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“Will Warren Buffett change how he invests because of COVID-19? I doubt it. The risk is investors overreact to COVID-19, chase the next big thing and take on too much risk. You don’t need to – there will be plenty of opportunities to generate good returns in the next few years.”

If there was a list of new investment rules during COVID-19, the first might be: don’t forget the old rules and their enduring value in crises. And the second: adapt those rules for a fast-changing world.

COVID-19 has turbocharged growth in e-commerce, e-learning, tele-health, remote work and the move to a cashless society. It will forever change aspects of property, banking, retail and how and where we work, live and play.

Here are 10 investment issues to consider in 2021 and beyond.

Stay invested

Investors who sold stocks after markets tumbled in 2020, and waited until economic data improved before buying back in, had a painful lesson.

“Timing the market was impossible in 2020,” says Atlas Funds Management chief investment officer Hugh Dive. “Unlike the GFC, the market in 2020 didn’t grind lower for a long time after the initial fall. Investors didn’t have the luxury of waiting to buy back in. They were far better off remaining fully invested in shares and riding the ups and downs.”

Timing the market has always been a bad strategy for retail investors. Elevated sharemarket volatility, social media and hysterical commentators increased the risk of selling and buying at the wrong time during COVID-19.

Two other reasons support staying fully invested in 2021. The first is near-zero savings rates that force investors to hold less cash and more shares and property. The second is conditions for a sustained sharemarket rally, albeit with corrections along the way.

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Clime Asset Management executive director John Abernethy is bullish on local shares. “Australia is in a unique situation. We’re heading into a global recovery without high debt, compared to the rest of the world. And we are only six months into a period of extreme fiscal and monetary-policy support, something Japan has had for 15-20 years and Europe for a decade.”

Abernethy adds: “The first leg of economic recovery is underway, the second will occur when borders reopen and the third in a few years when higher immigration levels return. Our market is well supported, yet is still trading well below its February high. On a yield basis (relative to term-deposit rates) our market is the most attractive it has been in at least a decade.”

Nobody knows for sure how markets will fare in 2021 given COVID-19 uncertainties. When recovery euphoria fades, lower investment returns could emerge, as has been the case in anaemic overseas markets that are propped up by government support.

For now, the case to stay fully invested in Australian shares is as strong as it has been in years.

Keep watchlists

Another 2020 lesson was that cash is most valuable when nobody has it. When the market crashed in March, investment opportunities abounded. But with rates so low, how many investors had built up portfolio cash to redeploy when markets fell?

Lakehouse Capital chief investment officer Joe Magyer says 2020 reinforced the value of having a watchlist of stocks to buy. “The COVID-19 crash provided a once-in-a-decade opportunity to add value to your portfolio. To do so, investors needed a clear plan of how they would respond.”

Magyer says the starting point is to understand the stocks that an investor already holds. “When markets fall, investors often look to add new stocks to their portfolio, when the better strategy is often adding to positions in stocks currently held.”

Also, keep an eye on potential stocks to buy, says Magyer. “Bear markets historically happen once every three years. Investors must be patient and know what they will buy, and at what price, in a market downturn.”

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Knowing what to sell is as important. “If you need to free up cash quickly by selling shares, you must know in advance where to take profits in your portfolio,” says Magyer.

Buy the crisis

Contrarian investing is easier in theory than practice. Buying shares when global markets were in freefall and pandemic uncertainty was rampant was nerve-racking.

Fat Prophets’ Angus Geddes. 

Fat Prophets founder Angus Geddes says the big lesson from 2020 is governments will do whatever it takes to support their economies. “Investors can buy into a crisis with more confidence knowing governments and central banks will throw money at the problem.

“Right or wrong, the reality is governments worldwide have shown more propensity than ever to support their economy during COVID-19. There’s a limit to how much support governments can provide, but it’s hard to see them not stepping in during the next shock with circuit-breaker funding.”

Geddes says investors should buy into crises early – an approach Fat Prophets used in March.

“When everyone is fearful and cashed up, you have to be fully invested. If you wait for conditions to improve after a crisis, it will be too late. As hard as it is, you need to buy on the worst days for the market, believing governments will step up in the crisis.”

Remember business cycle

Investors risked overlooking the importance of the global business cycle in share investing, amid COVID-19 chaos and deafening market noise about a recession.

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Burman Invest chief investment officer Julia Lee says fiscal stimulus and loose monetary policy has reset the business cycle. The Australian government has so far provided $507 billion to support the economy, KPMG analysis shows.

“Government support during COVID is vastly higher than in the GFC (about tenfold higher),” says Lee. “This weight of money will help support the Australian economy and kickstart the next business cycle. It’s an exciting time to be investing in shares.”

Lee says the world is in the early stages of a business cycle that typically takes eight to 10 years from peak to peak. “We are at the start of a multi-year bull cycle in commodities as higher demand from China emerges. The economic recovery will be strong.”

