The Steps Interview: Willis Owen’s Lowcock on three fund-picks amid a ‘Black Swan’ crisis
- Stock markets blindsided by current crisis, but rebound has been swift
- Current market prices signal optimism, perhaps too much
- Near-term safety could be in larger, higher ‘quality’ companies, and those set to benefit from the crisis
“The fastest bear market in history”
My interview with Adrian Lowcock, head of personal investing at Willis Owen, a broker, starts with a scene-setter on the spectacular crisis caused by Covid-19, and it’s a steely reminder of the panic and mayhem that ripped through stock markets in Q1 as the global economy came grinding to a halt. Using a long-time industry expression of down markets – originating in the depiction of the back-footed stance of a fighting bear – he is referring to the dramatic falls in stock markets seen across the world this year, with major indices including the UK’s FTSE-100 shedding around a third of their value in under a month. Ouch.
“It began as a crisis in China – an Asian thing – that didn’t seem like it was going to impact the rest of the world. While it would impact the supply of goods, it wouldn’t necessarily impact economic activity.”
“All of that changed when it became an Italian issue and a US issue. Markets suddenly sold-off rapidly, because as soon as that happened, it changed the dynamic of the crisis very materially – it became a demand problem.”
What’s puzzling me is how markets seemed to have been blindsided. Surely human history is peppered with the calamitous impact of pandemics – couldn’t they foresee the ensuing carnage?
“This is referred to as a black-swan event – it’s not something you can easily predict, it’s not something you can forecast – all [investors] can do is react to it.”
Adrian continues, saying that although the rout has been sharp, “the rebound has been quite rapid too, quicker than the global financial crisis (GFC) of 08 / 09”, even though the economic hit for the quarter far outweighs it. There appears two reasons why: first, that central bank action to support economies has been better and faster; and second, that the drop in economic activity is a result of government action, whereas in 2008, with the financial system on the verge of collapse, there was no control over it. Theory dictates that a snapping of political fingers should return to economies their much-needed demand – it’s just becomes a question of when.
Adrian reflects that while these are important differences, the market still seems to be overly bingeing on optimism:
“The market is trying to look for a way out – I’m wary of this. A lot of economic data coming out over the next weeks and months is going to look grisly and horrible. In the UK, we’ve just heard the economy is forecast to shrink 35% for the quarter, which is huge. I can’t think the market has factored all of this in.”
With a bumpy ride on the menu – oft described as market volatility – I’m intrigued to find out which areas of the market might fare better in the nearer-term. The consideration of investing involves assessing a vast array of financial assets and securities across markets, and the forces that drive their performance are varied. One fund manager described it to me as a soap opera: each day an exciting new episode as new information and new data feeds into the markets. The fun (and indeed skill) of investing is in finding which areas have a bit more fire underneath them considering the economic climate (although everything falls when sell-offs are severe). Adrian has some in mind:
- Higher ‘quality’ companies seem a bit more sheltered – by this we mean strong brands with business models that are hard to replicate (known as having an economic moat), that generate lots of cash in their day-to-day operations, and that achieve higher-than-average returns on the projects in which they invest. He says these are likely to receive the lion’s share of the better economic data as it rolls-out over the next few months, which should prevent an overly nasty hit to their share prices if lockdown measures continue.
- Larger companies are likely a bit safer than smaller ones – they will generally have stronger cash reserves, better access to private funding, and could even sell assets if need be to keep themselves buoyed during the crisis.
- Look out for stock-specific beneficiaries of the Corona crisis – areas such as healthcare, for example the UK’s Astra Zeneca, which announced testing of novel Covid-19 treatments; or technology, where companies such as Amazon have played such an important role in distributing to consumer’s homes the essentials during the lock-down; or the consumer staples we’ve all been filling-up on, such as the soaps and washing powders provided by the Unilevers of this world.
Adrian goes on to discuss a couple of funds that take these concepts into account. In the UK, there’s Lindsell Train UK Equity, run by Nick Train.
“Nick Train loves high quality companies, that you’re going to have repeat business for, that are going to be in demand, that have sustainable business models.”
Nick Train is a well respected manager in the UK. His fund invests in any size of UK company, it is fairly large managing around £5.5bn in assets, and his management style means he tends to take bigger bets with his investments: while most funds have around 50 – 60 stocks, Train has around 20, which means his performance is likely susceptible to bigger price swings.
Looking to the US, Adrian points to T Rowe Price Large-Cap Growth as a good contender. Run by Taymour Tamaddon, it is more diversified than Nick’s fund, with around 60 -75 stocks, and focuses on large-sized and high-‘quality’ US businesses.
I finish the interview with what he thinks about markets beyond the current crisis and Adrian remarks that the longer-term opportunity could be in cyclical stocks – companies more closely linked to the ebbs and flows of economic cycles and data releases.
“With the stimulus in place, the recovery could be very attractive – the [economic] growth could be very attractive.”
In particular, he points to smaller companies, which have been broadly dumped by investors as they usually are under the threat of looming recessions. He says these stocks have the potential for good returns amid a broader economic rebound in the longer-term if you can find a fund manager who can sift through the good from the poor. Adrian recommends Merian UK Smaller Companies, run by Dan Nickols, who heads the well-resourced small and mid-sized companies team at Merian. Dan has a strong track record and is a proven stock-picker, but Adrian warns that the fund is “vulnerable to recession, so expect volatility in the short term”.