#16 🔊 Austyn’s Weekly Financial Strategy.

Below is a link to a short Q&A audio interview I’ve just recorded where I give my thoughts on these extraordinary times.

Link to Audio Recording

Nick Griffith:

Good afternoon, Austyn, how are you?

Austyn Smith:

Very warm. I think we’re sitting in the middle of a heatwave at 31 degrees this afternoon.

Nick Griffith:

A heatwave that will last all of three days.

Austyn Smith:

Yes, that’s our summer.

Nick Griffith:

So welcome. It’s Nick Griffith and Austyn Smith, on Thursday the 25th of June, doing our quick Q&A for the week. So let’s get stuck straight in. You’re known for cautious investing so I guess one of the biggest questions is, how do you keep investing with lower risk, during this unprecedented crisis?

Austyn Smith:

Yes, the current situation is unique in terms of combining financial problems with a health crisis, and this has changed how we approach our Cautious Blend ® remit. That’s because back in March when we first entered this, low risk funds, typically fixed-interest gilts and corporate bond funds, behaved almost as if they were stocks and shares funds. That’s because back in March, we didn’t just have a health issue and a fledgling financial crisis, we actually had a liquidity crisis. There was a seizure within the financial system of ready cash / liquidity in certain asset classes.

In the Federal Reserve press conference a couple of weeks ago, they actually mentioned this for the first time, and that’s why they have done what they’ve done, to step in to stop a liquidity crisis. And of course, when you have that sort of situation affecting global financial markets, even something that is perceived as quite low risk has to be sold to pay for something else. So you had a lot of forced selling of low risk assets, which in turn made the price of those go down. So what was really interesting about this particular episode was, low risk assets fell by as much as -10% or -15% in a matter of two or three weeks, so it was very different.

Nick Griffith:

Wow, that is a big drop. So some new rules are being defined as we go.

Austyn Smith:

Yes, it means we have to do things slightly differently. And now because the Federal Reserve has said that they’re going to step in and support bond markets and corporate bond markets, that has meant that those things have recovered, but you’ve got to be very careful as to what you’re allocating to. So in previous calls, I’ve mentioned about upping the quality in portfolios, and that’s what fund managers have been telling me that they’re doing, going into the more high quality bond sectors rather than perhaps being in the high yield sectors. Because the high yield area, whilst you’ve got higher yields and perhaps higher growth, is behaving more like a stock market fund would.

And of course, we just have to be a little bit careful about what happens in a possible second wave. So that’s meant that throughout this crisis, we’ve held a little bit more cash than we would normally do, because we would normally allocate that straight into fixed interest and other types of corporate bond funds. But we haven’t been able to do that as much because those assets have actually been quite risky in their own right. So managing the risk over the last six months, it’s been a blend of various asset classes, to blend out the risk as much as we can.

Nick Griffith:

Very interesting. You mentioned the Federal Reserve, and I think when we were talking earlier about this, there’s going to be a Fed announcement this evening on bank stress tests, where they might be limiting how much information they supply. Is this a lack of transparency ? And how much transparency is a good thing for the economy, society, and obviously financial investments?

Austyn Smith:

Yes, so tonight after the markets close in America, there’ll be an announcement by the Federal Reserve where they stress test their banks and large financial institutions. And last week, they said that they weren’t going to tell us everything, they were going to withhold certain information. So it’s sort of failing to disclose certain things, and so obviously people then ask why ? And so, behind the scenes, I think that there are still some issues with banks in how they’re operating and the structure of the financial system. We’re not being told everything, and the Federal Reserve is probably one of the institutions that actually does give a degree of forward guidance as they did a couple of weeks ago.

So there are still stresses within the system. I suppose that’s the bottom line, and that might affect the share prices of banks in the coming weeks, it might affect their ability to pay dividends. So there’s still a lot of moving parts to this, it’s not just a case of the economy’s reopening and we can all go out in the sunshine. There’s a lot more to run in terms of financial and stock market bumps in the road.

Nick Griffith:

Yes, and I think one of the statements we looked at earlier on was, ‘we’re only as strong as the weakest link’. And we can see the US it’s having issues with rising infection rates. There’s a lack of unity there, and I’m just using the US as one example of how the world is behaving. What impact do you think that these sorts of patterns are going to have over these coming weeks and months?

Austyn Smith:

It’s very much going to be ‘stop and start’, and I know I’ve said that before, but this is the reality of a health crisis and a virus. So there’s been a big uptake in the number of COVID infections in the United States in the last couple of days, and that is being put down to certain States coming out of lockdown too early. So a lot of States came out of lockdown on May 25th, which was Memorial Day in the United States. So today we’re one month on from that, and we’re seeing lots of infections, and that’s unnerving markets. So we’re going to have a lot of choppiness in markets over the next few weeks.