Investors should buy shares during a recession, says Lee. “If you wait for the recession to be over, it’s too late to buy at the bottom. Markets always move in cycles, and the stage of the cycle defines what multiple you pay for stocks. It’s easy to forget that during COVID-19.”

Julia Lee of Burman Invest.  Janie Barrett

Australia technically emerged from its short-lived recession when gross domestic product grew 3.3 per cent in the September quarter. But for almost 1 million unemployed Australians, and others who will join them when JobKeeper ends in March, the economy still feels recessed.

Re-rate on rates

Interest rates had been falling since late 2011, but a current cash rate of 10 basis points in Australia and negative interest rates overseas changes everything.

Cadence Asset Management founder Karl Siegling says investors must pay more for growth stocks with rates near zero. “In the old days, you’d buy a company growing earnings at 15-20 per cent annually if it traded on a price-earnings (PE) multiple of, say, 12-14 times. You knew the stock was cheap and would eventually be re-rated.”

Siegling adds: “Today, you might have to pay a PE multiple of 25-30 times for a company with 15 per cent earnings growth. At the same time, you pay that high multiple when there is less earning certainty over the next one to three years due to COVID-19 risks. The whole valuation formula is in reverse due to low rates, which the pandemic has exacerbated.”

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Value investors who refused to pay higher multiples for stocks have underperformed, says Siegling.

“We don’t like paying higher prices for stocks, but there has been an ongoing squeeze towards higher valuation multiples. Low rates are driving asset prices higher.”

Siegling favours unloved stocks on low multiples. “We’re spending more time looking at companies that have had share price collapses, such as Treasury Wine Estates or [beauty products supplier] McPherson’s. Be prepared to look further down the market for value in 2021.”

Rethink income investing

In 2012, an investor who sought $100,000 of annual income from cash investments needed $2 million of savings. Today, investors need $10 million to produce the same return (with average 12-month term-deposit rates falling from 5 per cent to about 1 per cent).

The upshot is that even multi-millionaires cannot earn enough from cash to fund a decent lifestyle. In a low-rate environment, investors have to take more risk to earn yield. That means a higher allocation to shares for their dividend yield.

However, COVID-19 showed how quickly companies could defer or cancel dividends during a crisis. And how the usual yield suspects – banks, listed property and infrastructure – were among the worst stocks to own given their sensitivities to COVID-19.

VanEck’s Arian Neiron.  Louise Kennerley

“It’s a difficult time to be an income investor,” says Lakehouse’s Joe Magyer. “I don’t see that changing anytime soon given the incentive for central banks to keep rates low.”

VanEck Asia Pacific managing director Arian Neiron says investors should consider new yield sources in 2021. “Until interest rates move higher, and the risk-free rate provides a meaningful return again, investors will have to rethink income investing. They need to look beyond conventional sources such as government bonds, credit, hybrids, the banks or Telstra.”

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Neiron believes emerging-market bonds are an opportunity. “There is a misconception that emerging-market bonds equate to emerging-market equities. The latter can be very volatile, but emerging-market bonds have had less volatility over 10 years than Australian listed hybrids.”

Neiron says COVID-19 will ultimately support emerging markets. “The hyper fiscal stimulus and low rates will boost global growth and emerging markets. We believe a diversified portfolio of emerging-market bonds can provide attractive yield with less risk than investors realise.”

The VanEck Emerging Income Opportunities Active ETF targets a 5 per cent annual yield.

Invest in disruption

One the best trades during COVID-19 was buying the Nasdaq 100 Index at the peak of the crash in March. The BetaShares Nasdaq 100 ETF is up 42 per cent since mid-March. Technology was the best-performing sector a year after the US sharemarket lows during the 2003 SARS crisis and has starred again during COVID-19.

The recurring investment theme has been the quickening of trends, such as online shopping, and the need to invest in disruptive companies that reinvent their business and find new audiences through technology.

“COVID-19 has amplified the digitisation of business,” says Alex Pollak, chief investment officer of Loftus Peak. “The booms in e-commerce, digital entertainment and remote work during the pandemic are speeding up change in business models and creating opportunity.”

Alex Pollak of Loftus Peak. Kate Geraghty

Pollak adds: “History is being written as technology redefines business. Investors need targeted exposure to that disruption and an eye on the new companies that will emerge and hit their stride over the next year or two.”

COVID-19 has provided a sweet spot for disruption investing. Loftus Peak’s Global Disruption Fund, also offered as an actively managed fund on the ASX, returned 43 per cent over the year to end-October 2020. The annual return is 26 per cent since the fund’s 2016 inception.

