Taking action - in real time

The market volatility of the past few months has posed significant challenges for advisers and portfolio managers. 

The speed with which the market sold off in February took many by surprise. In the month following 21st February, for an Australian investor the local market was down 35% and the US market by 24%. How many sighs of relief when the rebound occurred and both markets rallied. In fact, rallied too strongly in the minds of some. The NASDAQ Composite Index NDX where so much of the technology action was happening  and which includes Apple, Tesla, Nvidia and Facebook was in fact up from 9750 in late February to 12056 by the beginning of September on an aggregate PE of 40.

Too much of a good thing?

Making decisions like this is what portfolio managers get paid for. And like the other portfolio managers who are responsible for Philo MDA portfolios, Drummond Capital Partners had spent a good deal of August reviewing the amount of the portfolio which should be invested in global, particularly US, markets. Their thesis had been for some time that technology driven companies in a low interest, COVID affected environment would continue to enjoy earnings growth. But had the thesis temporarily run its course?

Back to this in a moment because while all the adrenalin surge of major asset allocation decisions is taking place, there’s the humdrum, quotidian business of corporate actions and other routine daily decisions to take care of.  

Other Philo clients hold Tabcorp in their portfolios and on 19 August TAH announced an underwritten 1:11 right issue at $3.25. At the time the stock was trading at $3.56 after generally trading in the $4.00 - $5.00 range over the previous 5 years. So for many investment managers and analysts taking this up was a no brainer, even if the immediate gains seemed small. UBS research from 19 August for example had a target price of $4.70 and a Buy rating. The closing date to take up the rights was 10 September.

Easy to say – harder to do when the actual entitlement might apply to hundreds of clients.

Back at the ranch, the team at Drummond had formed the view on 1st September that they should be taking profit by reducing exposure to a concentrated global growth fund they had long held as part of the technology thesis.

Drummond communicated this to Philo with a change in portfolio weights and this change was implemented on platform by Philo for all eligible portfolios. Over the following 3 days the NASDAQ peaked and fell 11%, including a 34% fall in Tesla, at that time a significant holding in the fund.

Meantime in other Philo MDA portfolios which held TAH, a concurrent set of decisions was being made by the investment manager – Pendal in this case – about taking up the corporate actions. The recommendation to Philo was to take up the rights, and this was done on the platform by the Philo administration team without requiring any work from either advisers, their support staff or the clients.

The benefit of the MDA service over this one week period was not merely that a significant asset allocation decision could be implemented in a timely way, or that a corporate action could be effected without involvement of advisers or clients, or even that hundreds of personal recommendations were not required, with the resultant time savings for adviser offices.

The real benefit to my mind was that these actions could be undertaken concurrently on the portfolios that were affected, by the appropriate specialists and could mesh without conflict and without adviser offices having to prepare separate lists of affected clients, or if necessary combine recommendations into a single ROA for any clients subject to both events. Advisers and their support staff didn’t have to check for the returned acceptances and clients didn’t need to be involved in portfolio or investment decisions which they have ceded to experts.

The other message that comes out of the Drummond decision and its timely execution is the avoidance of the cost to investors of delaying the implementation of portfolio decisions. James Freeman, Head of Investments for Philo, recently undertook a study to quantify this, looking back over the markets of the past 20 years. The research shows that a four week delay erodes about half of the value added by correct decisions and a 3 month delay destroys 80%. For a copy of the research click here