The Investment Committee

27th March, 2020

Blog, IC Insights

You make the most of your money in a bear market, you just don’t know it at the time!

Bull” and “Bear” markets are characterised as rises (bull) and falls (bear) of over 20%. They get their names from how the animals attack their prey – bulls bring their horns upwards, and bears hit with their paws downwards. Over the course of the last 100 years, we have had 25 bear markets and 26 bull markets. On average, a bear market lasts just 10 months, compared to a bull markets at just under 3 years. Markets also tend to rise more in bull markets than they fall in bear markets – this is why things generally go up over the long term.

Our most recent bear market occurred in 2008; incidentally just after the portfolios were launched. This was a pretty severe one; there were runs on banks, at one point it looked as if the financial system would collapse, and equity markets fell significantly. Our portfolios of course also fell in value, but by less. As the chart below demonstrates, the Low, Medium and High Risk Portfolios lost 12%, 17% and 22% respectively to the bottom of the market.

At the time it was extremely scary, just as the world is today. Millions of investors across the world sold all their assets down to cash in and amongst the panic. Depending on when they did it, they would have felt better for a short while, but then they would have then missed the best opportunity for a generation over the next five years:

As a Low Risk investor, at the worst point you would have seen a paper loss on your portfolio of 12%, but providing you held your nerve, you would have gone on to make 56% over the subsequent five-year period. Comparatively, High Risk investors would have been down 22% at the bottom of the market, but then gained 100% over the next five years. The quote “you make most of your money in a bear market, you just don’t know it at the time” refers to the idea that it’s therefore what you do in bear markets that’s important, not the fact they happen.

Fast forward to today, and we are in another bear market. It will in fact go down as the quickest on record, with a 30% correction happening in just 22 days; in 2008 it took 250 days for the same outcome. As we discussed in our previous blog, this one is different in a variety of ways, though it is the same in the most important way; as some excellent long term opportunities have been created.

As an example, at the start of 2020, looking forward to the year ahead, we were finding it hard to see where the next 2% growth would come from in lower risk portfolios. Some of our fixed income assets had been on such a good run that you weren’t really being compensated for taking risk anymore. Fast forward three months and those same low risk assets have fallen significantly, and we are able to pick up some opportunities in quality companies at significantly discounted levels, many even greater than we saw in 2008. So, whilst we have lost some value from our portfolio peak in February, we can see considerable forward returns from here are in our grasp. Therefore, whilst it might not be plain sailing in the next few weeks, the potential outlook is far better than it was at the start of the year. Sometimes you must take one step backwards to make two forwards.

Our portfolios have protected the downside as we would have expected. Our parallels with 2008 are apparent. Yes, we could have enjoyed greater downside protection, however, to do so would have meant holding assets that when the market recovers will lose significantly. Our central case is that this virus will not last forever, and therefore, government bonds are an example of areas we are deliberately light on. Had we been heavy (we could have been) our short-term protection would look much more impressive, but when markets smell that the virus is weakening, just like in 2008, such investments will not stand you in good stead and will severely impact the climb away from the bottom of this current market fall.

Our strategy has been and remains to add into quality companies, both into their equity and their debt. We will continue to put the cash we have within our portfolios to work by picking up some excellent opportunities that are now presenting themselves. We will not know the full benefit of this activity for a while yet, but if history is anything to go by, our clients are now in the same great position they were in in 2009.