Investing through and beyond coronavirus

The fund’s manager since launch, Cormac Weldon, says that this is in part due to paying “a lot of attention to downside risk. A lot of outperforming is avoiding really bad under performers, so we want a stock where in our view the upside greatly outweighs the downside risk.”

At the moment he is particularly concerned about indebted companies. “A lot of companies have borrowed quite a bit of money [over the past few] years,” he explains. “And when businesses slow down in a recession it has an impact on profitability. There’s no doubt that the bankruptcy rate will increase over the next few months. So one risk we’re looking at is what the impact of that will be, although not so much on the companies we own as we don’t expect any of them to go bankrupt. But many of the companies in our portfolio are customers of companies that will go bankrupt, so we’re looking at what impact that [will have on them]. For instance, within technology, are some of the software companies selling exclusively to very small companies that may be at higher risk of bankruptcy? [This risk is] not unique to this period, but a year ago we [were] much less concerned about bankruptcy.”

Mr Weldon also says that they take a ‘pragmatic’ investment approach, changing their focus as the economic and market cycle change.

“Other managers label themselves as either growth or value investors, but typically those two styles don’t perform well at the same time," he says. "Our view is that we should attempt to perform well irrespective of what the environment is dictating. So if it’s an environment where growth companies are doing well – as has been the case for the past few years – it’s our job to recognise that and be in the right companies to achieve outperformance. [Or if] there is an opportunity for value to outperform we would want to be represented in those stocks.

"So our pragmatism is really just about judging what types of stocks and companies we want to be in. And if, for example, we identify that value’s the right place to be we have to pick the right value stocks as they don’t all perform well together. So analysis and stockpicking, and judging the downside risk, is a key part of our process.”

At the moment, growth companies are doing well. “In the early part of the year we were positioned in high-quality companies with relatively low indebtedness and a degree of predictability about their returns, as well as some higher-growth companies,” says Mr Weldon. “So [in the] year to date, for example, Amazon (US:AMZN) has done very well for us. We added to it during the downturn [because] we thought it would benefit from the current period we’re going through. With bricks-and-mortar retailers worldwide closed as part of government-imposed lockdowns, home shopping is surging. Amazon’s costs are also increasing as it hires new staff and seeks to protect the health of workers in its distribution hubs. But it is increasingly regarded as the main long-term winner in an otherwise beleaguered retail sector.”

Amazon and other tech companies could also benefit from the increase in people working at home – a trend that may continue even after the coronavirus has come under control.

“I think the working-from-home environment will produce opportunities in technology,” says Mr Weldon. “Perhaps one of the most obvious ones is cloud computing, which at the very simplest level is dominated by Amazon and Microsoft (US:MSFT), with Google [which is listed as Alphabet (US:GOOGL)] playing catch-up.”

Other growth companies to which Mr Weldon has added include Activision Blizzard (US:ATVI) “on the basis that many people would be playing more video games at home". This company develops and distributes content and services across various gaming platforms, including video games consoles, personal computers and mobile devices. 

Mr Weldon and his team have also added to "some of our safer stocks, such as government services contractor Booz Allen Hamilton (US:BAH), which has done very well for us".  It provides management and technology consulting, analytics, digital solutions, engineering, mission operations and cyber solutions. 

Looking further ahead, Mr Weldon thinks certain parts of the healthcare industry could do well. Because of the focus on dealing with coronavirus many non urgent procedures and elective surgery, such as knee and hip operations, have been cancelled or postponed.

“So when healthcare becomes more normal as we pass through the coronavirus period [certain] healthcare companies will benefit as normal healthcare procedures increase and catch up, although this may be in over six months or longer," he explains. "[These could include] quite big companies such as Johnson & Johnson (US:JNJ) and Abbott Laboratories (US:ABT)."

An area Mr Weldon and his team are not so keen on is banks, and earlier in the year they reduced their holdings in JP Morgan Chase (US:JPM), Bank of America (US:BAC) and Citigroup (US:C), expecting them to underperform as bond yields dropped. “That was actually one of the first decisions we made when we realised what would happen with coronavirus,” explains Mr Weldon. “When you’re going into a recession, demand for loans slows down – people have less ability to borrow money and those who’ve borrowed money in the past have less ability to pay, so bad debts go up. We thought it was better to step to the sidelines, with banks in particular, and wait for the dust to settle to get a better view of when the economic recovery will happen.”

Mr Weldon and his team have used proceeds from reducing their holdings in these banks to add to Visa (US:V) – even though he expects that its earnings will be blighted in the short term. “But beyond these terrible, testing times the global migration from cash and cheques to cards will be ineluctable,” he adds.

Listen to our full interview with Cormac Weldon