Spring 2020 Quarterly Insights
Greg Fuss is a U.S. equity portfolio manager. In this interview, he discusses the financial impact of the coronavirus, his long-term investment philosophy and the outlook for the economy and financial markets.The obvious issue on everyone’s mind is the coronavirus.
Early on, the consensus was that it was very likely to get worse before it got better. And certainly the virus got worse, both in terms of people directly affected and in terms of what governments and individuals have done because of it. There’s no question we’re in recession. City and state shutdowns would have ensured local recessions, but the widespread shutdowns sealed it nationally. And the huge spike in unemployment claims points to that.
Social distancing seems to be working — not great, but better than forecast or believed. That threw daily life into some disarray, but it’s a necessary step in the process of recovery.
There were a few days where the credit markets experienced a little bit of drama. Had that been allowed to continue, had it gotten worse than it did, we could have had a rerun of the global financial crisis. Instead, some of the tools that were invented in the financial crisis were used right away. At least for the time being, the domino effect that could have happened was held in abeyance. That was helpful for the stock market.
The large stimulus package was important. One of our economists described it as the cavalry having arrived. It doesn’t mean the battle is over. It just means you have reinforcements on your side. It was a big package, and we’ll see if it was enough. But it was substantial, and it looks to be very helpful.
Having done this for 30-plus years, I’ve been in many downturns in my career. But it’s important to look forward and remember that when the market starts to recover it can do so very quickly. It’s not always clear, even in hindsight, what caused an upturn to set in at a specific moment. So staying in the market means you won’t miss the early stage of any upturn, which can be very powerful.
Yes. For me, they were less about a threat like the coronavirus and more about stock prices that were elevated by most measures. I started trimming back some positions in the middle of last year. I seek quality growth at really reasonable prices. The part about “really reasonable prices” had largely disappeared. Actually, for anything that wasn’t under some sort of stress, it had completely disappeared.
It’s important to proceed with caution. A lower stock price doesn’t automatically make a company or a sector attractive. Cruise ship stocks, for example, have been hit very hard. In a normal recessionary time, cruise companies would just cut the price of their cabins until they fill up the ships. But I’m not sure there’s any discount they could offer right now to get people in those rooms. So far, I’ve done absolutely no buying of those kinds of stocks. For a few stocks, I might wait until they get crazy cheap. If they do, maybe I’ll be interested.
One of the elements of my approach is something I call a “waiting room,” where I track companies I like but that are too expensive. My experience has been that most stocks give you a chance somewhere along the line — an entry price that a long-term investor finds attractive. Sometimes they drop during a few days of generalized panic, like in the coronavirus situation. Other times, it’s been a quarterly misstep that our analysts believe they understand, or it can be as simple as sector rotation.
These usually don’t happen all at once. You have these waiting-room companies that you know really well, and unless it’s the whole market falling, one by one they offer you that chance that you’ve been waiting for. Of course, a fair number of stocks never get out of the waiting room. The stock price can remain unattractive, or there could be issues with a company itself. But it is a sorting mechanism that forces me to prioritize the most compelling opportunities, and it’s been pretty effective over most periods.
One of my largest holdings is a chipmaker. Another is a digital payment processor. What do those have in common? They are both picks and shovels. The first portfolio I started off with at Capital Group homed in on the idea that e-commerce was hastening the transition from cash to credit cards. At that time, it wasn’t clear where e-commerce was going. Obviously, Amazon is the biggest in the space now, but I couldn’t know that then. But in a way I didn’t have to figure that out. All I needed was to have the picks and shovels. I was relying on my high-level concept being right, that we were transitioning from cash, but it seemed quite likely.
The chipmaker is the same idea. Very different industry, but it is a foundry — most companies design their own products but go to a manufacturer to physically make them. There is a long list of chip-heavy applications: virtual reality, the internet of things, autonomous driving. The list just keeps going. All of them need semiconductors, and regardless of the coronavirus, they will continue to need semiconductors.
The above article originally appeared in the Spring 2020 issue of Quarterly Insights magazine.