- Market Commentary
- By Jack Ablin
- March 24, 2020
Welcome to Stage Two: Finding Winning Strategies for the Aftermath
The COVID-19 pandemic has become a multifaceted global crisis. The human element is enormous, with hundreds of thousands of people infected to date worldwide. Governments are busily inventing policies to address the healthcare emergency and to provide a buffer against the enormous economic dislocation those policies will undoubtedly create.
The reaction of the markets has been understandable given the widespread, yet uncertain, path of both the virus and its aftereffects. Stage One – swift and massive market fallout – involved liquidity raising and risk reduction, as investors and companies raised cash to cover a period during which business could be at a standstill. Stage One selling was indiscriminate and its impact was felt in both the bond and equity markets. Risk reduction through forced selling targeted equity markets, as volatility spiked from a quiescent level to an all-time high in a period of a few weeks. Nearly $250 billion flowed into government money market funds last week alone.
We are now in Stage Two of the markets’ reaction to the crisis: investors are beginning to discriminate between the winners and the losers under current and foreseeable circumstances. We see three opportunities for responding to the recent massive liquidity shift:
Blame the proliferation of low-cost, index-oriented exchange-traded funds (ETFs) for indiscriminate selling in both the stock and bond markets. We know that across the board, baby-with-the-bathwater selling pushed both good stocks and vulnerable stocks downward simultaneously. The same thing applied to bonds, where high-grade bond outflows surged past $35 billion last week, surpassing the previous $7.3 billion weekly record, according to Bloomberg News. While it’s virtually impossible to predict the overall economic and financial impacts that will result from the COVID-19 outbreak, we do know that the blowback will not treat all companies equally. That’s why careful security selection in both investment-grade corporate and municipal markets as well as in the equity market would provide investors an added layer of insulation that passive investing simply can’t offer. Our Cresset team has developed several options for clients interested in individual security selection for equities and bonds.
If you are an investor with the luxury of dry powder, we see a great opportunity to provide liquidity to investors looking to get out of illiquid assets. Cresset has allocated a portion of our Growth portfolio to private equity secondaries, a strategy designed to buy private equity limited partnerships in the secondary market from private equity fund limited partners. This strategy buys private equity limited partnership shares in the secondary market from investors who either want to reposition their portfolios or simply need to get out. The result is a well-constructed, diversified portfolio across a variety of industries and holdings often purchased at a discount, thanks to the premium today’s investors are willing to pay for liquidity. Historically, the strategy has done a good job of outpacing US large caps in normal times. We suspect that at current market levels the opportunity is greater than average.
Distressed credit managers have been the Maytag repairmen of the fixed-income market, thanks to low interest rates and abundant liquidity keeping troubled businesses operating for years past their expiration dates. Today’s swift liquidity freeze is likely to reverse that trend, offering robust deal flow to distressed credit managers. Providing liquidity to managers to purchase distressed debt and restructure their troubled issuers has historically offered investors equity-like returns within the fixed-income credit space. Cresset’s newly launched Private Credit Access Vehicle has the flexibility to allocate nearly half of its capital toward distressed credit opportunities.
By matching clients’ investment allocations with their cash flow needs, Cresset’s goals-based strategies offer a modicum of insulation and predictability in an otherwise unpredictable environment. Your advisor will be reviewing your portfolio and will reach out with recommendations that could help you take advantage of market dislocations amid today’s uncertainty.