The 2020 crisis is a very different one to 2008. In 2008, there was a severe lack of liquidity and structural market reforms had been overlooked. In 2020, global governments have pumped so much money into the market that one loses all sense of “zeros” in the final figure.
In 2019, we increased cash levels across selected portfolios as we believed that markets had simply become too expensive – some companies had reached their fair value price and we crystallised profits for our investors. As we stated in Q1 2019, we felt keeping some liquidity would serve us well when the market corrected more than it did in Q4 2018 – something we expected.
As value investors, one of our key analysis is our internally created “Shareholder Value Creation” ratio. We want to know if companies we are investing in today will be present and relevant in say 10 years’ time. EBIT, net income and capital structure are some of the factors considered to create this ratio. Internally, we use this as the driving force behind our coined “Future Ideas Strategy”.
Many companies within our analysis remained expensive until recently and we remained disciplined to not add them to our portfolios (even though we love what they do). However, in March, some of these companies fell between 35-60% and these price drops were too much to ignore. Not only did they come into our valuation range, they become significantly cheaper than our financial models suggested. Cue rebalancing! We took the opportunity aggressively – adding companies such as Intuitive Surgical, Heico and PayPal to our global mandates to name a few. We also added the likes of Allianz, Bayer and SAP to our balanced strategy.
With our homework paying off and our rebalanced portfolios now in place, we have a tremendous margin of safety that had previously been lacking. Our investors can be sure that we will do our best to navigate these uncertain times and continue in returning long term value to them. I remain optimistic that this global pandemic will be beaten and that markets are already returning to normal – short-term tailwinds aside.