Active and Passive in Current Environment April 2020

Callan Boyle, VP in Linear Investment’s DFM team talked to Kate Horne about how both Active and Passive portfolios might behave and function in the current environment. We are living through unprecedented times and policy makers are creating global asset purchasing programmes and implementing fiscal stimulus in the crisis that has no apparent villain.

We find ourselves in unprecedented times where we face a global crisis, the story of which no one is able to predict the ending. Kate chatted with Callan to understand how Linear’s DFM team are viewing the current environment.

“All markets have experienced volatility in the current climate.” says Callan, “Many will have seen the VIX (CBOE Volatility Index), a popular volatility indicator, which has hit historic highs. We have a demand shock with uncertainty around the virus as well as the oil supply shock from the OPEC+ breakdown. The pandemic is bringing in to question the earning abilities of corporates, which obviously has effects on their ability to service debt or pay dividends; affecting bond and equity holders alike. Given the initial search for liquidity amongst the uncertainty, we even saw treasuries and gold behave erratically. Initial sell-offs were rather indiscriminate.”

Linear’s Discretionary Fund Management team run both Passive and Active portfolios and with the guidance of their investment committee are working to keep abreast of the momentary changes in the market. Linear’s Passive portfolios are designed to track their indices but there has been some dislocation between the underlying NAV and prices of some ETFs: “For example, BlackRock’s iShares iBoxx $ Investment Grade Corporate Bond did experience a sharp discount on its underlying NAV before the Fed implemented a new policy. Once this happened, the bond returned to trading at a premium. This illustrates that accurate information is vital and how reliant on government policy the investment market is at the moment. We are witnessing something we never expected to and in all probability never will again.”

Linear’s Discretionary Fund Management team run both Passive and Active portfolios and with the guidance of their investment committee are working to keep abreast of the momentary changes in the market. Working alongside industry subject matter experts, Allan Lane and Irene Bauer, Linear are well placed to continue to thrive in uncertain times. Linear’s Passive portfolios are designed to track their indices but there has been some dislocation between the underlying NAV and prices of some ETFs, which we posited with Callan. “There has been some dislocation, for example in the credit space gargantuan BlackRock and Vanguard ETFs experienced a sharp discount to their underlying NAV. The secondary market for credit has always been quite opaque but a combination of record primary issuance from Investment Grade corporates, growth in BBB bonds, fallen angel risk, and even perhaps adjustments to traders working from home created challenges and liquidity issues. Policies from central banks such as the Federal Reserve extending asset purchasing programmes to investment grade corporate bonds should help to put in more of a floor”.

Of course, times such as these can also create opportunities for Active portfolio managers. In their search for liquidity to weather the storm, investment grade corporates have made use of credit lines and additionally contributed to one of the highest ever primary issuance of debt, around $250bn in March. Callan says “These issuances are something active managers will have been able to take advantage of. Having said that, we still need time for the pandemic to unfold before we see the market show any more semblance of calm. Policy makers have really paved the way to providing a floor and the expansion and speed has been simply phenomenal. Eventually we will have to look at what the unintentional consequences of all of this leads to, but one thing at a time.”

“The overriding point in this is to always think about the benefits of a discretionary manager. The flexibility they have in managing portfolios , the ability to make changes in real time and the intellectual property to create “all weather portfolios” designed to navigate both good and bad times.”

If you would like to know more about how Linear’s DFM team can help you, please email jchurchman@linearinvestment.com or cboyle@linearinvestment.com