How Fund Managers Approach a Market in Turmoil - Adviser Investments

How Fund Managers Approach a Market in Turmoil

April 3, 2020

In the latest of our special podcast updates, Chairman Dan Wiener and Chief Investment Officer Jim Lowell joined together to review what the recovery might look like for the economy and the stock market. They also shared what they’re hearing from mutual fund portfolio managers they follow closely and respect, and what they’ll be listening for in first-quarter earnings reports.

What follows is a transcript of their conversation. To listen to the podcast in its entirety, please click here.

Dan Wiener:
In this Adviser You Can Talk To Podcast, Chief Investment Officer Jim Lowell and I will discuss the current Coronavirus crisis and its impact on the economy and the markets.

It’s April 1, Jim. It’s April Fool’s Day.

Jim Lowell:
I like it, Dan.

Dan Wiener:
I don’t know what we’re going to do with that because I think we want to address more serious topics. In fact given that it’s April Fool’s Day, how do you feel about this new bull market that the Dow Jones introduced the other day? We had a three-day rally, the stock market went up, the Dow anyway, went up more than 20% and all of a sudden, The Wall Street Journal, Dow Jones is calling it a new bull market. Do you buy it?

Jim Lowell:
No, I don’t buy it. I think that we have a long volatile way to go, but hopefully in a short amount of months to get from where we are today to where inevitably we will be, which will be a recovery trajectory rather than what I think is still a market, an economy, that’s clearly prone to the ever changing medical data as much as it is prone to the economic earnings and interest-rate data.

I think while it was certainly great to see the rally (and while we say “time in the markets, not market timing,” as a discipline long-standing of ours to capture the sense that you really never want to be out of a market totally because you will miss such significant upsides), as we were able to witness just last week, nevertheless, there’s still likely to be consistently more downward then upward pressure on the markets in the days and weeks ahead.

There’s still likely to be consistently more downward then upward pressure on the markets in the days and weeks ahead.

Dan Wiener:
Yeah, let’s talk about that for a minute. Last week, we got maybe the first, and I would say only, piece of economic data that really reflects what’s going on with this pandemic that has hit globally and now hit in the U.S. We saw that new unemployment claims number. This is people who are filing for unemployment for the first time jump from the 200,000 level to the 3.3 million level. Yet the stock market was up 6% that day.

Jim Lowell:
First, a staggering number. Likely to get significantly more staggering as we enter the really difficult weeks and potential months as we sort out virus fact from market and investor emotion.

Dan Wiener:
Right, we’re going to get another number tomorrow in the morning.

Jim Lowell:
We are and it’s going to be… I mean I’ve seen estimates as high as a third of the U.S. workforce being unemployed. [Note: Jobless claims came in at 6.6 million in the April 2 report.]

We’d like to say obviously that we focus on jobs as a litmus test of the health of our economy, because we are a consumer-driven economy—meaning, the better the employment numbers are, typically the healthier our economy is and vice versa. But that said, while the numbers are going to be off the charts bleak, depression-era-level numbers, we think it’s better to call it a “suspension” rather than an “unemployment” theme because eventually, these jobs, many of them will likely be built back in as the demand recovery gets underway. We don’t know when that will be, but we don’t think it’s a question of if.

I don’t know about you Dan, but I haven’t yet seen an estimate of how many jobs and at what rate they’ll return once we really take a turn for the better in terms of this current crisis. We definitely know that we’re analyzing, researching, separating the kinds of employment data that we think we will see from what we absolutely know will be, of course, very bad news over the next weeks, potentially months.

Dan Wiener:
Well, I think what you’re getting at here is this question about whether we have a V-shaped recovery in the economy and a V-shaped recovery in the stock market. I mean… it’s not surprising that we don’t really have an answer for this yet because, as I said, the single piece of economic data we’ve seen was last week’s unemployment claims number.

Yes, the first-quarter earnings conferences calls with corporate executives are going to start in the next week or two and really, it’s not going to be a question of what the earnings were in the just-ended quarter, it’s going to be a question of what are these executives, what are these leaders of major U.S. corporations seeing out in the world? How is their demand changing? We know for a fact that if you’re an airline, a cruise ship operator, a restaurateur, demand for your products and services has virtually disappeared. But on the other hand, there are going to be companies that are going to be winners in this and that’s what we’re hoping to hear.

