting that was going to impact asset valuations, as rates go up, valuations come down, and that exactly happened through 2018. And we wouldn&rsquo;t just sit with even less with the markets for something we knew was predictable. But 2019, the game changed again, and they said they're going to cut interest rates. So, we actually came out of cash. We don't sit in cash because there's a black swan event that could happen at some time. We do that by having a super high-quality portfolio and running risk, less risk than the markets run in our portfolio and actually our portfolio through coronavirus has held up pretty well. If we were sitting in 20% cash going into coronavirus, it would have done even better to portfolio. But in the last 12 months, our portfolios outperformed the market by 10 percentage points that would not have happened. If we'd been sitting in cash for the last 12 months. So, all I'm saying for a lot of people the cash is -- we do it because we're issued about a foreseeable macroeconomic event. Not because we panic and go cash during the middle of uncertainty.</p> <p><strong>Freeman</strong>: And I just want to pick up the point that you raised about Warren Buffett, I know you watch, you're something of a disciple of Buffett.</p> <p><strong>Douglass</strong>: I'm not the only one by the way.</p> <p><strong>Freeman</strong>: There are a few of them around. But what would Buffett be doing now.</p> <p><strong>Douglass</strong>: He's got a lot of cash, he got a lot of cash and his inclination would be to buy, to swing the bat when markets are selling off, I suspect an 8% to 10% sell off, he wouldn't find mouthwatering. And don't forget even that it's in the context in the last 12 months the markets were up over 30 percentage points. So, coming off 10% when the markets were up 30, I suspect he would say this isn't what I call a panic and it's not a panic. This is a relatively modest sell off with extreme information being passed around and uncertainty at the moment, but I suspected markets came off 20% or 30%. Buffett has 120 billion cash I suspect he would start spending that money. I would think at his age. I think he's probably hoping for an event. Warren quite likes when markets panic at the end, but I would say if you ask him, he would say I don't regard this as a panic in terms of the market movements at the moment, it's relatively modest, but it could get -- anything can happen in the next three months. There's a lot of uncertainty. It's fluid at the moment.</p> <p><strong>Freeman</strong>: And underpinning a lot of this is obviously China. So, will the disruption in China have a long-term effect on say supply chains in disrupting the way that businesses around the world actually interact with China?</p> <p><strong>Douglass</strong>: Well, it's very interesting, the beginning of coronavirus where it looked like it was an epidemic. I'm not using pandemic, epidemic within China. People were saying well China's really risky. We're going to have to move our supply chains out of China. And what I would say to you is first of all, moving on scale supply chain somewhere else without the infrastructure is really hard to do. Maybe one company can do it, the scale of manufacturing that they have for all people to move their supply chains one just isn't viable. And secondly, doubts on epidemic but people were thinking of a pandemic is at low risk having your supply chain in China or in Indonesia, or Vietnam, if this starts spreading into Indonesia or Vietnam as a pandemic, and that's what a pandemic is, it spreads across national borders, is your supply chain safer. I would say that Chinese ability to curtail it, because of the way they can operate and effectively control things.</p> <p><strong>Freeman</strong>: They can flick a switch and things happen.</p> <p><strong>Douglass</strong>: They can flick a switch. Good luck in Vietnam or Indonesia or India. If you put your supply chains into those countries and most people try and go to low cost jurisdictions, you may be actually increasing your risk to a pandemic by moving your supply chain to a third world country that actually doesn't have the ability to control things as much. What I would say is probably the more realistic scenario is people have moved their supply chains to make them as efficient as possible to take out all the infantry in the system to get it to just in time manufacturing, shipped it straight away, straight to your warehouses. And people weren't predicting that that production could get shut down for an extended period of time. And then they ran out of goods, when it ran out goods.</p> <p><strong>Freeman</strong>: Because they don't have big inventory.