The spread of the coronavirus has impacted all our lives, not merely our portfolios. During this crisis, we want to make sure you’re fully informed about all that Adviser Investments is thinking and doing to respond to the situation. In the first of what will be a series of special updates, Chairman Dan Wiener and Chief Investment Officer Jim Lowell sat down to discuss their perspective on the market’s sudden plunge, as well as the outlook for long-term investors like us. What follows is a transcript of their conversation. To listen to the podcast in its entirety, click here.
Hey Dan, good to be with you, albeit from a safe distance. Of course, not only is telecommuting not new for the two of us, we’ve been doing so for a few decades with Adviser Investments, [with] me here in Newton, Mass., and you and our director of investment research, Jeff DeMaso, in our Brooklyn, New York space. Adviser Investments has always been on the cutting edge of technology that enables us to communicate not just with each other, but with all of you across the spectrum of media, just like this podcast.
Yeah, I would say we’ve really been on the leading edge, sometimes the bleeding edge, when it comes to being technology-savvy. In fact, I checked with our IT guy and we have spent $2 million over the last two years just getting our technology into place so that all of our people could work from home, take care of our clients from home. We are totally up and running and we don’t have to be in our offices to do so. We can all do this from our homes. We have super high technology. It’s been quite a lesson here, but we’ve met it face on, and it’s working out very well.
I love that point, Dan, that technology is a key failsafe of ours in a crisis—seamless in terms of enabling us to carry on as if it was business as usual. Obviously, this crisis makes nothing usual, but from our perspective, we clearly were able to move seamlessly to ensure not a minute or a moment was lost in our ability to manage investments wisely and well and stay in touch with all of our clients.
Which brings me to why we’re doing this podcast. While we’re used to events and markets changing rapidly, the rate of change exponentially increased because of the spreading coronavirus. And because so much is changing so rapidly, we thought a regular podcast to cover some of the most important bases from our investment perspective makes sense. And so we’ll be alerting you to each new podcast, or you can always check with our website for regular updates that our team will be putting together as we manage through these difficult times together.
And speaking of difficult times, Dan, can you talk a little bit about the characteristics of this bear marketA period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market. that we’re suddenly in?
Well, yes. Something that’s quite unique about this current bear market is that it has occurred so rapidly. We went from market records in February to a bear market in an incredibly short period of time. And this is not typical of bear marketsA period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market., but it also isn’t atypical if you know what I mean. Every bear market is a little different. We’d been through all kinds of bear markets over the last 100 or so years that I’ve looked at the data. And interestingly, one of the best investors that I know—who’s been around for many, many decades—once told me that the worst bear market he was ever in was during the 1970s, when he said, “it felt like a sandpaper market.” He just kept getting rubbed down and down and down day after day.
And I went back and looked at the data on that bear market—it lasted over 500 days. So imagine having the same kind of rubbing down, sand-papering down, of your portfolio, but it’s happening in little bits and pieces. You never really know when it’s going to end. So that’s one type of bear market. This is another type of bear market. The one thing that we know about all bear markets is that they end.
The one thing that we know about all bear markets is that they end.
Bear markets always feel like the end of times when you’re in them, as we know. And while most of us feel most panicked at some point in time, we know that hope is also just around that panic’s corner. But where hope always is, we just can’t tell you where and when. Dan, I know we’ve been tirelessly researching, analyzing, modeling, discussing where we go from here, virtually nonstop over the past several weeks, together with our deep bench of research analysts led by Jeff DeMaso, director of investment and research. Can you put this current crisis (and I’ll certainly try and help too) and this market slide into historical perspective? I mean, we know that market corrections, crashes, dislocations are not unique to this particular moment.
Put it in perspective? The 10,000-foot perspective is that any kind of situation in the economy or in the global ethos that causes us to go into a bear market gives investors, as you said, great pause, but it’s usually, there’s some kind of uncertainty and uncertainty is heightened during bear markets. And so our defenses go up really fast. I mean, it’s sort of a flight response to the uncertainty and a flight response to the quote-unquote ‘risks’ that we see as our portfolios go down in value.
However, having been through—along with you—two of the biggest bear markets we’ve ever seen, the financial crisis of 2008 and the bursting of the tech bubble in 2000 to 2002, .one of the things we know is that in hindsight, when we look at bear markets in the rearview mirror? They appear to be incredible opportunities. What kind of opportunities? Opportunities to upgrade the value and the quality of our portfolios, upgrade the quality of say, the managers or the funds in our portfolios, but also it’s really the opportunities for those managers who we’ve already selected and put into our portfolios for them to go out and upgrade the stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. that are all being thrown out, babies with bath water, when traders panic.
I think that’s an excellent point. And of course we’ve been in touch with several managers, both managers we invest in and managers we respect highly, to take not just their perspective on the current crisis and what they may or may not be doing about it, but as you say, to listen to how they are assessing, analyzing, maybe upgrading best ideas and their own portfolios at discounted prices. Maybe some managers building a little bit of cash, some dry powder for when some of the facts on the ground begin to supersede the fears that we all know now by rote.
And one of the areas that we’ve been overweight significantly—really since the inception of the firm—has been health care. And I think health care has been holding up relatively well, along the lines as we hoped it would as a great defensive sector. Not [just] because of the current crisis being a health care crisis, but because of the ongoing necessary demand for more and better health care. Would you say that’s true, Dan?
