Money making lessons from the Coronavirus correction


There are two important lessons
to take from the current Coronavirus correction. First, you have to be
diversified in your holdings of wealth-building assets. And second, you should
look to companies and funds that can weather the negative winds of change that
are more likely when you’re in the 12th year of a bull market.

Over the weekend, the AFR
did a piece spotlighting fund managers who anticipated a stock market sell off
because of the Coronavirus. One of them was the legendary Geoff Wilson, of
Wilson Asset Management, who revealed that he had sold shares, to be holding
about 25% of his assets in cash.

When a fund manager is
totally confident, he/she will be nearly fully invested to ensure they get the
best and biggest returns for those investors who have put their money with them.
When they get nervous, they build up their cash reserves and Geoff would have
taken profit to go to cash for 25% of his total assets in his fund. But when he
thinks prices have fallen to silly levels he would, in all likelihood, buy back
in, unless he believed a crash was coming.

This is what fund managers do
because they can play short term and long term, depending on their approach to
investing described in the fund’s product disclosure statement or rules.

But when you think about it,
Geoff still has 75% of his money in stocks, so those wealth builders who have
financial advisers, who might be 60% exposed to stocks and 40% in term
deposits, bond funds, hybrids and less risky investments more likely to deliver
interest rate-style returns, are even more safely positioned than Geoff!

Even if you were 70% exposed
to stocks, you’d be more safely positioned. And this underlines the value of
being diversified.

I was interested in the
performance of one of our best fund managers — Hamish Douglas — and his Magellan
Financial Group (MFG), which has been a huge success story.

Magellan Financial Group (MFG)

As you can see, since 2019,
the share price has surged from around $23 to $73, which was a 315% huge rise!
Since the Coronavirus, MFG has slumped to $53, which is a 27% fall, proving the
old adage that stock markets go up in stairs and fall in elevators. That said,
Hamish’s climb was a steep one.

After seeing how a high-flyer
like MFG had fallen, I was keen to see how our fund — the Switzer Dividend
Growth Fund (SWTZ) — weathered the Coronavirus storm. This fund is never
designed to shoot the lights out. It’s meant to harvest income from 30 or so
reliable, biggish, dividend-paying companies. Franking credits can also add
about another percent or two and if the stock market has a ripper of a year for
capital gain, then that can be cream on the cake.

For a variety of reasons (including
Bill Shorten threatening to take franking credits tax refunds away for
retirees, which mean big companies paid special dividends to reduce their
franking credits before the election), the total return of the fund for 2019
was 18.87%. The yield was 8.05% but with franking, it went to 11.49% before
fees.

That was a shock and a great
year but usually we shoot for 5% to 6% return plus whatever capital gain comes
along, though as interest rates fall and the economy is slow, this expected
return could drop a tad. After all, dividends come out of profit and making
profit is harder nowadays because of drought, bushfires, floods and this damn
virus.

This recent bad news has
taken SWTZ down 11.8% from its all-time high of $2.70 on February 20. And this
has come as the S&P/ASX 200 Index has dropped 13.2%. Meanwhile, a great
company/stock like CBA is down 22% and Woolworths, a really safe kind of
investment because we even eat during a recession, was down 12.8%.

The point I’m making is that
you have to be careful about investing to shoot the lights out, especially when
a bull market could be on its last legs. That’s why diversification and looking
for income, even if it means less expected returns.

One day, the stock market
will crash over 20%. And some time after that, I will be recommending to my
clients to raise their exposure to stocks to cash in on the early, big rebounds
for stocks after a market nosedives big time. But for now, I’m playing it more
cautiously.

That said, I will be soon
buying some companies that have been unfairly belted up in this Coronavirus
correction. And I will be picking up some companies such as Xero, CSL and others,
which last week actually went up as the market went south!

I might even buy some
Magellan and an ETF with the ticker code WCMQ, which has only fallen 7.4% since
the stock market sell off. This is a company I have some ownership in brought
the WCM Quality Global Growth Fund to the Australian Stock Exchange from Laguna
Beach California so I’m glad it has shown some strength during these
challenging times.

A similar listed fund from
Magellan, MHG, has fallen only 9.4%, which again has dropped less than the
market.

Much of this story has
underlined the benefits of being diversified and hanging out with people who
know a little more than you know.

One final example I have to
throw in. On my TV show three weeks ago, CMC Markets, Michael McCarthy, told us
if you wanted to take a “put option”, which is like insurance for the profits
you have made on stocks, you could have paid $17,000 for insuring 95% of a
million portfolio and the ‘coverage’ would’ve lasted until June.

Anyone who took up his idea
would be down 5.7% rather than a potential 13.2% and they could be down even
more if their portfolio of stocks was more exposed to high growth companies
that have been clobbered of late.

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