</p> <p><strong>Douglass</strong>: They don't hold infantry and that was the trend in manufacturing that sort of infantry less manufacturing supply chain, I suspect, people will initially think let's just move somewhere else and realize well that's probably not the viable and actually doesn't really change our risk dramatically. But what they may want to do is put more latency into their supply chain and put more warehouses and more infantry into the supply chain line. So, they've got more resilience to something like this in the future that costs money, you have to put cash in to do that and who's going to pay it, is it going to be the manufacturer of the good, the retailer, the brand owner, how's it but I'll suspect where we're really talking to companies and we're thinking about from a financial modelling, is there a working capital requirement here from a cash flow perspective? Or putting more resilience in the supply chains at the moment.</p> <p><strong>Freeman</strong>: Okay, so that's the main.</p> <p><strong>Douglass</strong>: For us it&rsquo;s a flow on, which does have some impact on valuation at the end of the day, depending on whether they get it back in price or in any way. But all this manufacturing, people just say, oh, everyone is going to move their manufacturing out of China. I go good luck.</p> <p><strong>Freeman</strong>: You don&rsquo;t see it happening.</p> <p><strong>Douglass</strong>: I see it at the margin. But I just don't think that when people think about it, that actually is going to solve, one it's very hard to do at scale. And then secondly, does it really reduce your risk to a pandemic? And a pandemic, by definition is a global spread of a disease.</p> <p><strong>Freeman</strong>: Just lastly, in the higher volatility environment and the low inflation should investors be expecting active managers to outperform and obviously Magellan, you've outperformed in an up market, investors right to expect managers to continue beating the benchmark in this current environment or are passive funds becoming still a popular option in this sort of environment.</p> <p><strong>Douglass</strong>: You're asking the general passive versus active debate. The first thing I would say is the trend towards passive purely I mean the true passive investing in the index it's super low cost, invented by Vanguard Jack Bogle. The office next to my where I sit is called the Bogle room. That's because I've got a huge amount of respect for what Vanguard and Bogle did for investors around the world. They commoditized the index. So, I'm a huge fan of index investing, it's very, very low cost, and makes a lot of sense for a lot of people. I do believe that true active investing that people are very concentrated and taking very high active shares, maybe if they've got some skills in reading the environment and changing the allocations through that. I absolutely believe that you can add additional value over and above the index. I don't think all active managers can do that, because a lot of active managers are running very large hundred stock portfolios. The probabilities of those things materially outperforming net of fees are actually very low.</p> <p>Most people never move their positioning and then risk positioning a lot of it looks backwards about just repeating what worked for them in the past. But you know, good active managers can absolutely add value particularly in these environments, but the index has its place as well. So, you're never going to hear from me people putting their money in index funds is a stupid thing to do. At the end of the day, and I think they've done a service because it made it a lot tougher for the active managers who weren't truly being active. They were marketing machines more than they were evaluating machines for, for investors and that part of our industry is in trouble. And frankly, it deserves to be in trouble.</p> <p><strong>Freeman</strong>: So, you are saying this environment is heading into a downturn, this could sort the wheat from the chaff, so to speak, in terms of active managers that can continue to outperform?</p> <p><strong>Douglass</strong>: Well I think the last decade &ndash; the last decade has been a very interesting decade and it's sorted lot of people out. You know, at the end of the day, I think this is more of the same when you get volatility, and particularly this type of volatility. People dramatically underperform the index. People don't like that. And then in the last 10 years, it's been a difficult environment that you've had to navigate around. A lot of active managers have underperformed there but there have been a number of active managers who have dramatically outperformed as well because they're doing something very different to them, so I'm not afraid at all of passive investing. I don't think it in any way harms our business in what we're doing. And I think it's done a great service to, to society and to many investors around the world.</p> <p><strong>Freeman</strong>: Thank you very much for your time today, Hamish, I really appreciate your time.</p> <p><strong>Douglass</strong>: My pleasure, Glenn.</p>

Video Archive...

A Democrat clean sweep and corporate America
15/01/2021  Morningstar's head of policy research Aron Szapiro explains what sort of changes a Biden government will make and how they will affect company valuations.
