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

--  |   14/03/2020 Text size  Decrease  Increase   |  
email_fwd
<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...

'Then we got hit with the equivalent of a war'
15/06/2021  Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.
Understanding Magellan's active ETF strategy
11/06/2021  Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.
3 off-the-radar small caps
10/06/2021  Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.
Small cap gems and how to find them
09/06/2021  Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.
Stock of the Week: Salesforce.com
08/06/2021  They’re building an empire.
3 oil stocks we still like
07/06/2021  A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.
Considering crypto? Here's what to think about
04/06/2021  As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio
Why we like Wizz Air
03/06/2021  The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.
3 global infrastructure picks
28/05/2021  4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.
Are crypto ETFs coming?
28/05/2021  The SEC continues to sort out its regulatory concerns.
Stock of the Week: Apple
27/05/2021  We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.
Opportunities in global infrastructure
25/05/2021  Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.
Tribeca's eye for Domain
24/05/2021  Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.
Stocks for emerging markets
19/05/2021  American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.
2 stocks for the rise of the robots
18/05/2021  Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.
Square: Stock of the week
18/05/2021  Square's Bitcoin purchase is more marketing than operations
Tesla: Stock of the week
10/05/2021  If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.
Why Tribeca's so upbeat on stocks
07/05/2021  Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.
Looking for value in emerging markets
05/05/2021  Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.
Cash slashed, Aussie equities up: Why Morningstar updates Model ETF portfolios
04/05/2021  Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.
Investing basics: Explaining the disconnect between the stock market and the economy
30/04/2021  The stock market and the economy are not the same. Here's why.
Why deforestation matters for investors
23/04/2021  EARTH DAY 2021: Why should investors care about deforestation and how can it can be taken into account within an investment portfolio? 
The silent killer: How to prepare your portfolio for inflation
21/04/2021  Do investors need to worry about inflation, and how do you prep your portfolio to protect you from it? Morningstar Investment Management's Dan Kemp explains.
ESG investing is about more than feeling good: Morningstar equity research
20/04/2021  Values-based investing is ultimately up to the investor.
2 US wide-moat stocks to buy on a dip
16/04/2021  Amazon.com and ServiceNow are looking increasingly attractive.
Fidelity's Kate Howitt names her 3 top stocks for 2021
15/04/2021  Investment tips from Australian equities fund manager Kate Howitt.
Back to basics: What is income investing?
14/04/2021  What is income investing, why is it important and which investors should focus on it? Morningstar Investment Management's Dan Kemp has the answers.
Hunting for pockets of value in an overheated market: Morningstar
13/04/2021  Morningstar equity strategist Gareth James discusses the great value rotation, why he believes the Australian share market is overvalued and where opportunities still lie for hungry investors.
Vaccine rollout drives energy's rise
12/04/2021  But the sector's current tailwinds are likely unsustainable, so investors should prioritise high-quality businesses with stable balance sheets, says Morningstar's Dave Meats.
Finding value with Kate Howitt
08/04/2021  Kate Howitt oversees Fidelity’s Australian Opportunities fund. She discusses her investing approach, the outlook and where she sees value.
Investing for millennials
07/04/2021  Goldman Sachs's Laura Destribats talks about the millennial investment trend, and why tech and experiences are so important to this generation.
What if I want to buy Bitcoin?
06/04/2021  Remember that the returns on speculative assets like Bitcoin are high risk
EGG, SGF, ZBRA: Foraging for the unloved gems
01/04/2021  Steve Johnson explains why Forager Funds Management has bought and held Enero, SG Fleet and Zebra Technologies and why they're poised for further growth.
Why the 'covid spending economy' will flourish
30/03/2021  Forager's Steve Johnson explains why he's bullish on consumer spending, enterprise software companies, and why he has cashed in on big names like Uber.
Proteomics set for growth, says Kardinia
29/03/2021  Kristiaan Rehder explains why the West Australian biotech is among the top performers in the Bennelong Kardinia Capital Absolute Return Fund.
Should you be worried about inflation?
26/03/2021  And how to make inflation "personal."
Crypto what?
25/03/2021  The how, what, and why of cryptocurrency.
The long and short of an absolute return fund
24/03/2021  An absolute return fund aims to seek returns in all weather. Kristiaan Rehder from Bennelong Kardinia Capital explains how.
