reflections - Priscilla Kavule
10 December 2020
I work with institutional investors including pension funds and sovereign wealth funds. I’ve been in the industry for almost six years, so this was my first experience of a significant market crisis. Here are three lessons I'm taking away.
There are opportunities amidst the chaos if we're not too distracted
At a time when everything is falling apart, it is so easy to get caught up in the emotions of the latest shocking headlines and the significant market losses. However, what this new world also presents are investment opportunities that can disappear almost as fast as they appear.
As a consultant going through my first financial crisis, it’s highlighted the key benefits of quick decision-making in order to take advantage of short-lived price dislocations. This pandemic has been a prime example of how short-lived these opportunities can be; with ever changing scenarios and new lockdown restrictions enforced at the “drop of a hat”.
Distressed debt or private lending are two examples of investment opportunities presented by this crisis. Where a lot of businesses couldn’t take the pressure of staying shut for too long and banks were too nervous to issue loans, the pandemic presented a surge in “distressed” companies seeking funding elsewhere; thus offering investors the chance not just to make a “quick buck” but also to provide a lifeline to some of the struggling companies/businesses (if one acts quickly enough). This also aligns well with the recommended idea of having a diversified portfolio as these asset classes provide access to sectors that can sometimes be limited on the listed market.
For investors whose domestic listed markets are small (eg African listed markets), the appetite for these asset classes already exists and therefore the case for quick decision-making to “snap up” the opportunity is heightened, as obtaining these assets at a discount adds an attractive premium.
The need to reassess risk appetites in a world of low yields
But of course, that begs the question: how risky are these opportunities? While the answer is that they definitely carry more risk than your ordinary asset classes, I think we can all agree that we’ve had to adjust our risk appetites in search of that extra yield. So as a long term investor with no immediate cash flow pressures (eg an immature pension scheme or a sovereign wealth fund in a developing market), why would you hold your money in cash currently providing a negative return (taking into account fees and inflation)? Furthermore, why wouldn’t you take advantage of opportunities to buy discounted assets due to others having a short term investment horizon?
Timely decision-making is vital
But as I mentioned before, these opportunities aren’t always available so timing is very crucial when they show -up. Therefore it’s no surprise that during this pandemic, investors that have managed to take advantage of these opportunities are ones that had a robust structure for quick decision-making; eg being well educated on broader asset classes and having a sub-committee to focus on specific aspects or a policy on alternative asset classes.
Taking a step back to think about this crisis, for me it’s been surreal and still feels like a fuzzy dream that I can’t quite explain. And maybe it’s because we all heard about coronavirus in China and didn’t quite imagine it would spread so rapidly. Or maybe because the image I have of the last financial crisis is a very visible loss of jobs with people leaving office buildings with a box in hand (the famous sight of Lehman Brothers employees), compared to going through it all virtually and in isolation.
Either way, it's definitely not what I imagined it would be like. Looking purely at listed investments, the decline lasted about a month to the end of March; with most assets rebounding and staying fairly resilient since then (albeit with some volatility). So I’m left wondering: is that it or is the worst still to come? That was no accident of course; central banks acted quickly to slash interest rates to all time lows and governments unleashed generous fiscal stimulus packages. This perhaps is a testimony to lessons learnt from the previous crisis.
But even with news of a vaccine potentially signalling the beginning of the end, I think I’m still in a “state of shock” and haven’t quite processed it all, due to how quickly things have been changing and the various actions we’ve taken to stay on top of it. Or maybe this is just what it feels like when you spend the best part of the year working in pyjamas!