3 stocks for climate transition
14/01/2021  Freight-rail, building temperature efficiency, and carmaking are among the sectors Aviva Investors' Jaime Ramos Martin has his eye on.
The outlook for dividends
13/01/2021   Dividend investors had a hard time in 2020, but Morningstar analyst Dan Lefkovitz think the outlook is brighter for the year ahead.
3 themes for fund investors in 2021
11/01/2021  Morningstar Investment Management's Dan Kemp reveals the three investment themes on his mind for the year ahead.
What next for oil and gas companies?
06/01/2021  Morningstar equity analyst Allen Good looks at the prospects for oil and gas giants in the year ahead. 
China outlook 2021
05/01/2021  China had a strong year after a rocky start, but can it continue—and what does a US President Biden mean for the region? Morningstar analyst Lorraine Tan explains.
Tech, travel and trends for 2021
04/01/2021  Morningstar equity director Alex Morozov considers the outlook for tech, travel and beyond for the year ahead.
Money and investment lessons of 2020
01/01/2021  How to plan for things you can't plan.
Morningstar Year in Review 2020
25/12/2020  2020: we look back at the highs and lows of an unprecedented year in financial markets and explore the themes shaping 2021.
Are music streaming companies a big hit with investors?
22/12/2020  Music streaming companies have seen stellar growth in user numbers. We ask Morningstar equity analyst Neil Macker if the trend can continue.
What Tesla's inclusion in the S&P 500 means for investors
21/12/2020  While it stands as the largest addition in the index's history, this likely won't impact everyday investors all that much. 
Peter Warnes and the 2021 Forecast
18/12/2020  Will there be opportunities to deploy cash in the new year? Will there be a reprieve from covid? And what will the incoming Biden administration mean for markets?
Investing in the climate transition
18/12/2020  Companies that specialise in solar, building efficiency and renewables underpin Aviva Investors' Climate Transition Global Equity Fund, says Jaime Ramos Martin.
Why does liquidity matter?
16/12/2020  Why does liquidity matter to investors, and how can it affect your returns? Morningstar equities director Tom Whitelaw explains.
Introducing the Morningstar Capital Allocation Rating
14/12/2020  Learn what we look for when rating a company.
Incorporating ESG into our equity research process
14/12/2020  Morningstar's new approach unpacks the environmental, social and governance risks that companies face.
Tagliaferro: yield ideas for your portfolio
10/12/2020  Industrial companies typically generate better cash flows and can offer a steady income stream, says the IML founder.
Anton Tagliaferro on value versus growth
09/12/2020  The lofty valuations of Tesla and Afterpay typify the effervescence and speculation in the market, says the IML founder.
Can car companies be ESG investments?
08/12/2020  Car makers may not be an obvious investment choice for ESG-conscious investors, but Morningstar analyst Tancrede Fulop says some of the largest companies score highly in some measures such as safety and human capital.
The US and China under president-elect Biden
07/12/2020  Janus Henderson's Matt Peron considers how the relationship between the US and China will evolve under a President Biden.
Investing basics: what is active and passive investing?
04/12/2020  What is active investing, and what is passive investing? We're at the whiteboard to explain the pros and cons of each 
Why we still like Treasury Wine
04/12/2020  Treasury Wine Estates remains an undervalued stock in spite of China's demand-destroying tariff on Australian wine. Morningstar director of equity research Adam Fleck explains why.
What is gold worth?
03/12/2020  And do any other assets currently compare?
Why now is the time for ESG investing
02/12/2020  We're at an inflection point in ESG investing, says Sustainalytics founder Michael Jantzi. Here's why. 
10 stocks retail investors bought in covid sell-off
01/12/2020  Beaten-down travel stocks and BNPL providers featured heavily, says nabtrade’s Gemma Dale.
How retail investors seized on covid sell-off
30/11/2020  Many people were waiting for the opportunity to buy shares at historic discounts, says nabtrade’s Gemma Dale.