But at the moment, because the Federal Reserve have said what they’ve said, ( that they will do whatever it takes ), I think that the Federal Reserve is holding sway at the moment. There’s an old adage, ’don’t fight the Fed’. So if the Federal Reserve are pumping money into the system to try and support asset prices, generally that will win. But the Federal Reserve and all central banks, including our own, are used to pumping money into the system to help financial institutions. I personally think that there’s probably going to have to be some more support for companies at ground level in the ‘real economy’.

I’ve heard talk within markets and what I’ve read recently, that perhaps the Federal Reserve or the US government will be considering more fiscal stimulus to try and get their economy going a bit quicker. Because I think there’s just this worry that certain States or certain sectors will be shut down again, as we’ve seen recently in Germany.

We’ve now just seen in the last couple of days, New York saying that anyone who flies in from Texas and Arizona and Florida, some of the badly affected States, will have to go into quarantine for 14 days. So, we could even see a situation in the next month where Europe doesn’t allow people from the US to come in unless they go into quarantine for 14 days. These are all things that I’m weighing up in my mind. I’m trying to weigh up both positive and negative as dispassionately as I can, and make decisions based upon what we think is the right thing to do to help protect people’s money.

Nick Griffith:

Yes, and I think it’s an important point because there are a lot of worries out there, from health to even what people might be doing to help their families and their friends. But your purpose is to really protect their money, and this brings other benefits in a sense, so I’m just wondering what your thoughts and feelings were on that?

Austyn Smith:

Yes, in any normal financial problem, our overriding issue is to be cautious and protect people’s money. However, I think in this current crisis, it’s gone a little bit further because I think a lot of families are worried about what’s going to happen over the next six months. When furlough finishes, will people still have their jobs, and how this may affect friends and family. Will they have their jobs, will people have to help out their family financially with rent or mortgage payments. There’s a lot of other things going on.

So what I’ve tried to do is to take the weight off people’s shoulders a little bit by saying, “Look, we will try and manage this money as cautiously as we can. Yes, we’re here to make money, but just at this point in time, I think protecting it is important.” And if we handle the money correctly, then we’re not just protecting people’s money, but hopefully we’re protecting people’s peace of mind, protecting their confidence, and their lifestyle. And I suppose that then also filters down into their health and wellbeing as we go through this journey, because I think it is going to be a long journey.

Nick Griffith:

I think that was something recently portrayed in the last UK daily press conference, and saying this is not going to be weeks and months, this is going to be a period of a year or two. So this is a journey.

Austyn Smith:

Yes, Professor Chris Whitty said in the last daily press conference that this is going to be with us for a long time, and there’s no getting around that, and that obviously with social distancing being eased, that’s not risk-free, as we’re seeing in America at the moment. And so what that means is that, we have to prepare ourselves. I think that in July and August, things will reopen, and I hope people will recharge their batteries because I think we’ll need to have some mental resilience and some sort of physical resilience as we go into the autumn. I think that’s when we’ll know what’s going on with the economy a lot more, as whilst certain sectors are already laying off people, we may have further redundancies as furlough ends. So unfortunately there is going to be some hardship coming up for the population as a whole, and so what we’re trying do is to just do our bit, to try and make what we do less worrisome for people.

Nick Griffith:

Indeed, and I was reading that although these are tough times, there’s been a lot of positives too, some of which are quite transparent and open, and others that we’ll see in the future. Some of the more resilient businesses were started during times like these, when they were forced to dig deep and be frugal.

Austyn Smith:

Yes. I think there’s just going to be a lot of changes, and I think it’s been quite hard to think about that-

Nick Griffith:

Absorb all of this in such a short time, yes.

Austyn Smith:

Yes, there’s been so much to absorb over the last few months, and there’s that phrase, the ‘new normal’, I’m not sure I know fully what it means other than the fact that possibly we’re already in the new normal. That’s because social distancing isn’t going to suddenly finish by a certain date, it’s going to be around in one form or another, until we’ve all had a vaccine or we’ve all got herd immunity. So in one sense, we’re already at the new normal.

And the new normal has a benefit too. Pre-COVID, I think, society was a little bit selfish and maybe self centered in certain areas, but that’s all completely changed. And when I talk to clients, they now know who their neighbours are, and there’s a lot of caring attitudes and consideration, as to looking after people.

Nick Griffith:

I think that’s a great note to end this week’s call on today, Austyn. So I just say, as a general note, if anyone’s got any questions, then do email Austyn, and thank you very much for your time this afternoon.

Austyn Smith:

Thank you, Nick. Take care.

Past performance is not a guide to future performance
The value of investments can fall as well as rise
Portfolio performance varies according to client circumstances

About Austyn

Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.

Following his work on risk reduction strategies, in 2011 he was recognised by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’

Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.

With over 25 years financial strategy and wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.