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Holon Global Investments co-founder Heath Behncke believes COVID-19 has brought forward at least three years of changes in consumer behaviour. “Cloud computing and healthcare are good examples: both industries have had years’ change condensed. Portfolios that don’t have exposure to digital-infrastructure trends will underperform.”

Behncke says the pandemic will drive demand for digital currencies. “Australia will have negative interest rates within five years and that will unleash a spike in asset-price inflation. More investors will include Bitcoin in their portfolio as a digital form of gold to protect their portfolio against the risk of accelerating inflation and declining purchasing power.”

Holon, a specialist investor in disruption, advocates for digital currencies. Its Holon Photon Fund returned 41 per cent to end-November 2020.

Thomas Rice, portfolio manager of the top-performing Perpetual Global Innovation Share Fund, says investors should focus on future disruption winners and valuations. “The biggest winners from 2020 won’t be the winners the next year. A huge amount of growth has already been priced into companies benefiting from the acceleration of digital trends during COVID-19.”

Thomas Rice of Perpetual Rhett Wyman

Rice says investors need to be “hyperaware of change”. “Assumptions about how the pandemic will affect business today might not be true tomorrow or next year. Everything is moving so quickly. With innovation investing, you need to be able to adapt your investment style quickly.”

The Perpetual Global Innovation Share Fund, a high-conviction investor in disruptive companies, returned 57 per cent over one year to end-November 2020.

Revisit funds/advice

Index funds boomed in 2020 as investors used exchange traded funds to position for a recovery in Australian shares. The combined size of ETFs on the ASX grew 53 per cent to $92 billion over one year to end-November, ASX data shows.

Chris Brycki, managing director of Stockspot, an online investment adviser that uses ETFs, believes index funds will continue to take market share from actively managed funds. “If ever there was a year for funds that pick stocks to take advantage of opportunities and prove their value, it was 2020. But the data shows active funds collectively underperformed.”

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About 64 per cent of general equity funds in Australia underperformed the S&P/ASX 200 Index in the first half of 2020, S&P Global research found. On average, investors were better off using low-cost ETFs that mirror an index return.

However, many Australian active funds are value managers, an investing style that lost favour as the market preferred growth and momentum strategies. But COVID-19 has created the best opportunities for value managers in years, suggesting a sustained period of outperformance from higher-quality funds is possible.

“The last five years have been tough for value managers,” says Grant Berry, a property portfolio manager at SG Hiscock. “Industry disruption has favoured technology companies and growth-focused investment styles. The pandemic reinforced that trend as tech stocks outperformed, and real assets, such as property, were disrupted. That has provided an opportunity for value investors, particularly in areas such as retail property that have lagged the market recovery.”

Stockspot’s Chris Brycki. Christopher Pearce

InvestSMART head of research Nathan Bell sees opportunities in small-cap stocks. “There is a lot of value in small caps, as the large investment banks have been reducing their broker coverage in this area to cut costs.

“There is also plenty of value in unpopular stocks. The valuation gap between growth stocks and value stocks is wider than before the tech wreck in 1999. It could be far more profitable [to own value stocks] over the next five years as the massive stimulus measures combine with vaccines to create a stronger economic recovery than predicted.”

Focus on fees

COVID-19 will add even more pressure on asset managers to lower fees, principally through the effect of lower interest rates and investment returns. How can a cash or bond fund that returns 1-2 per cent charge annual fees of 50 basis points or more in this climate?

“Lower rates will pull down returns across asset classes, which in turn will require lower fees,” says Stockspot’s Brycki. “If you’re paying 1 per cent in fees for a fund that is probably going to average 5 per cent in annual returns over this decade, you’re losing a quarter of your return. Fees will matter even more as rates head lower.”

Brycki argues the cost of financial advice needs to fall. “Investors should be able to get an appropriate standard of advice without paying higher fees. Technology can automate a lot of work, such as portfolio rebalancing, which should result in lower fees.”

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Protect capital

Bear markets have a knack of encouraging new capital-protected products. Few of these products have taken off – their turnoffs include high fees, product complexity and investors having to give away too much upside return as a trade-off for capital protection.

However, the need for capital-protected equity products is rising as lower rates and returns force prospective and current retirees to hold more growth assets in their portfolio. A 50:50 split between equities and bonds may not provide a sufficient return for younger retirees with rates near zero. They might need a 70:30 split.

With that comes higher risk from owning more shares – a problem for those nearing or just in retirement. The Retirement Income Review said the superannuation system needed to address sequencing risk, which occurs when an investor has to sell assets during a financial shock.

Some investors who sold shares during the 2008-09 GFC or the COVID-19 crash will never recoup those returns because they sold at the bottom.

The Retirement Income Review also highlighted the need for retirees to draw on their capital and use it as a source of income in low-return markets. A new generation of low-cost, simple, capital-protected equity products could partly be the answer, by creating annuity-like equity returns in volatile global sharemarkets.