AMP: difficulties now, but dividends later
27/11/2020  The 171-year-old wealth manager has had its scandals but there's merit to its turnaround strategy and the quality of its other assets, says Morningstar's Shaun Ler.
'Be careful using buy now pay later'
27/11/2020  BNPL products such as Zip Co help boost consumer spending but they come with risks and are overvalued, says Morningstar analyst Shaun Ler.
Hamish Douglass: Winners and losers in the covid era
26/11/2020  The Magellan co-founder argues the ecommerce acceleration is here to stay and ponders the effect it will have on other sectors such as travel and commercial real estate.
A 'wonderful hunting ground'
25/11/2020  Greg Dean of Cambridge Global Asset Management explains why the consumer services sector has yielded healthy returns.
Hamish Douglass and big tech
25/11/2020  Magellan's co-founder explains which tech behemoth the Magellan Global Fund no longer owns, why one was too tricky to value, and why regulation is no threat.
Hamish Douglass: 'We're lucky this pandemic hit when it did'
24/11/2020  Magellan's co-founder on why 2020 resembles 2000 and why covid-19 is a dry run for something that could be much worse without proper planning.
Should you beef up your exposure to meat processors?
23/11/2020  Their shares have gotten hammered this year. Are they opportunities or value traps?
What is the Morningstar ESG Commitment level?
20/11/2020  Our new rating highlights the degree to which a fund or asset manager considers environmental, social, and governance issues.
What's driving the flows into ESG funds
19/11/2020  Morningstar's Grant Kennaway explains why sustainable funds are increasingly popular and why they're performing well. 
Too much upside baked into Bunnings: Morningstar
17/11/2020  Morningstar director of equity research Johannes Faul looks at home improvement retailer Bunnings.
What is ESG?
16/11/2020  From climate change to workers' rights, ESG is a big part of the investing world. We're at the Morningstar whiteboard board to explain what it means and why it matters.
"I'm still cautious": Peter Warnes' best ideas for income investors
12/11/2020  We're not out of the woods yet, says our head of equity research, as he looks for safety in businesses we can't live without and shies away from the banks. 
Is it time to get exposure to China?
11/11/2020  Perhaps it is time to have exposure to this economic powerhouse and its 1.4 billion population, says Morningstar's Peter Warnes.
Tapping into the contactless spending boom
10/11/2020  What happens when you buy something when your bank card? Morningstar analyst Niklas Kammer explains which companies are benefiting from your transaction.
Can luxury stocks recover from covid?
09/11/2020  With travel bans and economic lockdowns, the luxury sector has been hit hard in 2020. But there are still opportunities, says Morningstar analyst Jelena Sokolova.
US election scenarios and what they mean for investors
05/11/2020  A discussion of taxes, stimulus, regulation, and the likely market reaction as results from the 2020 poll come in. 
Don't try to time elections
03/11/2020  Why you should resist the urge to make predictions when there's a disconnect between the economy and security prices.
3 names on the alternative protein shelf
02/11/2020  Etoro analyst Josh Gilbert shares his thoughts on Beyond Meat and two other companies making inroads into the plant-based meat sector.
Hamish Douglass: I'd be super surprised if Trump won
30/10/2020  The Magellan rainmaker explains why he doubts the Republican leader will prevail and why investors should brace for volatility—and ignore it. 
Gauging the appetite for alternative protein
29/10/2020  The market for plant-based meat is worth $14bn today and is expected to grow massively, says eToro's Josh Gilbert.
Browsing the opportunities aisle in retailing
28/10/2020  Morningstar equity analyst Johannes Faul explores the flipside to the surge in growth in online sales.
3 top Asian picks on Longlead's radar
22/10/2020  China and Hong Kong have been a happy hunting ground, says Longlead Capital Partners' co-founder Andrew West, who singles out tech, pharmaceuticals and power tools.
3 undervalued travel stocks we like
22/10/2020  These names stand to benefit from a resumption of leisure travel - and are all trading below our fair value estimates.
