Many advisors are currently working from home and proactively communicating with clients. They talk about the benefits of a well-diversified and balanced portfolio, staying the course and explaining what the CARES Act means to them. In short, they are doing exactly what they should be doing.  

In the face of challenging times, however, humans want to react. And they want to see their advisor reacting too; they want to know that you’re doing something. If they feel their advisor is not doing enough, some clients may do irreparable harm to their portfolios. 

Clients want to know what is going on inside their portfolios too. Unfortunately, in the world of mutual funds, transparency is not easily found.  

Today’s contributor post comes from Matt Potter, who worked for an active money manager during difficult times, including the tech bubble bursting in 2000, Sept 11, and the global financial crisis in 2008. He gives us an account of what is happening throughout the industry.  His insight into what managers are doing right now can give you talking points and ideas that you can share with your clients when they ask what is going on. We are all reacting, actively reviewing and making changes. Please enjoy the post from Matt Potter -- JDA

As I write this in early April 2020, I’m running out of adjectives to describe the capital markets. It is clearly an extreme understatement to say that we have seen significant volatility so far this year (and it’s only April). As you can imagine, one of the most frequent questions my team has been getting recently is “What is SEI doing to respond to these markets?”

Behind this question is an implicit bias for action. Investors want to know that we are doing something and not simply sitting back and repeating the mantra “stay the course.” It’s as if “the market” has taken human form and punched us collectively in the face — people don’t want to hear that they should just sit there and take it. They want to see us fighting back, whatever that means.

But market declines aren’t personally directed at any investor, and their refusal to act the way we want them to obviously don’t represent an affront to our personal honor. Markets have historically risen over the long term but have done so with periodic jarring declines — that’s simply the nature of the beast. As investors, our job is to recognize and accept how markets act, and plan our investment strategies accordingly.

Along these lines, I want to offer a perspective on what a sensible approach to unexpected market volatility can look like. As I have mentioned in previous blogs, before I joined SEI, I worked closely with a number of different portfolio management teams. During that time, I experienced the unwinding of the tech bubble, the aftermath of September 11, 2001, and the global financial crisis of 2008. I also saw how several portfolio managers assessed the impact of these events and the work they did on their portfolios.

How portfolio managers tackle serious market events


balance scaleTypically, the first step was a triage process. Each holding would be quickly analyzed to determine if it held too much potential downside risk or if it had outsized exposure to a particularly problematic area. In the current environment, for example, that might mean travel-related stocks. These were generally the first ones to be trimmed or sold outright. Even in the case of quality companies, if they were judged to be directly in the crosshairs of enormous selling pressure, it just wouldn’t be worth it to hold them. They could always be repurchased at a later point, but at that moment, their risk/reward profile wasn’t compelling enough to own them, or at least to own a full position.


Next, managers and analysts dug in and scrutinized all portfolio holdings. This process usually included calls with company management, conversations with external analysts who cover that sector, and a close re-examination of financial statements with an eye on balance sheet strength and cash flow. Conversations with other investors, either within the same firm or outside contacts, could also offer valuable insights and perspectives. The goal was to either revalidate the original investment thesis or conclude that the company’s fundamental case was no longer attractive.

There can be a temptation at this stage to revise the original thesis to reflect the new facts on the ground (e.g., from a turnaround story to a hidden asset story). It’s very important not to rationalize holding a position by merely changing the reason you own it. Discussions among team members can help keep investors intellectually honest. So can referring back to the original (hopefully written) thesis for buying the stock in the first place and candidly assessing whether that holding would be a compelling candidate for purchase if it weren’t already owned.

New buys

As weaker and lower-conviction names got pushed out of the portfolio, the team would also look for new buy ideas to replace them. Typically, they would maintain a watch list or wish list of companies whose fundamentals were judged to be attractive but whose valuations were previously deemed too high. Sudden market declines, especially when the selling is widespread and indiscriminate, can present rare opportunities to buy such high-quality companies whose stocks often trade at a premium. When nearly everything in the market has sold off precipitously, good companies along with mediocre or poor ones, valuation differentials often shrink and allow managers to upgrade their portfolios without overpaying or violating their investment disciplines (particularly for value managers). These upgrades can help drive better portfolio performance when markets normalize.

A key point to take away is that heightened market volatility doesn’t necessarily mean that portfolio managers will (or should) suddenly start trading more frequently. Much of the vital work that they do involves reassessing their current holdings and looking for potential new ones. This may not lead to a noticeable pickup in portfolio activity, but be aware that there is a lot going on behind the scenes. 

Every portfolio holding represents a decision to initially buy it and many subsequent decisions to continue holding it. Company fundamentals tend to change much less frequently than stock prices, and portfolio activity usually reflects this. 

Trading just for the sake of trading is generally counterproductive and a distraction.


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