Caught with the wrong portfolio? You're in good company

Many investors – including the great Warren Buffett, got caught with their trousers down by the Great Virus Crisis. But not everyone, says Merryn Somerset Webb. Some happened to have just the right portfolio.

Warren Buffett © Getty

How many fund managers went into the GVC (great virus crisis) with the portfolio they would have liked to be holding? Not many. And not even poor Warren Buffett.

In his downbeat online shareholder meeting last week, he told investors that he had spent much of March and April selling his huge stakes in the US’s four biggest airlines (United, American, Delta and Southwest) on the basis that “the world has changed” and holding them had been a “mistake”.

Advertisement - Article continues below

Unfortunately, it has not been the only mistake the world’s one-time greatest investor has made recently. Thanks to holding much of Berkshire Hathaway’s portfolio in out-of-fashion value stocks in an age of growth obsession, its shares have underperformed for a decade. They are up 126% in the past ten years. That sounds fine – until you look at the S&P 500 index, which is up 140%.

On the plus side, the fact that even Warren Buffett has been caught with the wrong portfolio as the music stopped should come as some reassurance to many others in the same boat.

It was the wrong time to get into value stocks

Anyone who went into the GVC having been convinced – as I was – that it was nearly time for a great switch from growth into value, from technology to the physical economy or from relatively expensive US stocks to cheaper, high-yielding UK ones has had an unpleasant few months.

Advertisement - Article continues below

For an example of just how unpleasant, take a look at the Temple Bar Investment Trust (which I hold). Its managers had positioned the fund in cheap UK shares, which had appeared to be poised for a post-Brexit uptick – or so we thought.

Advertisement - Article continues below

Temple Bar went into March with the worst possible portfolio (its top ten holdings included BP and Shell). Its shares are down more than 40% in the past three months. Ouch.

This is not to say, by the way, that the wrong portfolio is always the wrong thing to buy. Get a big enough discount on an investment trust and the wrong portfolio can still be a perfectly reasonable buy. There is still some of that kind of opportunity around in the niche areas of the investment trust market – but overall discounts have closed significantly since the low in March when they hit 20%. The average is now back to more like 8%.

A few people did get it right

Still, there are outliers – funds that went into the crisis in the perfect place. One is the Equitile Resilience Fund which was able to say in its last note to investors that its manager had “made no significant changes to the composition of your portfolio during April”.

Advertisement - Article continues below

Instead, managers are convinced that Covid-19 will simply accelerate the trends they had in mind when they chose the fund’s holdings. Our new interest in hygiene over privacy will help Visa and Microsoft as we shift to a cashless economy. Our shift to homeworking – one of the few changes that I think will last longer than the pandemic – will help US gaming specialist Nvidia (one of Equitile’s top holdings), not to mention Microsoft, Apple and Alphabet which are all in the portfolio already as well as the semiconductor business as a whole.

Advertisement - Article continues below

Starting from here, the managers might even be happy to have had LVMH in their portfolio: spending on luxury goods is already recovering nicely in China and they expect an element of carpe diem spending as the rest of the world reopens (although the more slowly lockdowns are lifted, the less likely that becomes).

Collectively, the fund’s holdings fit nicely with a slightly overused bit of advice from Canadian hockey legend Wayne Gretzky, whom Buffett likes to quote: “Skate to where the puck is going, not where it has been.”

Advertisement - Article continues below

The Equitile fund rose 33% last year, and is only down 8% this year. Add it all up and I think that were Equitile able to start again they would, I think, be happy to start from much the same place.

There are others. The managers of the Scottish Mortgage Investment Trust, which I also hold in my own portfolio, would probably say the same thing (its shares are up a slightly absurd 15% year to date). So would those of the Blue Whale Growth Fund (up 2.6% so far this year) and Fundsmith (also in my portfolio, and flat year to date).

Note that these funds are all pretty US heavy. Perhaps their managers have been keeping another well-known Buffettism more in mind than most: “Never bet against America”.

They may all find their time of trial is yet to come, of course. The stocks they hold are expensive and if the bears are right, the real bear market has barely begun. However, the really interesting question now is whether some managers might use this environment to start from scratch – because now might be a great time to do so.

Some are only just getting going

Retail investors are hugely engaged. All the platforms are reporting sharp rises in activity and there has been an interesting inflow of cash into equity funds (£2.6bn last month, according to fund settlement firm Calastone).

Advertisement - Article continues below

At the same time, while the recovery from our sudden bear market has been extraordinary in its speed and scale, there will still be bargains about. So far the opportunity has been pretty much ignored by the investment industry (which makes sense – fund launches usually mark the top, not the bottom, of the market).

Regardless, boutique management firm Downing is having a go with the launch of two new funds. The Downing Unique Opportunities Fund, managed by Rosie Banyard, will invest in companies across the size spectrum in the UK and has a long-term buy and hold strategy.

The Downing Global Investors Fund will take positions in around 150 companies catering to the still-growing global middle class population. By the end of the decade, fund manager Anthony Eaton expects that two-thirds of the world’s middle classes will be located in Asia.

I can’t tell you how well either of these will do, but they both have well-regarded managers – and come with the happy advantage of starting with a delightfully blank slate.

• This article was first published in the Financial Times



Investment strategy

How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, J…
2 Jan 2020

The good investments of the 2010s – and the bad

John Stepek takes a look back on which investments did well and which did badly in the decade that’s about to come to an end.
26 Dec 2019

Precious metals will keep shining – buy these funds to take advantage

Data on volatility suggests that a V-shaped recovery may not happen, so hold gold or silver.
1 Jun 2020
Investment strategy

How income from options could prove illusory

Funds that use call options to supplement dividends can offer higher yields, but this usually comes at the cost of lower long-term returns.
1 Jun 2020

Most Popular

UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020