2020 vision – Part 2: The upward bounce of an extraordinary six months

The first half of 2020 saw both a dizzyingly swift stockmarket crash and an equally remarkable rebound. In this article, we take a closer look at the upward leg of that journey

22/07/2020

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

As we observed in 2020 vision – Part 1, we may be little more than halfway through 2020 but it feels safe to say that investors will remember the year as a truly extraordinary one. Not only have we just witnessed the fastest stockmarket crash in history, the bounce-back that came hot on its heels has been every bit as remarkable – and, as we shall see, extremely tough for investors to navigate.

You may recognise the left-hand table in the following chart from the previous article. It shows all the times the market has fallen 30% and how long it took to do so – and, as you can see, the 22 trading sessions of this year’s pandemic-induced collapse represented the fastest of all time. It occurred even more quickly than the Wall Street Crash of 1929 – and, significantly, it was also quicker to rebound.

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When the dotcom bubble burst at the turn of the millennium, say, or as the credit crunch bit in 2007, investors had months to work out what to do and then gradually transition their portfolios to take advantage of the lower prices that were available. And while Black Monday itself may have brutal in October 1987, the rebound gave investors the best part of a year in which to make their moves.

This time around, though, while we were all getting to grips with the impact of Covid-19 and the ensuing lockdown on our portfolios, and speaking to company management teams to find out what was happening on the ground, the decline was already over. In effect, before you could rotate portfolios into areas of opportunity in any meaningful way, the market had bounced back hard.

Significant strains

No-one has lived through markets like this – no-one. Still, while the volatility put significant strains on investors of every stripe, that was especially the case for those of a value persuasion. The experiences of the last decade mean that, as 2020 began, there were few enough true value investors operating in the UK retail marketplace. Sad to say, there are even fewer now.

As we noted recently in Long-term opportunity, here on The Value Perspective, we find it surprising that the same themes, sectors and stocks that were seen as the answer when the economy was strong are apparently still seen as the answer now the economy is weak. Surprising or not, though, the upshot is that our portfolios are some 10 percentage points behind the FTSE All-Share over the year to date.

In the wake of a poor 2019, that has had the effect of moving our three and five-year numbers into negative territory – a fact we find as disappointing as we know our investors will and for which we feel a huge burden of responsibility. As you would expect, we are reviewing each step of our process to see where we can improve and so close the gap on the best possible performance from a value manager.

Effective diversifier

What we are not doing, however, is relaxing our tilt towards value. It is extremely important to us and to our clients that we continue to provide diversification away from the investment styles that are so prevalent these days. Quality, momentum and so-called ‘blend’ factors are ubiquitous– and we would be doing investors a disservice if they had no opportunity for counterbalance within their portfolios.

That only becomes more important as the number of true value managers continues to dwindle – for while this is no time to be harking back to the ‘glory days’ when value has more than punched its weight, investors looking to mitigate risk in these extraordinary times should bear in mind how value can be an effective diversifier in periods when other investment styles are faltering.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

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