The coronavirus pandemic has forced people from all walks of life to make some pretty fundamental reassessments—both personally and professionally.
That is certainly true for asset managers, whose job is far from easy during the simplest of times. Suffice it to say, the pandemic is causing them to rethink some foundational assumptions about the markets and their portfolio management responsivities.
“When equities took their big fall in March, we added to our overall exposure to stocks in our target-date funds [TDFs],” observes Mark Vaselkiv at T. Rowe Price. “More recently, we’ve been dialing down risk, as we agree with the assessment of a potential second wave of COVID-19, or a continuation of the first wave. This could be a freak show over the next three to six months.”
Vaselkiv is chief investment officer of the fixed-income team at T. Rowe Price Group, in Baltimore, which is one of the three large TDF managers PLANADVISER spoke to in late June, to learn their COVID-19 portfolio thinking for the upcoming cover story of the July/August issue.
The managers broadly agree that most of the market crises in recent memory have been brought on by a flawed financial system—the global financial crisis—or overenthusiastic markets themselves, as was the case during the 2000 dot-com or October 1987 crashes.
“This crisis was a new one—a rapid global spread of an unknown lethal virus,” says Dan Oldroyd, head of target-date strategies at J.P. Morgan Asset Management, in New York. “The big change here is that we have to make our best-informed judgments from incomplete and unfamiliar information.”
In the rosy outlook of the pre-COVID-19 environment, J. P. Morgan had increased target-date equity allocations by a few percentage points in its funds, but it reversed course in March. Realizing the need for more rapid decisions, the firm emphasized its reliance on higher-frequency data, such as credit card volumes.
“The data yields more narrow insights, and we were watchful of that, but it was that new information that helped us with the decision to re-risk,” Oldroyd explains.
“We’ve gone back to bonds,” Vaselkiv says. “The problem is that central banks have driven the yields on safe haven assets so low that developing longer-term performance in fixed income will be a challenge. Still, fixed income has a key role as a diversifier in the event of negative surprises, and the probability of that seems to be increasing at this point.”
While the COVID-19 news has been devastatingly bad—and since the end of June gotten worse in many places—it is being countered by the effects of overwhelming fiscal and monetary stimulus in the U.S. and around the world.
“You can look at past markets where there have been recessions and depressions and pandemics, but the monetary responses haven’t been at the scale we’ve seen recently,” says Andrew Dierdorf, a portfolio manager of target-date funds at Fidelity Investments, in Boston. “Given the circumstances we are living through, it is prudent to ask what might be the response of the market to all that stimulus. How will that affect the way we invest in the future?”
*Much more to come in the next print edition of PLANADVISER Magazine *