As stage one restrictions are lifted in Australia and we feel there is light at the end of the tunnel, it is interesting to observe the reactions and actions taken by the investment community over the last three months.
Increased Activity Among Retail Investors
Trend data suggests that retail investors have become substantially more active across the securities market. This includes:
- Increased trading frequency
- A higher number of different securities traded per day
- Decreased duration for holding securities
This activity prompted ASIC to release a public warning about the risks involved.
Mitigating Risk in Volatile Markets
But investing in the stock market doesn’t have to be risky. Knowledge and experience are strong factors to mitigate this risk. We take a moment with our Manager, Manny (EC Pohl & Co), to ask:
Questions on Investment Philosophy
- How has COVID-19 impacted the investment philosophy?
- Did the process change at all over the last 2-3 months?
As companies and countries responded to meet health concerns, we conducted a thorough assessment of our investee companies’ prospects in the current climate. Our investment portfolio comprises high-quality, low capital-intensive growth companies that have a sustainable competitive advantage. During this challenge, we ensured that:
- The competitive advantage remained relevant
- Companies had sufficient capital to survive the downturn
- We maintained our discipline to the investment process
Essentially, we confirmed that our investments still met our criteria, which did not change. While we don’t know how long the current situation will last, our investee companies are positioned to provide excellent investment returns over our 3-5 year investment horizon. As a long-term manager, short-term volatility does not impact how we assess our investments.
Cash Management Strategies
We’ve heard that Warren Buffett is currently sitting on a large portion of cash – have you made a similar move?
Generally, our cash levels are maintained in accordance with our investment mandate. For example, with Flagship Investments Ltd, the guideline target is 5%, with a maximum cash holding of 20%.
- Some clients are very strict with the limit, meaning we adjust the portfolio as investment values change.
- Other clients are more flexible, allowing us to manage the portfolio in line with internal rates of return (IRR).
This means that when the IRR decreases, we start to hold more cash, which occurred from December 2019 to February 2020.
Given that the market has broadly decreased from the highs in February, our IRR has increased significantly, and many of our high-conviction investments are cheaper than at any time in recent history. This presents a unique buying opportunity, implemented in accordance with our model portfolio construction.
Learnings from the COVID-19 Experience
Understanding that we are not out of the woods yet, are there any learnings or observations to date from the COVID-19 experience?
We have witnessed an incredibly unique global event with wide-ranging impacts on all elements of society. People are prioritising health and wellbeing; our communities, businesses, ways of working, interactions, and values have all been disrupted. We’re seeing individuals, communities, companies, and all levels of government doing their best to work through this period, balancing short-term and long-term priorities.
We are incredibly grateful for the hard work of all members of society in doing their part. As the Manager of Flagship Investments Ltd and custodians of shareholder wealth, we have focused on doing our best during this challenging time and producing the best portfolio returns possible.
We have remained focused on the business fundamentals, diligently implementing our proven investment process and supporting our business partners as best we can.
