Investors Should Treat Coronavirus Effect Same As Other Volatility

“Although the unfortunate reality is that volatility like this may be here to stay until the coronavirus runs its course, experience has proven time and time again that cool heads typically prevail,” analysts say.

Since the first media reports of the latest coronavirus outbreak broke in January, COVID-19 has been blamed for three large drawdowns in the S&P 500 Index.

U.S. investors might be more aware of this coronavirus than the SARS outbreak that occurred just over a year after the 2001 recession hit bottom because global markets and industrial supply chains are now tightly integrated, Thomas Nun, portfolio strategist, and Rachel Lin, investment analyst, with Great-West Investments note.

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COVID-19 is caused by a member of the coronavirus family that’s a close cousin to the SARS virus.

Josh Kutin, head of asset allocation, North America, and Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy, Columbia Threadneedle Investments, point out in a blog post that disruption caused by the virus has already filtered down to earnings. Tech bellwether Apple was the first major U.S. company to announce that it expected to miss revenue projections for the quarter as a result of the epidemic.

“Even if the momentum of the long bull market is still intact, the higher volatility keeps us from being too optimistic about equity market opportunities in the short term,” they say.

Monday, the Dow lost 1,031.61 points, or 3.56% of its value, while the NASDAQ fell 3.71% and the S&P 500 lost 3.35%. This was followed Tuesday by losses of 3.15%, 2.77% and 3.03%, respectively.

According to the Alight Solutions 401(k) Index, retirement plan participant trades to fixed income were 3.95% above normal on Monday. The two-day activity for Monday and Tuesday was 4.37% above normal.

In their commentary, Nun and Lin say “even if the economic costs ultimately prove to be material, recent experience also suggests that the worldwide economy should be able to bear those costs fairly easily, unless the outbreak gains significant momentum or mortality rates increase substantially.” They add that it’s hard not to see motives behind the recent sell-off as something other than fears about the coronavirus outbreak itself and perhaps more about a correction in stock prices that was overdue anyway given the strong run-up since the end of 2018.

However, “regardless of whether the U.S. market’s recent reaction to COVID-19 was a rational response to illness-related uncertainty or an overdue correction of past excesses,” they say, “the best way to navigate volatility like this is to resist the temptation to panic and stay the course.”

“Although the unfortunate reality is that volatility like this may be here to stay until the coronavirus runs its course, experience has proven time and time again that cool heads typically prevail,” Nun and Lin state.

Market volatility is a good time for retirement plan sponsors and advisers to remind plan participants about the fundamentals of investing for the long-term. John Diehl, senior vice president of strategic markets for Hartford Funds, previously told PLANSPONSOR, “These bouts of volatility actually present a challenge and an opportunity for you to go back to the fundamentals that everyone should regularly be focusing on. In this respect, the longer-term context of this week’s market moves is crucial to emphasize. Market gains in the U.S. and globally have been really strong over the last several years for those who have been strategic and patient, so you need to remember this as you view the market moves occurring right now.”

Investment Product and Service Launches

Franklin Templeton launches new funds, and Wells Fargo incorporates changes to TDFs.

Art by Jackson Epstein

Art by Jackson Epstein

Franklin Templeton Adds Growth Fund

Franklin Templeton has introduced its Franklin Focused Growth Fund, which seeks capital appreciation by investing in a concentrated portfolio of approximately 20 to 50 growth stocks.

The fund is managed by San Mateo, California-based portfolio manager Matthew Moberg. This launch brings to market a fund with an established track record; the Advisor share class initially funded in April 2016.

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Franklin Focused Growth Fund seeks to invest predominantly in equity securities of companies that the investment manager believes offer compelling growth opportunities.

“Fundamental research, focused on a long-term view of duration and pace of growth, drive our idea generation. We consider many factors when selecting investments, including a company’s strategic positioning in its industry, its historical and potential growth in free cash flow, and an assessment of the strength and quality of management,” says Moberg, senior vice president and portfolio manager with Franklin Equity Group.

Within this conviction-weighted portfolio, large allocations to growth-oriented sectors such as technology, health care and consumer discretionary are likely. The equity securities in which the fund invests will be predominantly common stock. While the fund primarily invests in large cap companies, it may also invest in small- and mid-capitalization companies. In addition to the fund’s main investments, it may invest a portion (up to 25%) of its net assets in foreign equity securities, including those located in emerging markets.

Franklin Templeton Expands Active ETF Lineup

Franklin Templeton announced the expansion of its active exchange-traded fund (ETF) lineup with the addition of three thematic ETFs: Franklin Disruptive Commerce ETF (BUYZ), Franklin Genomic Advancements ETF (HELX) and Franklin Intelligent Machines ETF (IQM).

The Franklin Disruptive Commerce ETF invests in companies benefitting from or facilitating advancements in emerging areas of the e-commerce space that are facilitating more convenient, customized, secure and time-efficient transactions for both consumers and businesses.

The Franklin Genomic Advancements ETF invests in companies benefitting from or facilitating advancements of new genomic-based research techniques and technologies designed to extend and enhance the quality of human and other life, driven by the advent of cost-effective and rapid gene sequencing.

The Franklin Intelligent Machines ETF invests in companies benefitting from or facilitating advancements of machine learning technologies in areas such as robotics, driverless vehicles and algorithmic data analysis.

All three are listed on the Chicago Board Options Exchange (CBOE) and will be actively managed by portfolio managers Matthew Moberg, CPA, and Joyce Lin, CFA, within Franklin Equity Group, thus not seeking to replicate the performance of a specified index.

“These three new ETFs seek to capture powerful, multi-industry and distinct long-term trends that we believe should have a large impact on our economy and our daily lives,” says Matthew Moberg, portfolio manager with the Franklin Equity Group.

Wells Fargo Incorporates Changes to TDFs

The Wells Fargo Funds Board of Trustees has approved changes to the principal investment strategies of the Wells Fargo Target Date and Dynamic Target Date Funds. These changes will go into effect on or about July 1, although the Factor Enhanced Equity Portfolios will be realigned with their new strategies in a systematic fashion over a period of approximately three months following the effective date.

Each revised portfolio’s risk profile will likely be more similar to its broad market benchmark than it is today, the company says. The realignment of the portfolios will be phased in over a period of approximately three months.

Also effective on or about July 1, Wells Fargo Target Date Funds that either have reached or are nearing their target date (the Today–2030 funds) will begin allocating a portion of their equity exposure to low-volatility equities.

According to Wells Fargo, no changes are being made to the fees, glide path, glide path methodology and underlying fixed-income holdings for the funds. Additionally, the underlying equity portfolios will continue to employ a factor-based investment approach. The portfolios will seek exposure to factors commonly tied to a stock’s potential for enhanced risk-adjusted returns relative to the market, such as value, quality, momentum, size and low volatility.

Wells Fargo says its approach to realigning the underlying equity portfolios over the course of three months is intended to mitigate the point-in-time market risk associated with the overall transition. However, there is no guarantee it will be successful in mitigating risk.

The Dynamic Target Date Funds will continue to use derivatives to implement their volatility management overlay strategy, the firm adds.

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