We’ve certainly been talking to our fund managers, the people that we invest alongside, about what they’re hearing and what they’re seeing, and I don’t know about you, I’ve gotten some comfort from them that the companies they’ve selected are really going to be the winners in this overall.

Jim Lowell:
Well, I think that’s a great point, Dan. They’re taking this bear market opportunity to upgrade the quality of the names in their portfolio, to add to some of their best ideas at deeply discounted prices.

We know that if it’s the international managers that we invest in and respect, they are not in the countries where the crisis is unfolding so much as they’re standing on the borders with binoculars looking in at opportunities that they know will be made manifest by this crisis.

The overall point maybe there is that we have said for now decades that we buy the manager, not the fund. We’re obviously not just believers in active management, it is at the core of our investment discipline and philosophy.

[Fund managers] are taking this bear market opportunity to upgrade the quality of the names in their portfolio, to add to some of their best ideas at deeply discounted prices.

As we talk to managers, I have not heard them come to a consensus on what they think guidance will or won’t be except to say that, for the most part, guidance coming out of this earnings round, if it is in fact offered, will be basically little more than conjecture. That doesn’t mean that there aren’t great companies, and as you said, companies absolutely capable of growing market share in this crisis. Clearly, at the expense of some other companies who will not.

Dan Wiener:
Sure, there’s going to be a shake out. What I’ve been reading about, for instance, American Airlines. They’re in a precarious financial situation, but if an American Airlines, and I’m not saying they will, but if they were going to go out of business, a Delta or a United, one of the other big airlines could come in, grab their roots. That’s how the strong survive here, right?

Jim Lowell:
No question about it.

Dan Wiener:
This is the law of the jungle.

Jim Lowell:
No question about it. And, speaking of law of the jungle, what we know about that law is that not only the fittest survive, but they tend to thrive when they come out the other side of a crisis. We know that our managers, certainly our research team, we are looking at areas not just domestically but around the globe where we think we’ll see durable strength and strength that we’ll be able to capitalize on what we think will be an inevitable rebound.

Although we don’t want to sugarcoat it: We think that we really could be seeing some volatile times. Not just as we head into the summer months, but don’t forget, without a vaccine likely to be delivered until 2021, we’ve got to go through another bout of this virus as we head toward the end of this year.

We’re in for some volatile times, but of course we run our portfolios with measurable defense, more measurable now then I think at really any time prior. We’ve got good buffers in place, bond buffers, even some cash reserves, dry powder for being able to add to better opportunities when we see a little bit more clearly what the long-term prospect of coming out of this near-term crisis is.

Dan Wiener:
Well let’s talk about—you mentioned bonds.

The last couple of weeks, I don’t believe I’ve used the word “dislocation” so many times since throwing my leg out one time. I mean there were these tremendous dislocations in the bond market and it felt a little bit like 2008 when the bond market seized up.

But this time, it wasn’t so much that it was seizing up, it was as if the plumbing had gotten clogged and there were more… It’s always fascinating to me that when there are more sellers than buyers, there’s all sorts of trouble in the bond market. But when there’s more buyers than sellers, everything seems to go so smoothly. I was a little confused by this. It does seem to have worked its magic out a bit. The magic has come back and they’ve worked out some of the kinks, but it was pretty… I hate to say it, dislocating for a couple weeks there.

Jim Lowell:
No question it was unnerving, although I would say past bear markets have exhibited at least a relatively similar pattern where at some point everything gets thrown out with the bath water, especially the greatest sources of liquidity, and that of course is a time where active managers, and managers of active managers like us, hopefully earn our keep and don’t run away from the opportunities that those dislocations create.

Dan Wiener:
It’s funny, I had been talking to a couple of bond managers the last week and this was I think a market experience where the ETF market, the exchange-traded fund market, really fell on its face. Where the participants who create, without getting into the details of this, that the participants who create the ETF shares really were not stepping up and the market… Those who were proponents of ETFs said that “price discovery” had risen in importance, but I think that what was going on there was that scaredy-cats had basically left the room and nobody was willing to make a market for these things. I felt like our good-old tried and true open-end mutual funds that price once a day were a lot more secure and safe for investors then these newfangled shiny toys called ETFs.

