As many of you will have noticed share markets around the globe have dipped on news that the Coronavirus has spread outside of China. For instance, the broadest measure of US shares, the S&P 500, has declined -3.1% since the end of last year.
Our Funds have not been immune to the sell-off. For instance, the fund with the highest share market exposure, the Focused Growth Fund, has declined 0.9% since the start of the year. It is worth remembering that this Fund was up 27.1% in 2019.
We held elevated levels of cash going into the sell-off. For instance, at the end of January Focused Growth Fund held 10.8% in cash versus the long-term target of 5%. These elevated cash holdings can have two benefits. First, they dampen down the impact of the share market dip. Second, it also allows the funds to take advantage of the weakness, i.e. buy shares at attractive prices.
It is also important to remember that share market gyrations are not new. In the long term, investors should expect higher returns from share market investments than bank deposits, but in return, they have to accept a bumpier ride. There have been a number of share market pullbacks over the past 5 years, but the Focused Growth Fund still returned 11.3% p.a. on average to the end of January.
On balance we expect this volatility to continue in the short term as we expect media outlets to run plenty more sensationalist headlines yet. Notwithstanding this, we have begun to cautiously increase our investment in companies that are unlikely to be materially impacted by the Coronavirus but have experienced significant declines in their share prices.
On a recent CNBC appearance, Warren Buffet summed up the situation: “It is scary stuff,” Buffett said. “I don’t think it should affect what you do in stocks.” “The real question is: Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?” “If it gives you a chance to buy something you like and you can buy it even cheaper then it’s your good luck”. “If something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low-level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments”
While shifting your KiwiSaver from the Growth Funds to Conservative at the start of a share market correction may appear to be beneficial - it is a risky strategy. Picking the direction of the share market is extremely difficult, and reversals in the direction of share markets occur suddenly and almost randomly. This makes the risk of mistiming the market significant. More specifically, there is a real risk that the shift to Conservative occurs after the market has dropped and then the market recovers before the money is shifted back to growth funds crystallizing losses.