We have changed our mind and cut exposure

This post includes the summary of our change in assessment of the COVID-19 crisis and the resulting changes to our global portfolios. We have changed our mind on the risks around COVID-19 and the positioning of our global equity portfolios has shifted significantly.

– Andrew Macken


We believe in the power of changing our mind. At times when the facts change – or even when our interpretation of those facts changes – we will adapt our thinking and modify our actions to ensure we are always doing our best to the deliver the best for our clients.  

Now is one of those times. We have changed our mind on the risks around COVID-19 and the positioning of our global equity portfolios has shifted significantly. 

Humans tends to be averse to change. It can be surprising, unsettling – even scary.  While I realize we may attract criticism for changing our thinking and our positions, we have done so on the basis that we believe it is the right thing to do for the people who have entrusted their capital to us.  

Let me first outline how our thinking has changed; and second I will outline the changes in our global portfolios. 

Our concerns surrounding how COVID-19 will impact the US in particular have significantly grown from what they once were.  

We believe COVID-19 cases in the US are likely significantly higher than the reported numbers and will likely increase materially from here. The extent of testing in the US has been relatively poor and the Administration appears well behind the eight ball. Hospital capacity under this scenario will likely be insufficient, and the potential for large-scale lock-downs in the US is increasing by the day. 

This translates into a much more significant – and relatively longer lasting – downside risk in US (and therefore, global) aggregate demand than we had previously assessed. Though we certainly hope we are wrong, we now believe we were overestimating the preparedness of many western governments and are therefore facing the possibility of a crisis-in-confidence in these governments. 

Now let me outline the changes that we have made in our global portfolios.

First, in our Montaka variable net strategy, we have significantly cut our net market exposure to approximately 20%. This is the lowest level it has ever been, and our objective is to preserve significant capital in a scenario in which we see a more severe and prolonged downturn. 

You might be thinking – but what if you’re wrong, the coronavirus turns out to be far less severe than we thought, and equities snap back? Well, we will be very, very happy that we overestimated the severity of this virus. This is what we are truly hoping for. Many of our clients are retired and more susceptible to its health risks. My father is 90; my mother is 76. I want nothing more than for COVID-19 to simply fade away – leaving everyone in our society healthy and unharmed.  But if it does not, we strongly believe we should at least seek to preserve as much of our clients’ capital as possible. 

This action also puts us in a very strong position to take advantage of the incredible investment opportunities that lie on the other side of this global humanitarian crisis – let’s not forget, we are now in a scenario in which some of the world’s highest quality businesses are undervalued – and becoming more undervalued by the day.

Second, in our Montgomery Global long-only funds, we have increased our cash weighting to its maximum of 30%. 

Now, we understand that the role this strategy plays in a client portfolio is to provide exposure to global equities – and we remain 70% exposed. But holding extra cash right now makes sense to us on the basis that, should we see a more severe and prolonged downturn, the extra cash will cushion the downside and provide us with even more ammunition to take advantage of the many investment opportunities that are waiting on the other side of this crisis. 

And if we’re wrong – again, as I hope we are – we may underperform slightly on the rebound in equities in the short term – A small price to pay, in our view, relative to what’s potentially at stake in the scenario of an aggressive downturn. But longer term, the opportunity set remains enormous.

This concludes the summary of our change in assessment of the COVID-19 crisis and the resulting changes to our global portfolios. 

And we reserve the right to change our mind again. 

Stay safe everyone.