3 dividend-paying real estate stocks for your watchlist
23/03/2021  Diversified portfolios, strong balance sheets and healthy payouts. Grant Berry singles out three big contributors to the SG Hiscock Property Income Fund.
AREITs in the time of covid
22/03/2021  SG Hiscock's Grant Berry explains how real estate was affected by the pandemic, how property stocks coped, and the chase for income in an evolving retail landscape.
Have we reached peak video gaming?
19/03/2021  Video gaming has soared under lockdown, can this sector keep growing post-covid? Morningstar analyst Neil Macker takes a look.
Myer: five stars and poised for the rebound
18/03/2021  The retail giant's strong balance sheet will help it navigate the shift to online shopping and capitalise on the return to normal life, says Morningstar's Johannes Faul.
Deliveroo IPO: what you need to know
10/03/2021  Ahead of Deliveroo's IPO, Morningstar analyst Ioannis Pontikis looks at the outlook for the business, its valuation and concerns about gig workers.
2 stocks for the e-learning boom
08/03/2021  E-learning has become the norm for young students and university-goers across the world. Morningstar analyst Michael Field looks at whether the trend is here to stay. 
February Reporting Season Wrap Up with Peter Warnes: Webinar
04/03/2021  Special guest Peter Warnes, our head of equities research, joins the Morningstar Foundations of Investing Webinar series to give his unique take on February Reporting Season and answer subscriber questions.
One year after the market crash, through the ETF lens
03/03/2021  The growth and adoption of exchange-traded funds has only accelerated as a result of the latest market crisis.
Brighter picture for big four banks
01/03/2021  Morningstar's Nathan Zaia on the outlook for the banks, dividend payouts and the move by the Bank of Queensland to acquire ME Bank.
One year on: lessons learned from the 2020 bear market
25/02/2021  The biggest takeaway from that period is not to panic when the market tumbles.
What if...I want to buy a gold ETF?
23/02/2021  From ETFs backed by bullion to miners with more upside potential - here's how to get yourself some gold.
'Full return to normal in 2021'
23/02/2021  If the US is to stage a recovery by mid-year, it will need the consumer services sector to fire, says Morningstar's head of economic research Preston Caldwell.
Google, Facebook versus Aussie news stocks
19/02/2021  Morningstar's Brian Han weighs up News Corp's deal with Google and examines the effect of Facebook's decision to block content from Australian media outlets.
Global real estate as a store of value
18/02/2021  Quay Global Investors' Chris Bedingfield explains how self-storage, data centres and industrial property can offer diversification and growth.
Spotting the 'covid winners'
16/02/2021  Uniti Group and Nextdc are among the companies that SG Hiscock's Hamish Tadgell says have flourished during the pandemic.
The transition from hope to growth
15/02/2021  Hamish Tadgell of SG Hiscock explains the portfolio changes he’s made in a bid to capitalise on the shift.
The future of the US economy
10/02/2021  Which pandemic-related trends have already passed, and which ones might be around the corner?
GameStop frenzy is history repeating
05/02/2021  The battle between the Reddit army and hedge funds is nothing new—the question is will regulators be willing to step in, says Morningstar's John Rekenthaler.
Who are the fast fashion winners?
03/02/2021  Competition is fierce for fast fashion retailers such as Asos, H&M, Zalando and Inditex. Morningstar analyst Jelena Sokolova takes a look at the sector.
Can your portfolio withstand volatile times?
01/02/2021  Volatility can be around any corner, says Morningstar director of personal finance Christine Benz.
How much equity exposure is too much in retirement?
28/01/2021  Retirees require stocks' growth potential, but they need a cash and bond buffer, too.
Key trends for China investors
27/01/2021  Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, looks at why Chinese stocks soared in 2020 and whether the trend can continue.
Redpoint's 3 top picks in industrials
25/01/2021  Redpoint's chief executive and portfolio manager Max Cappetta tells Lex Hall why he's got his eye on JB Hi-Fi, Goodman and Reliance Worldwide in 2021.
Looking for growth and income among industrials
21/01/2021  Redpoint CEO and portfolio manager Max Cappetta looks at the dividend potential of large-cap names, the resilience of Qantas, and the local tech landscape.
What we expect from oil prices
19/01/2021  Stocks still look cheap across all subsectors, especially oilfield services and refining, says Morningstar analyst Dave Meats.
What’s app-ening: investing from your phone
19/01/2021  What are the rewards and risks of using this technology?
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.