Well, yes, we’ve always had an overweight to the health care sector, but we’ve always done it using active managers that you and I and our research team have come to believe really have almost an extra gene for figuring out what the best health care companies are and putting them in our portfolios. And why do we do that? Because health care is a huge industry. It’s very diversified in and of itself. You’ve got everything from the big pharma companies to the biotechs, to the health service companies. It’s global, meaning that great companies are not just in the U.S., we’ve got some fantastic companies in Japan, some incredible companies in Europe.
And because of what we have termed demograyphics™, the aging of the populace, and let’s not forget that while we are aging here, we’ve got a huge emerging market where the population of lower class moving into the middle class is expanding dramatically. And what does the middle class want when they get to the middle class? They want better health care. So we think that health care has lots of tailwinds to drive it going forward. The fact that this happens to be a health crisis that is affecting us right now, well, there’s going to be a little bit more tailwind for some of the biotechs. We’ve already seen that. So yes, health care does prop us up, does provide something of a shock absorber in difficult market moments like this one.
And other market absorbers in our portfolios come from our longstanding discipline of diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not., which encompasses not just the diversification across a spectrum of risk-aware managers, but also in terms of asset allocation—stocks, bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., cash. And so I want to mention that currently we’re positioned defensively, based on the facts we know, and of course we can become more or less defensive in the weeks and months ahead.
We’ll certainly watch what our managers, that we’re invested in right alongside of you, do as well. The managers that we do invest in may already be putting some cash to work, as we’ve said, may be building some dry powder as we noted. But we think these managers are the best informed, best able to execute on the planet. And while it’s not hard for us to make the case, I would say, Dan, for a dramatic sinkhole in our economy in terms of a sharp, steep recession potentially, at this juncture, I think it’s also safe to say—correct me if you think I’m wrong, but I think we’re in agreement—that it’s not hard to make the case for a V-shaped recovery.
But while alarm bells are increasing, we’re not becoming increasingly alarmed here. Instead, we’ve taken actions, interactively reviewing where we stand in light of what we know and in light of the ever-changing landscape.
No, it’s not at all. But again, this is the uncertainty that is pervasive on Wall Street right now. We don’t know if it’s going to be a V-shaped recovery. We do know, I think it’s very clear, that the recovery—and this again is why you and I have always believed that finding the best of breed active managers is the way to go, particularly investing in times like these—because there are going to be winners and losers that come out of this economic turmoil.
Whether we go into a deep recession, whether we go into a mild recession, it’s a very unfortunate fact of economics that there will be some businesses that go out of business. Those that are weaker, have weaker balance sheets or weaker market positions may go out of business, but what does that do? It opens up the opportunity for the stronger businesses to take over those market positions. Maybe grab some market share, maybe expand their markets into other states, cities, countries, what have you. So we don’t know exactly how fast the recovery will come, but yeah, very clearly could be a V-shape. But the companies that will do the best are the ones that survive through the dark times.
I wanted to just pursue one other topic that you mentioned quickly and then passed over, and that is, we are invested alongside our clients. You mentioned it, we call it “eating our own cooking,” but we think it’s really a critical issue here. We invest, all the people at Adviser Investments, through our 401(k) planA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn.. Many of us who have outside investment accounts from the 401(k), we’re invested right alongside our clients. We own the same funds. We invest with the same managers, the bulk of my investible assets and those of my family, meaning my wife, my kids, are all in funds run by the same managers that our clients are in. And so we are walking down this path together, whether we are rising with a bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years. or falling in a bear market, we are all in this together. And I think that’s critical, because it’s one thing to spout a lot of aphorisms and what have you. It’s another to be right next door to you linking arms—although right now we’re practicing social distancing. But investment-wise, we have linked arms with our clients. And I think that’s really something that’s worth mentioning.
I completely agree, Dan. 100% of my assets are invested right alongside our clients’. Let me try and summarize what we’ve just been speaking about and draw this to a conclusion.
Our view is [that] the questions concerning both the depth and impact of the likely recession and the market impact of that, and the possibility, high probability maybe still for a V-shaped climb out of it, are still based on the quicksand of conjecture. But while alarm bells are increasing, we’re not becoming increasingly alarmed here. Instead, we’ve taken actions, interactively reviewing where we stand in light of what we know and in light of the ever-changing landscape.
We’re staying disciplined, diversified, rational, even as unreason increases. Our reasons for staying rational? As we talked about in this podcast, we have a range of options, an excellent array in terms of our arsenal for greater defense or offense. And we’re investing in not just the best managers we think our money can buy, but also in the strongest, most liquid, most transparent, most well-led underlying companies. And so in conclusion, all of us at Adviser Investments are here for you, and you can connect with us in a number of ways and we will keep communicating with you on a regular basis throughout this crisis.
If you have any questions or topics that you’d like us to address throughout this crisis, please email us at email@example.com. Thank you for listening to us today. And while we wish it were under better circumstances, we know better circumstances will ultimately prevail. Between now and then, all of us at Adviser Investments will be right by your side every step of the way and wishing you and your family good health and helping you secure your financial future.
Note: Dan Wiener mentions that Adviser Investments employees are invested in the same funds as clients through our 401(k) plan. Our retirement plan does include the same funds our clients are invested in; additionally, employees have the option to choose funds outside of the plan or to choose not to participate in the plan. Employees are eligible for the plan after one year of full-time employment.