3 reasons to like bonds
20/10/2020  Morningstar's Mark Preskett looks at three reasons why bonds are an important tool in your investment portfolio.
The monopoly asset that could boost Link
19/10/2020  A bigger stake in the online conveyancer PEXA could be the key to increasing Link Administration's revenue, says Morningstar's Gareth James.
How Longlead Capital defied the covid plunge
16/10/2020  Longlead Capital Partners co-founder Andrew West reveals how his Asia-focused fund managed to make gains during the historic covid-19 sell-off.
Investing basics: why invest in bonds?
16/10/2020  The investment board is back with an explainer on why you might invest in bonds.
Retiring during a pandemic
13/10/2020  How to handle this decision—even when it is made for you.
3 top picks in sustainability and software
12/10/2020  Nick Griffin of Munro Partners reveals why and where he sees opportunities in renewable energy, diagnostics and software. 
Investing basics: what's your personal inflation rate?
09/10/2020  Take stock of your spending to determine if inflation is an issue for you.
Ant Group IPO: What you need to know
09/10/2020  Morningstar analyst Chelsey Tam explains why investors are excited about the flotation of Ant Group and why it's different from Alibaba.
Spotting the winners of tomorrow
06/10/2020  Companies that address the growing demand for decarbonisation will have a 20-year growth opportunity, says Nick Griffin of Munro Partners.
An interview with Whitehaven Coal chief Paul Flynn
30/09/2020  EXCLUSIVE EXTRACT: Morningstar's Mat Hodge and Lex Hall talk to the CEO of the independent producer and exporter about the company's fortunes and its future.
How to get rich slowly
30/09/2020  Slow and steady wins the financial race.
3 top picks in global healthcare
29/09/2020  American Century Investments' low-turnover strategy invests in companies developing vaccines, treatments for neuro-cognitive diseases and innovations in telemedicine.
Investing in the healthcare needs of the future
25/09/2020  By 2050, almost 20 per cent of the global population will be over 65 and demand for healthcare will climb, says Michael Li of American Century Investments.
Morningstar's Mat Hodge on Rio's fortunes
22/09/2020  The destruction of an indigenous cave shelter was unforgiveable but there are other reasons why the iron ore heavyweight is overvalued.
Cannabis: the world in 2030
21/09/2020  Morningstar equity analyst Kristoffer Inton on the outlook for the seven producers under coverage.
3 top picks for the EV revolution
18/09/2020  Morningstar's Seth Goldstein singles out three undervalued stocks that span the entire electric vehicle supply chain.
The 2020 election and your portfolio
18/09/2020  The bumps and bruises of election time may tempt you to shift your portfolio strategy.  
'The tech rally has gone too far'
17/09/2020  UK-based Premier Miton's Simon Evan-Cook says the tech rally of 2020 is reminiscent of the dotcom boom, but inflation could be a bigger threat.
Why EVs will be a common sight on the roads of the future
16/09/2020  By 2025, the cost of batteries and manufacturing will fall and EV functionality will improve, says Morningstar's Seth Goldstein.
Using personal data to better estimate retirement savings
11/09/2020  Estimating the length of your retirement with personalized information will help you save the correct amount.
2 China stocks we like
09/09/2020  Morningstar's Chelsey Tam reveals which stocks and sectors have shone—and which have underwhelmed.
How to be a better investor: episode 3
28/08/2020  Products, services, what is what in the world of finance—and how to look out for yourself
Where to invest for income
24/08/2020  A raft of companies have cut their dividends this year, leaving income investors concerned. But Morningstar's Dan Lefkovitz says there are still plenty of options out there.
DNR Capital's eye for gaming, building supplies and software
18/08/2020  DNR Capital's chief investment officer Jamie Nicol profiles some of the top ten holdings in his Australian Equities High Conviction fund. 
The trouble on Telstra's horizon
17/08/2020  Morningstar's Brian Han explains why he has trimmed his fair value estimate for Australia's dominant telco and the future of its dividend payout.
