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Insights from the Front Line

CFA Society Chicago’s Women’s Network hosted a virtual discussion on Managing Wealth Through a Pandemic on May 7, 2020. Panelist included Jenifer Aronson, CFA, managing partner of Mosaic Fi, Sunitha Thomas, CFA, senior vice president and regional portfolio advisor at Northern Trust Wealth Management. The event was moderated by Elizabeth Martinez, CFA, senior vice president and portfolio manager at Bank of America Private Bank.

Topics discussed included asset allocation, alternative investments, estate planning, demographic differences in investor behavior during the market collapse and expectations about a recovery. Panelists opined on aspects of asset management that have changed forever due to the downturn and provided insight on lessons learned while giving advice to those looking for a career in wealth management.

Asset Allocation

The market downturn is proving the importance of diversification and asset allocation. Federal Reserve policies to backstop corporate debt signals structural risk in fixed income so a strategic overweight in US equities may be optimal. Municipal bonds are risky because of the stress states are under managing through the health crises and reduced tax revenue but federal government help is a possibility.  Therefore, fixed income and small-cap equities, which typically underperform in a downturn, may be present more upside when the market recovers. Trend towards ESG investing is expected to continue.

Alternative Investments

Hedge funds returns are typically uncorrelated with capital markets so are a core part of some holdings.  Moreover, private equity offers an illiquidity premium so could provide higher returns. A lot of companies are remaining private due to stock market volatility.

Estate Planning and Other Investor Advice

Making sure estate planning documents are in order is important. Tax loss harvesting and gifting or contributing to Roth IRAs of adult children is occurring. Avoid selling risk assets at depressed levels.

Very risk-averse average investors concerned about retirement may want to maximize cash allocations and turn off reinvestment of dividends. Investors near retirement or nervous about cash reserves should review family budgets to better understand needs. Consider moving some 401(k) assets into a Roth IRA. Younger investors may want to dollar cost average into the market.

Information on the Payroll Protection Act can be overwhelming, so the panelists are advising small business owners about options. Unemployment has historically not been an option for independent contractors and sole proprietors but is now available. Federal government providing a $600/week benefit and the state is providing assistance. Furloughed employees also qualify.

Investor Behavior – Demographic Differences

In terms of gender, men are watching the market more closely, reacting to day-to-day noise. Women are not regularly checking the market’s performance and seem to be prepared to wait it out. As it relates to age, older clients are generally less concerned and less reactionary while younger clients are more nervous, in part due to it being the first major downturn they have experienced.

The number one question clients are asking is why the market is going up when the economic fallout still has to play out. A positive correlation between economic data and stock market performance does not always exist. The market may be recovering quickly because the downturn was driven by an event rather than a structural problem. Some clients are looking for opportunities to take advantage of the downturn but the strategy of staying invested, as timing the market is not easy, is being reinforced.

Market Recovery Expectations

A slow economic recovery into 2021 is anticipated. However, the market will respond to containment of the virus, which is viewed as phase I of the recovery, and government policy responses, which are viewed as phase II. News on treatment therapies and a vaccine could also have an impact.

Volatility is anticipated with the depth of the downturn being influenced by whether there is a 2nd wave of infections, the effectiveness of government stimulus/support and the longer-term trajectory of the economic recovery. As corporations gain more visibility, less volatility is possible.

Potential risks that could derail an economic recovery, irrespective of whether it’s a V, U or L-shape, include a 2nd wave of infections and inflation due to the level of cash in the system. Fast food spending increased post receipt of stimulus checks.

Downturns Effect on Asset Management Business

The downturn is reinforcing the importance of never being complacent. Investor communication is 2-3 times normal levels. For those looking for a career in wealth management, this is a historic time so it’s critical to learn as much as possible, volunteer to help out as this is an opportunity to shine.