A year on from the COVID crash, what have big investors learned?

A little over a year after the coronavirus pandemic began its brutal course, fund managers are taking stock of one of the most extraordinary market meltdowns in living memory.

Coronavirus has been with us for more than a year.

A little over a year after the coronavirus pandemic began its brutal course around the world, fund managers are taking stock of one of the most extraordinary market meltdowns in living memory.

For some, it was exhilarating; an investor’s dream — if you strip away the death and economic devastation. For others, the sheer magnitude of what was happening was hard to comprehend.

“I was shitting myself,” Cyan Investment Management director Dean Fergie says of the stockmarket crash a year ago.

“This time last year we were seriously worried. The whole world was shutting down.”

Weeks earlier, equity markets around the globe, including in Australia, the US and Europe, were surging to record highs, even as the mysterious pneumonia-like cases emerging from China were gaining widespread attention.

Then the world started to take the novel coronavirus seriously.

As panic spread, equity markets went into free fall, with trillions of dollars wiped out in days.

Platinum Asset Management boss Andrew Clifford was in his element.

“This is what investors should live for. Not events that cause wide-scale human suffering, but drama in the market — this is what it‘s all about. This is the challenge; to make the right calls and to take advantage of it for our clients,” he told The Australian.

“It’s what any professional, in any field, is looking for: Those challenging events to test their skills against.”

Weeks prior, at the end of January, Platinum had seen what was coming and pumped billions of dollars into index shorts.

But the market kept rising; it didn’t make sense. Losing its nerve, the fund took the shorts off. Then the market dropped, and dropped again. By the end of February, the shorts were back on.

Tensions between oil giants Saudi Arabia and Russia added to the market meltdown, sending crude oil prices spiralling down more than 30 per cent on March 8.

The following day, dubbed Black Monday, $150bn was wiped off the local stockmarket, the Australian dollar plunged 5 per cent and government bond yields hit record lows.

Local energy stocks were battered through the session: Oil Search plunged 35 per cent, Santos dived 27 per cent, Beach Energy lost 19 per cent and Woodside Petroleum fell 18 per cent. BHP dropped 14 per cent.

It was at this point that Platinum stepped its shorts up — by now the fund had billions of dollars in index shorts.

It was a public holiday in Victoria — Labour Day — but whatever plans Armytage Private director Bradley King had leading up to the long weekend were well gone.

“That day, when oil stocks were getting smacked, I actually got a speeding ticket driving into work,” he said.

“In markets like that, when things go that way, you don’t take a break or a holiday. If a market is open, you’re looking for opportunities and you’re watching for risk.”

The boutique fund manager runs “a lot” of high net worth clients, many of which are retirees.

“We were certainly worried about them and their allocated pensions. In hindsight, it was the best buying opportunity, but at the same time, when you already have zero income on cash and the market is struggling with income … you worry about the retirees: how are they going to live, how are they going to fund (their lifestyle), what will happen to their pensions.”

For Investors Mutual investment director Anton Tagliaferro, it was a confusing time as the market swiftly edged toward bear market territory.

“The disruptions caused by COVID were totally unpredictable. The market was at record highs in February and retreated extremely quickly through March. And it would have stayed low if not for the huge amounts of intervention that we saw in the subsequent months.”

As the stockmarket drowned in a sea of red, major companies started sending their staff home. On March 13, Telstra declared all employees would be working from home until at least the end of the month, with the “unprecedented situation” requiring “decisive action”.

The exodus out of cities and into home offices was complete within days as the federal government imposed a nationwide lockdown.

Fidelity portfolio manager Kate Howitt vividly remembers reading a report from Imperial College London at the time, which warned that lockdowns could be in place for 18 months.

The startling prediction was a wake-up call, she said.

“Every investment practitioner in the world read that paper and went, ‘Oh my God, 18 months of depressed economic activity. Forced depressed economic conditions is just a horrible outcome that is not priced into any asset in the world’.

“So the biggest period of uncertainty was in March. And that was because of the scale of the virus, the impact of the virus, the fact that lockdowns were going to be necessary, and you were going to have this enormous depression of economic activity. That was becoming clear. They were dark days,” she said.

Even as the market had further to fall, buying opportunities were starting to emerge.

“Whether it‘s this crisis or a completely different style of crisis, this is where opportunities are made,” Mr Clifford told The Australian at the time.

“There are going to be bargains; there already are bargains, but it’s a very tricky environment. When markets are already down 35 per cent, perhaps they will go down another 10 or 15 per cent. Is this the time to be running for the hills? I’d suggest probably not.”

In this “unprecedented” crisis, Platinum was buying up GE stock when it dropped to $US7 a share. Its share price has since risen above $13.

The fund also added to its copper exposure, industrials and even bought travel stocks, including Ryanair.

Investors Mutual was buying and selling too, but Mr Tagliaferro regrets not going for the riskier bets.

“With hindsight, one should have been buying the most risky stocks, companies like Afterpay. But at the time, one has to be a brave man, I think, to be buying the most risky stocks at a time of such great uncertainty.”

Afterpay’s shares have rocketed in the past year, surging from $8.90 a share last March to their current price of $119 — even that is down from the $160 a share it hit last month.

Armytage had a bit of cash to take advantage of the market drop, but the last thing the team wanted was to catch a falling knife.

“We just had to wait and position ourselves until we got comfortable with some of the stocks that we really liked,” Mr King said.

“We had a sort of moment where we sat down in the boardroom and said, ‘Well what‘s going to recover quickly? We know the banking sector isn’t going to, and energy markets are going negative, so let’s look at some small cap companies that were market darlings. So we invested in some of those.”

EML Payments and Kogan were among the buys the fund manager went ahead with, though Mr King admits he sold out of some stocks too early in the recovery phase.

“The strategy was to look for companies that would grow and have some revenue growth because we knew dividend streams would take a while to come back.”

At Cyan, while dumping travel stocks early on in the market meltdown, Dean Fergie also lightened up on some consumer discretionary stocks, which, in hindsight, was the wrong thing to do, he admitted.

Even with the stockmarket crunch battering returns in the early months of the year, Cyan’s C3G fund rebounded strongly, returning 9.8 per cent over the 12 months through December, compared to the S&P All Ordinaries Accumulation index, at -0.7 per cent.

“Having been an investor for 30 years, I am smart enough to know that I can never be 100 per cent sure what‘s going to happen. So even when I saw the markets crashing and thought ‘oh this is disastrous, the outlook looks really dire’, I knew better than to sell all my holdings on what could have been the bottom of the market,” Mr Fergie remarked.

“There‘s an element where you’ve just got to hold through the uncertainty. And the market dived so quickly, so sharply, that even though there was all this uncertainty, there’s also an element of ‘wow there are some really, really, good value opportunities here at the moment as well’.”

When relief came from central banks and governments, it exceeded all expectations.

“The defining characteristic of this downturn was governments generally, and the Australian Government specifically, put themselves in the role of primary shock absorber,” Ms Howitt said.

“The government‘s attempt to build a bridge to the other side worked. Then we marched across it, and now we’re pretty close to the other side.”

But such widespread support creates moral hazard for the next crisis, she warned.

“Why are asset markets so exuberant? Why are people prepared to take on big mortgages? There’s a big shift towards assets that will do well if interest rates go up. And yet, housing markets are pricing that interest rates will never go up.”