Finding bargains the market overlooks
14/08/2020  DNR Capital's Jamie Nicol reveals how his Australian Equities High Conviction fund finds quality businesses that will endure difficult conditions.
How to be a better investor: episode 2
13/08/2020  Put your money to work if you're looking for financial freedom.
How to be a better investor: episode 1
10/08/2020  Learn how to picture your goals so you can better reach them.
3 undervalued names in childcare
05/08/2020  Morningstar's Gareth James identifies three sector names trading at attractive discounts in an increasingly 'essential' sector.
Is the 60/40 portfolio dead?
05/08/2020  Reports of the strategy's demise are greatly exaggerated, says Morningstar's Christine Benz.
Why you should ignore a fund's yield
04/08/2020  Investors may assume a fund's yield to determine how much income it will pay, but it's not always so simple, warns Morningstar analyst Rajesh Yadav.
What are the right bonds for retirees today?
03/08/2020  It depends on your expectations and timeframe. Look at bonds as being portfolio stabilisers—sources of cash flow you can draw on when your equities are down, says Christine Benz.
3 top picks in rail, roads and utilities
28/07/2020  When utility stocks plunged during the onset of the pandemic Lazard Asset Management's Warryn Robertson knew it was time to jump in.
Infrastructure stocks in the covid era
24/07/2020  Lazard Asset Management's Warryn Robertson looks at how the pandemic has affected toll roads and airports and what the future of travel holds.
ESG stocks shine in covid-19 crisis
23/07/2020  Morningstar analyst Tancrede Fulop singles out a few companies that have performed well and also led the way in looking after staff. 
Stock-picking: Have you got what it takes?
21/07/2020  New stock-pickers are prone to lose money. Are the lessons worth the price? We ask Morningstar's Christine Benz.
Why mining stocks aren't yield plays
20/07/2020  Elevated iron ore prices have lifted mining company earnings to eye-watering levels but this doesn't make them income stocks, says Morningstar's Mat Hodge.
Commodity stocks riding high, but for how long?
17/07/2020  Local miners should deliver stellar fiscal 2020 results but such outperformance is unlikely to last, says Morningstar’s Mat Hodge.
The rise and rise of Amazon
17/07/2020  --
Should your portfolio shift when the economy slumps?
16/07/2020  How to make some upgrades during this down time.
Will Airbnb IPO or what?
16/07/2020  Covid-19 has made the intended public offering impossible, says Morningstar's Andrew Willis.
3 Japanese stock picks
15/07/2020  JPMorgan's Nicholas Weindling talks opportunities in Japan and reveals the stock that has been his largest holding for almost a decade
Small cap stocks: 'Inevitably, we see it all end in tears'
15/07/2020  The asset class has a habit of outperforming but Morningstar's Ross MacMillan sees signs of a bubble.
A trio of growth stocks
13/07/2020  Rachel Winter of UK fund manager Killik & Co talks payments, social media and investing in her monthly stock pick round-up
3 reasons healthcare is showing fit performance
09/07/2020  And what we expect to see moving forward.
Same old story: growth beats value
07/07/2020  Large growth maintains its supremacy in the Morningstar Style Box during a volatile first half for mutual funds. 
Nikko's 3 top Asian picks
06/07/2020  Nikko Asset Management's Peter Monson looks for strong sustainable returns and he sees that in Asian stocks that span financial exchanges, computer game makers and condiments suppliers.
How appealing are Asian stocks?
02/07/2020  China’s ongoing recovery from COVID-19 presents solid investment opportunities, says Nikko Asset Management.
'Unemployment will be higher, activity lower'
01/07/2020  Aviva Investors' Mark Robertson on the 'second wave', the widening gap between the West and China, portfolio protection and how covid has accelerated the tech revolution.
Smartwatches and luxury watches battle for your wrist
29/06/2020  Does the rise in smartwatches show that data, not diamonds, are a girl's best friend?
3 top picks in water and waste
26/06/2020  They may be 'boring' says Fidelity's Bertrand Lecourt but these names offer solid and long-term returns by delivering essential services.