Peace and quiet, options, and portfolio performance during the pandemic


So far this year the coronavirus crisis has led to a distressing range of tragedies and challenges. As far as investors are concerned, however, the situation could be worse. 

Prompt action by the Federal Reserve, and other central banks, has prevented stocks following oil into freefall.  Options strategies have played a big role in protecting portfolios from pain.  The latest market bounce has led to hopes that economies can recover – one day.

HR and personnel issues have simply disappeared

Lockdown has even offered peace and quiet to investors keen to contemplate recovery strategies.

Ian Barnard is chief executive at Capital Generation Partners, a multi-family office. He says “The panic we saw in 2008 has not been replicated. There has been calm, sanguine, thinking about what to do next.”

He has seen benefits in working away from the office: “One revelation is the frictional cost of travelling to work and working in an office. I think they were greater than I realised. HR and personnel issues have simply disappeared.”

Without office gossip, individuals are less inclined to fret over their status at work. This frees up time for getting jobs done. Calls with clients have also gone smoothly, says Barnard.

Time scarcity is faced by every wealth adviser, which implies lockdown can provide a solution. According to Essentia Analytics, rushed decisions and behaviour flaws knock 94 basis points off performance each year. This measure is the median of a spread between 25 and 200 basis points, it adds.

CapGen advises, and manages, assets worth $3 billion. It evolved out of Said Holdings, a single-family office started by Middle East businessman Wafic Said.  

His son, Khaled, started Cap Gen in 2003 with policy adviser Charlotte Thorne as well as Ian Barnard, who started his career as a corporate adviser at Smith Barney and served in the British Army. 

CapGen is an adviser which has made effective use of portfolio insurance by taking a view on cheap calls and put options for years as cash equities became increasingly expensive during the latter stages of an investment cycle. 

Barnard says of 2020:  “We went into the beginning of this year with clients owning a lot of insurance protection against bad news and events.”

“There’s no doubt in my mind our insurance expressed through options added to performance. When equity markets were down 25% to 30% this year, we were down single figures.”

CapGen has been on the front foot during the lockdown, which must be good news: “If you have a very aggressive portfolio approach when things turn down, you get distracted by the fires around you. It takes your eye away from the big question: when it is the right moment to re-engage with risk?”

Robert Sears, CIO, has refined CapGen’s options strategies as part of its asset allocation model. Barnard says: “Ten years from now, Robert will be recognised as one of the great CIOs of his generation. A super-smart guy who has taken on the philosophy and outlook we had as founding partners, built on it and made it better.”

CapGen has just reinforced the investment team by hiring heavy-hitter Quintin Price, a former BlackRock global executive, to chair asset allocation. 

Apart from options strategies, CapGen has suggested that clients should invest in value stocks rather than growth equities which have attracted an increasing flow of funds for a decade. 

Looser money conditions are yet again, boosting the big tech. A debate is raging in the investment community over whether value will regain its strength. But Barnard sees no reason to change the route map. He points out value stocks are now at such a discount that even a cautious recovery will lead to a really strong tailwind.

“Value has been a detractor. But we are performing well against our benchmarks, with the help of options and currency strategies, as well as good manager and ETF selection.

“You can’t be attached to big tech stocks forever, because you end up saying nothing else is worth anything. GDP growth can only keep going so long. And when you reach the size of Apple and Amazon, it’s a matter of time before you hit regulatory risk.” 

He finds the cash flow produced by value stocks compelling: “There’s no reason why they can’t use technology either.”

Small cap and emerging market stocks look attractive to CapGen for the medium term, along with credit and high yield. US equities and the dollar, not so.

Right now CapGen is saying that clients should deploy a third of their risk budget. “We haven’t seen the levels of cheapness that we think is coming. The first order debate to have with clients – and a lot of our lockdown discussions – relates to this issue.”  

CapGen is also wary of the recent love affair between family offices and venture capital: “Amazing stories of growth are happening.  But you need to ask yourselves whether one or two winners in a portfolio can compensate for the 20 or 30 that don’t work.  You need to decide whether you can forecast demand for their products. On a risk-adjusted basis, we prefer more conventional private-equity strategies.”

CapGen helps clients to access alternative third-party funds. It also offers advice on direct investment through a team led by Ion Bogdaneris, who once ran Lord Jacob Rothshild’s family office.

Barnard says: “In direct investing, we are here to help our clients manage their deal flow and monetise it. To help get the most value from it. And that can involve bringing clients together.”

CapGen recently advised the purchase of an online jewellery operation, which has performed well during the lockdown, plus a European health and fitness business.

Barnard is particularly wary of property funds: “On aggregate, real estate as a broad asset class will be tricky for quite a while. Retail and office, particularly secondary office, have got a challenge. But pockets have done well. I think a granular, more value-based activity makes sense.”  

The conversion of offices into residential space could be one opportunity.  The lockdown has also provided investors with opportunities to refurbish leisure space. 

It can be tough to gauge prospects for deals in the coronavirus era. Pandemics have not, as yet, figured in economic forecasts. But thorough analysis to protect against downside risks will surely get the process off to the right start. 

Barnard is yet to be convinced CapGen will have enough access to candidates to grow its client base and hire new talent under the lockdown.  

But he adds: “To be honest, things have so far gone better than I could have expected.” 

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