Richard Temperley, Head of Investment Management with Zurich Life, speaks to Barry McCall about the company’s outstanding track record over the past 30 years.
2020 will be remembered as one of the most eventful years in the history of global investment markets. From record highs to precipitous falls and to the dramatic recoveries followed by some sharp corrections, the year has had just about everything.
By the time the COVID-19 pandemic struck the western world in earnest, one of the longest bull markets in history was still running. “We had seen an 11-year bull market in equities, beginning in March 2009 just after the financial crash,” says Richard Temperley. The persistent low-interest-rate environment was the key supporting factor to the recent bull market.
COVID-19 brought about the fastest ever market correction over a three-week period in late February and early March. “We have had other corrections but none as sharp as that one,” says Temperley. “The market fell by 35% from top to bottom in the US. That was unbelievably quick – just 15 working days. It was caused by worries about the lockdown and economic growth stalling.”
That sharp fall constituted a bear market which is defined as a decline of more than 20%, according to Temperley. “We are now back in a new bull market,” he points out. “The US market has replaced all of its losses and reached new highs in August and early September. Other markets have not fared as well, and their recovery has not been quite as strong. By the beginning of September, the UK had recovered 44% of its losses, Europe had recovered 60% and in Japan, it was at 90%.”
But those figures do not give a clear picture of what was actually happening in the markets. “The rise in the US market was largely concentrated in a small number of sectors,” Temperley explains. “These were mainly tech and consumer discretionary stocks.”
The enormous influence of these stocks is illustrated by their collective value. “The big five stocks – Microsoft, Apple, Google (Alphabet), Facebook and Amazon – account for just 1% of the S&P 500 in terms of their number but they now represent almost a quarter of its value as measured by market capitalisation. The US stock market is roughly 65% of the global market value so these five companies alone represent about 16% of it.”
These companies were already doing well but they have done even better during the pandemic. “There has been an acceleration in the current growth trends in online shopping, increased use of computer technology, consumption of online entertainment and so on,” says Temperley. “But there are other stocks which haven’t been performing well or recovered as much. These include banks, energy, and some retail.”
The rapid bounce back was aided by the unprecedented wave of spending from governments which was aimed at stimulating economic recovery. “The US government alone is spending vast amounts of dollars,” Temperley notes. “The EU has also agreed a major spending package while the French government has recently announced its own programme. We haven’t seen the economic recovery yet, but it will come.”
Central banks joined in with interest rate cuts and quantitative easing.
At another level, measures like enhanced unemployment payments helped people whose jobs have disappeared. That provided more liquidity to help ensure economic growth resumes by the end of the year or early in 2021. “The markets expect a recovery next year, the only question is its strength,” he adds.
Despite this turbulence and volatility, Zurich has turned in an exceptional investment performance over the past 12 months. “We are active fund managers,” he explains. “We take decisions on the asset classes to invest in and what investments within those classes we want to be in. We have a long track record of outperformance going back more than 30 years.”
This year’s strong outperformance was in part due to Zurich’s response to the sharp fall in the market during the spring. “We increased our holdings of those tech and consumer discretionary stocks in order to tap into the potential recovery in the market,” says Temperley.
This activity was backed by Zurich’s overall strategy. “As active managers, we have had a much stronger bias towards growth stocks such as technology companies,” says Temperley. "We have been underweight in value stocks like energy, banks and utilities. Our funds benefited from that. However, there will come an inflection point where we will reverse this sectoral strategy.
"We have also been decreasing our holdings of sovereign bonds and increasing our exposure to corporate bonds.”
He points to the long-term positive performance of equities over all other asset classes but says strategies must change in accordance with conditions. “Investors need to cater for volatility if they are nearing end of their investment time horizon. It is wise to reduce equity exposure at that point. That’s how lifestyling products work – they protect people’s capital from high volatility.”
But this may not always be the best option. “A big talking point in the defined contribution pension world at the moment is the number of people going into approved retirement funds (ARFs) instead of annuities,” he says. “In that event, it is not wise to totally de-risk. There is the 4% drawdown from the ARF to be accounted for as well as underlying inflation. Investors need to be looking for returns of around 5% or 6% if they want to ensure continued growth in their fund.”
This means they need to be prepared to take some risk with their ARFs. “The question is how much they want to take. It is the investment adviser’s role to figure that out and make sure clients understand the level of risk they are taking and are comfortable with it."
While volatility may make the individual investor’s nervous, it is welcomed by Temperley. “Volatility is the friend of the active manager,” he says. “Good active management is always better than passive. We recognise that there are still dangers out there but our job is to navigate what is in front of us and identify what offers the best returns for our clients.”
For more information, visit www.zurich.ie. Zurich Life Assurance plc is regulated by the Central Bank of Ireland.