Five rules for navigating a market crisis – Part 2

When it comes to finding a way through a market crisis, there are five rules investors would do well to follow. Here we look at rules two and three – ‘Get to the coalface’ and ‘Trust your process’

19/08/2020

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Experience has taught us there are five key rules to help navigate a market crisis and the first of these, as we outlined last time, is Fix the roof. Once you are satisfied you have done that, it is time to ‘Get to the coalface’. No matter how bad things may seem, do not go to ground, do not hide away – market panics provide the greatest opportunity to find decent businesses at good prices.

There really is no substitute for turning stones. Since the start of the year, here on The Value Perspective, our nine-strong investment team have looked at hundreds of businesses across every market sector – analysing in depth around 35 in the UK and more than 150 as possibilities for our regional and global portfolios. Each of these now has an entry in our research and decision-making repository, The Value Archive.

As we have discussed in articles such as Time to be brave, the speed and breadth of this downturn has been without precedent, which has meant breadth and depth of investment resource has really mattered. Since 2015, we have doubled the number of investors on our team who are looking at stocks, thereby making it easier to consider more ideas in less time but in greater detail.

That proved hugely beneficial during the recent market downturn – albeit we wish it could perhaps have had a slightly longer duration and so provided us with even more opportunity. As we have also discussed elsewhere, this episode was not just brutally quick on the way down – arguably even more disconcertingly, the subsequent upward bounce turned out to be the fastest on record.

Trust your process

That leads neatly on to our third rule – ‘Trust your process’. When markets fall and investment performance suffers, the pressure to change your approach can be huge. This, though, is not the time to cut corners or start behaving differently. Every process needs to evolve – to capture the evolving nature of the stockmarket – but that should happen continually, not just when share prices are dropping fast and emotions are running high.

How do we analyse stocks today? We analyse them the same way we did 12 months ago. And 12 months before that. Our investment process is, however, a living entity. So while it is based on the same philosophy we have been reaffirming to our investors for the best part of two decades, in recent years it has coalesced around four key building blocks – or, as we call them, our ‘edges’.

Informational, Analytical, Behavioural and Organisational – as discussed in greater detail in the linked pieces, these are areas where we believe, correctly channelled, our efforts can yield an advantage over our competitors and the wider stockmarket. These four edges remain the same, but how we leverage them constantly evolves – a good example being the relatively recent introduction of ‘after action’ reviews.

We now explicitly set aside one day every six months to work through all our notes in The Value Archive and try to understand where we got things right – and wrong. It is all very well having our archive, but it means nothing unless we continually leverage it. These reviews are just one way in which we have evolved our investment process in a bid to eke out marginal gains to help make money for our investors.

In our next piece, we will discuss our final two rules for navigating a market crisis: ‘Keep your discipline’ and ‘Be brave’.

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin 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.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.