Share
The last month and a half has seen some historic moves in both equity and bond markets. Based off of daily closing prices on the S&P 500 Index, the average daily move in the S&P 500 Index over the last 40 years has been around +/- 0.75%. In the month of March, the average daily move on the S&P 500 Index was over 4%. This has happened two other times in the last 40 years—the first was during the Stock Market Crash of 1987, and the second was during the Global Financial Crisis. Needless to say, the exogenous shock to the markets and the corresponding volatility has been extreme.
You’ve heard a relatively consistent message from us in our response to this volatility: we are continuing to recommend a disciplined approach that follows our greater investment philosophy and aligns with each family’s long-term objectives. For instance, we are not seeking to time the market, but rather have sought to rebalance to target either when price action takes us too far outside tolerance levels- or when we are raising or deploying cash. That being said, another key component of our investment philosophy is to utilize active managers in asset classes in which we believe the opportunity for excess returns justify the additional fee burden that comes with active management. We wanted to spend some time discussing what this aspect of our approach means for your portfolios during this period.
Over the last 45 days, together with our colleagues at Asset Consulting Group, we have been in contact with our investment managers and have been watching them manage through these tumultuous times. We thought we would share some of the insights we have gleaned from these conversations, as they highlight an important concept: while the core of our families’ portfolios have been staying consistent from an asset class perspective, fund managers are making portfolio decisions below the surface to reflect their outlook for the businesses they own and the environment in which we find ourselves. Broadly speaking, the actions being taken by managers fall into three broad categories:
Risk Reduction
Managers have been active in re-underwriting the businesses they own and have made changes to their holdings based on their view of the company’s ability to weather a prolonged downturn. Two examples of this would be the approaches of Artisan International Value and Integrity Small Cap Value, as both of these managers refreshed their evaluation of balance sheet leverage sustainability amidst a longer term slowdown. As a result, they have sold a couple of businesses that they felt had leverage levels that would either hamper their ability to manage through the downturn or their ability to have flexibility in a recovery. Pioneer, which is a multi-sector bond manager, has added to certain investment grade corporate bonds which they believe will be able to sustain meaningful periods of impairment.
Upgrading
Managers have also used the periods of indiscriminate selling as an opportunity to (in their estimate) upgrade the quality of the businesses in their portfolio by buying companies that might previously have been too expensive. Interestingly, Artisan, who we mentioned in the paragraph above, has been equally active on this front, as they purchased a record number of new businesses in Q1, one of which was a large global e-commerce business. Two more examples would be Brown Advisory and WCM, two managers that fall within the “growth” style spectrum. Brown, in particular, added a global financial services and consulting firm that provides business process outsourcing to India. Brown believes the stock sold off due to negativity surrounding the Indian COVID-19 induced shutdown, however they have determined that the staff in India primarily work remotely and they believe the pandemic will have less of an impact on earnings than previously estimated.
Holding Steady
Managers are also maintaining their convictions. They are comfortable with the businesses in their portfolios and are either holding steady or managing around the edges as price movement causes positions to become either over- or underweight relative to their target holding sizes. A couple of examples here would be Atlanta and Wasatch. Both of these funds focus on smaller businesses in the US and in emerging markets respectively, and they have not made any major adjustments to their holdings. Atlanta has been trimming or adding to their holdings depending on whether significant price movements take them too far away from their target allocations (sound familiar?). The bond manager that we discussed previously, Pioneer, has predominantly been holding steady as cash reserves have allowed them to meet fund flows without having to become forced sellers into a bond market with challenging liquidity dynamics.
Based on our observations at the surface—and asset class— level, it is fair to say that portfolio allocations are remaining relatively static despite the current market conditions. We’ll reiterate that we don’t think now is an appropriate time to make any significant shifts away from long-term targets. But that doesn’t mean small adjustments aren’t warranted, given the degree of uncertainty. The actions we see managers taking to better position their portfolios to weather this environment feel appropriate to us – they are measured and consistent with each manager’s long-term investment process. We believe that, in aggregate, these smaller adjustments result in a portfolio that has evolved on the margin to reflect our current environment.
This report is the confidential work product of Matter Family Office. Unauthorized distribution of this material is strictly prohibited. The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations. The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report. Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available. Nothing in this presentation should be construed as an offer to sell or a solicitation of an offer to buy any securities. You should read the prospectus or offering memo before making any investment. You are solely responsible for any decision to invest in a private offering. The investment recommendations contained in this document may not prove to be profitable, and the actual performance of any investment may not be as favorable as the expectations that are expressed in this document. There is no guarantee that the past performance of any investment will continue in the future.
About Thierry J. D. Brunel
Matter welcomed Thierry to the team in 2013, after he packed up his family and seven years of family-office and wealth-management experience and left Washington D.C. for St. Louis. Thierry started his career with a focus on investment research, as a member of the investment strategy group for Convergent Wealth Advisors. There, he was responsible for due diligence and monitoring of investment managers and strategies covering both public and private equities. He transitioned to a role as a client-facing portfolio manager with GenSpring Family Office, where he specialized in portfolio oversight, tactical allocations, and liquidity management for more than 20 families. At Matter, Thierry taps into his deep expertise in investment strategy to serve as an advisor and thought partner for our families. He also enjoys planning and leading family meetings that cover a range of topics—from family business governance to communication skills to multigenerational investment committees—and supporting families in making strategic, intentional decisions around their wealth. He currently leads the Matter investment committee. Thierry attended Wake Forest University (where he met his wife) and earned a BA in economics. His casual demeanor cloaks a diverse international background: Born in Hong Kong, he spent his early years in Singapore and Australia before his family moved to the United States. Traveling between Asia, Australia, his father’s native France, and his mother’s native Iowa has given Thierry a deep appreciation for globally diverse perspectives—and fluency in French. An active member of his community, Thierry currently serves on the investment committee for the Ronald Mc Donald House Charities in St. Louis. A long stay in the NICU when his son was born made Thierry a committed supporter of the organization’s work to provide accommodations for families whose children need intensive care. When he’s not at work, Thierry likes staying active by playing men’s league hockey, spinning on his Peloton bike, and keeping up with his three children (or at least trying his best). He is a lifelong Cowboys fan and has cheered them on from wherever he’s lived for as long as he can remember. Thierry also enjoys cooking, with a particular focus on grilling as well as sauces and marinades— nods to his American and French heritage. And at the end of the day, he enjoys a good St. Louis microbrew.