How are Family Offices Restructuring Their Portfolios Due to Covid-19
The months ahead will most probably be quite volatile and dynamic
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Since the worldwide outbreak of the coronavirus pandemic over the past couple of months, businesses globally have almost come to a standstill. It will be a while before the world recovers from the economic shockwaves caused by the pandemic.
The months ahead will most probably be quite volatile and dynamic. While it is still a little early to predict the economic fallout from the shock, economies of developing nations will face greater challenges before they get better as compared to developed economies.
As it is, the ongoing global recession over the past 8-9 months had triggered a slowdown in the consumption and manufacturing sector. The lockdown has caused short term pain in various service industries like restaurants, logistics, and start-ups among others. Manufacturing sector has been shut down due to logistic issues and social distancing.
In the last month and half, stock market has lost more than 30% of its value. There have been mark to mark losses in portfolios of various investors with investor erosions seen in even the top ranking rich and affluent business families.
For any business entity, the utmost priority has to be to first take care of the employees and ensure their safety. For a Family Office, it can get challenging to function during a lockdown.
For a Family Office to function as smooth as possible during the lockdown, there needs to be systems out in place where employees can work from home without too many challenges. Systems which ensure the employees are well equipped to execute new/ongoing transactions, trading in the stock markets, creating necessary reports and all other back office work.
Once the necessary arrangements are made to work effectively from home, the focus is on protecting the investments. As a Family Office, we have always been very conservative and not exposed to high amount of equity. We were on equal equity and debt. Since we believe in long term stocks, most of the investments done through various products and/or our own equity desks are all long term portfolios. Stocks which have intrinsic value and will always remain good stocks.
Do not panic sell. This is crucial aspect to be remembered. We did minimal changes in portfolios only whenour research suggested it was the right time to get out, as the stocks might not remain good for too long. Losses if any, can be averaged by investing in stocks which are steady or already at a good value. We further allocated into portfolios/products which had a strong presence and value. To take advantage of unforeseen events and have maximum benefit from any crash, it would be advisable to include systematic transfer plans in the portfolio.
The business of start-ups have been quite hit. Hence, investments in start-ups will need to be monitored closely. Start-ups require a lot of money which at this point is a luxury not many can afford to have. Advise your start-ups to curtail costs in every way possible – marketing costs, operational costs etc. They need to be careful in terms of being able to survive the economic hit until they're back to full business. Fortunately few of our start-ups had raised money in the last 6 months which has enabled them to have a cash buffer to sustain/take the hit of these past 2 months for the next couple of months.
Also, in current times it is good to remain slightly passive and not have too many activities. With less trading volume, the stock market itself is not too active at the moment. Most of the purchases are mostly opportunity buying based on product wise and/or stock wise.
As a Family Office, it is imperative to remain calm and not take any knee jerk decisions.It would be premature to plan investment strategies until the impact of the coronaviruspandemicis contained and the lockdowns are lifted.However in all scenarios avoid leverage, stick to portfolios which don't need debt, can survive volatility, move towards Balance sheet investing and away from P&L investing.
The economic challenges caused due to the pandemic are quite unprecedented. Once the lockdown is lifted, we will still have to bear the brunt for a minimum of 6-8 months before the markets recover and come back. There will be a lot of short term pain before we can begin to maximise value to create sustainable business.
It will take time for the manufacturing sector to kick in, services to begin and everyone to get back to where they were before the lock down. Even after they start functioning, service industries like restaurants, malls, cinemas will run lower capacity. This basically means that the situation will not normalise quickly. However, there is simply no choice here. The curve needs to flatten and the 21-day lockdown has significantly slowed down the curve. Only social responsibility and discipline from citizens in following lockdown rules will help in flattening the curve altogether.