Jim Lowell:
I might not go that far but I would certainly say that I think the ETF industry as a whole saw a structural deficit in the way its instruments were trading and I know that they have been studying that painful lesson rapidly and hopefully well. We’ll know when the next downturn comes.

Nevertheless, as you say, mutual funds did not necessarily suffer the same kind of misfortune on the bond side of the fence, and speaking of maybe not misfortune, Dan, but let’s talk about something that’s really held up well in this crisis-driven market, and that’s the health care sector, long an overweight inside of our portfolios.

Dan Wiener:
Yeah, well we probably are putting our clients to sleep talking about this so often, but health care has always been an overweight in our portfolios.

There are periods when it really shows its defensive capabilities. I mean one of the things about the health care sector is that it is very, very diverse. We’re talking about pharmaceutical companies, we’re talking about biotech companies, we’re talking about medical supply companies and we’re talking about medical service companies.

Ex the pandemic, we have always been big fans of this industry because it is what 15%, 16%, 17% of GDP in the U.S. alone, it’s an industry that is global in nature, there are fantastic companies both overseas and over here at home to invest in, the mapping of the genome 10 years ago or so is finally beginning to bear fruit.

We could go on and on about why we think health care is a great industry but, yes, in these trying times it has held up better and you and I both are big believers that active managers are the best way that gain access to this sector.

Jim Lowell:
And to the whole market. This is a market where selectivity, stock-picking skillsets, the things that we and our research team, led by [Director of Research] Jeff DeMaso, spend their days poring over, come to the fore. This is not a market where you want to own the whole market. This is a market where, to get back to your earlier comments, you want to really be able to sort out the fittest companies that have the highest probability not just of surviving but of thriving.

Dan Wiener:

Jim Lowell:
Dan, I guess as we’re coming to the end of this conversation, can I ask you a non-investment question?

Dan Wiener:
Sure, why not?

Jim Lowell:
I think a lot of our listeners would like to know what we’re doing to keep ourselves sane outside of all of the investment research material we’re poring over. What non-investment-theme book or movie do you recommend for all of us who need some real downtime?

Dan Wiener:
Oh you’re playing into my hand here. Am I allowed to plug my daughter’s book Uncanny Valley?

Jim Lowell:
I hope you do.

Dan Wiener:
Okay, well I will plug my daughter Anna Wiener’s book, Uncanny Valley, which hit The New York Times bestseller list.

I notice you said non-investment-themed. Believe it or not, right now I am reading Huckleberry Finn. Escapism, reading about escaping down the Mississippi River. My wife read it on vacation, and it was a must-read to change course in the course of our lives. I figured I do that, and then there are some business books that I’ve read over the last year or so that I thought were fantastic. The book about Theranos, Bad Blood. The Mike Isaac book about Uber, Super Pumped. Then I recently read Dark Towers, which is a book about Deutsche Bank. I recommend all of them.

What are you reading? You’re a poet.

Jim Lowell:
I always recommend any sort of selection or collection of Seamus Heaney’s poems, in good times or bad. I think one of my top-10 films, neither artistic nor thought-provoking would be the homage to Spaghetti Westerns and Kung Fu flicks called Big Trouble in Little China.

A book that has given me some historical context for today’s crisis with specific regard to U.S.-China relations over the past 100 years, and it’s a very readable book. It’s called The Imperial Cruise, by James Bradley.

Ultimately, I think between the two of us we’ve created a great book list for all of those who are listening.

Dan Wiener:
Well I appreciate your time, Jim, and I hope everyone has enjoyed these podcasts. We are going to try to keep these going on a regular basis now, particularly during this stressful time.

I want to thank you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, and I hope you did, please subscribe and review our show. You can check us out at Your feedback really is always welcome, I really mean that. If you have any questions or topics that you’d like us to explore, please email us at Thanks for listening.

This is a transcript of a podcast released on April 1, 2020. This transcript is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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