Jarod Dawson: Coronavirus update

A note from the Enhanced Yield Fund Portfolio Manager, Jarod Dawson

We thought it might be helpful for investors to communicate a few of our thoughts around the current COVID-19 coronavirus situation – in particular with regard to markets and the Enhanced Yield Fund (EYF).

It is clear that the virus is continuing to spread across many countries around the world. As well as having a material impact on people’s personal circumstances (in some cases tragically), it is also naturally having an impact on the global economy, and hence investment markets.

What is also clear to us is that 24-hour media coverage is fuelling a heightened and sometimes mis-informed perception of how people perceive the risks and potential implications on various facets of their lives. Every day there is a count in the press highlighting which countries are reporting new cases and how many – adding to negative sentiment. 

One of the most interesting anecdotes we have witnessed is that stores continue to sell out of medical masks, as people perceive them to be an efficient way of protecting themselves from catching the virus. However, leading medical professionals such as the US Surgeon General say categorically that they don’t protect people from contracting the virus. Many experts agree that regularly washing your hands will do more to keep the virus at bay, than wearing a mask!

As the virus spreads however, people’s reactions in terms of how they live their lives will lead to real impacts on the economy. For example, if people decide against travelling, or dining at their local restaurants - rightly or wrongly - that will impact levels of economic activity.  

Given China’s position as a key driver of global growth, and being largely regarded as the epicentre of the illness, it is also likely that weaker Chinese growth near term will have a meaningful impact on the rest of the world.

Additionally, the impacts on local businesses in many major economies from reduced tourism and generally weaker demand will potentially see global growth soften near term.

Taking all of the above into account, this is largely why we have seen markets enter a notable corrective phase over the past couple of weeks. Every day investors are speculating (sometimes wildly!) about the magnitude of the impact on markets, and how long it will last.

At PM Capital, we are not interested in speculation or hysteria. We have built our detailed investment research process, and thus our firm, around identifying businesses that we believe to be among the best in their relevant industries. We target companies that we think are in a good position to be able to handle various levels of economic activity over the longer term, and who can deliver us an attractive level of return for a given level of risk. 

In particular, we are not interested in making rash investment decisions based on short term news headlines. If new information regarding a particular business does come to light, we prefer to work methodically and rationally through any implications that it might have, and come to an informed decision.

In addition to this, we quite often find that at the point where investor fears are heightened, and people start selling investments for reasons other than those relating to their valuation, some of the best investment opportunities often present themselves – consistent with our contrarian style.

Experience tells us that good businesses will generally be fine through short term noise and volatility, even through the low points in an investment cycle. Some businesses even thrive.

Leading into the current period of market volatility, the EYF has been holding a substantial cash exposure of between 45% - 50%, helping to preserve investor capital. Moreover, we also have an additional 10-15% of the Fund in assets that are technically not cash, but will likely behave the same as cash given their short dated nature. The upshot is that we have plenty of available capital up our sleeve that can be quickly deployed into attractive investment opportunities. We will go about this rationally and methodically.

Near term, we expect that month to month returns will probably bounce around a little more than usual. There will be some months that are stronger than we might expect, and likewise there will potentially be some months where performance is weaker.

In the background though, we are applying an investment process that has been tried and tested over almost two decades – through periods such as the global financial crisis in 2008/09, the European banking crisis in 2011/2012, the China growth scare in 2015/16, and Brexit and US/China trade friction in 2018/19. Despite all of these periods of volatility, the EYF has consistently delivered on its performance objectives, and we are confident that we can continue to do this into the future.

A reminder too that we have PM Capital’s own money sitting alongside our client’s in the Fund – so when making portfolio management decisions we are doing so for both our capital as well as that of our client’s.

We would like to thank all our valued clients for your ongoing support, and we look forward to what we hope is an exciting and prosperous partnership in the years to come. 

Sincerely,

Jarod Dawson

Director, Global Yield Portfolio Manager

 

 

More on the Enhanced Yield Fund

More insights from Jarod

 

This note is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Enhanced Yield Fund (ARSN 099 581 558). It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider a copy of the Product Disclosure Statement which is available from us, and seek their own financial advice prior to investing. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.