At Burgundy, we pride ourselves on doing meticulous research and owning excellent companies run by trustworthy people. As quality/value investors, we often find the two parts of our philosophy in tension with each other – where quality offers little value or value offers little quality. Usually, this tension is resolved by the normal interaction of the economy and the stock market, as quarter by quarter we compare corporate results to the expectations of our investment thesis.
Occasionally, in situations like October 1987 or the autumn of 2008, a major disruption causes huge declines in equity prices. During those periods, the best advice has always been to back up the truck and buy great companies on sale.
What is happening now bears little relationship to those crashes, where high interest rates caused a familiar economic contraction, and a slow deterioration in business conditions allowed resilient companies to outperform. This time, the vehicle has come to a screeching halt and thrown us all out of our seats. The requirement for social distancing to combat the spread of Coronavirus has sent the entire economy home to wait and, if you are lucky like us Burgundians, to work.
The implications of such a full stop to economic activity are sobering. Unemployment is exploding. Government programs that took months to implement in 2008-2009 have been passed in three weeks. New income support measures that are literally unprecedented have been brought in to get cash to those who suddenly lack an income. The streets are eerily empty. Friends and neighbours can seem very distant from us.
There is also the sense of dread we all share as we hear of the relentless rise in the numbers of the diagnosed, the hospitalized, and the dead. It touches off those two deadly enemies of human serenity: anxiety and depression. The handmaidens of those two demons are panic and lassitude, neither of which is useful for good decision-making.
I have always prided myself on paying very little attention to financial TV. But I confess to a certain ghoulish attraction to it in recent weeks, and especially since working from home. The stock market is acting like an instant opinion poll on whatever is happening in the world, and the reactions are fascinatingly extreme. With Saudi-Russian oil price wars, trillion-dollar government programs, Coronavirus statistics, business closures, and public health advisories, the capital markets have not missed an opportunity to react, and overreact, to all of these headline events.
And I am watching this and trying to make sense of it without my familiar surroundings of Burgundy’s office and my beloved colleagues in investments, client service and administration. So what can we do? We will do what we have to do – we will make the best of it.
It has been inspiring to see how well our firm has been functioning as we implement the most extreme of possible “out of office” scenarios. Our technology people have been magnificent as have our traders. The client people have fielded questions and handled client concerns with quiet professionalism. Portfolio managers have been expertly repositioning their funds and holding virtual meetings with their analysts. No panic or lassitude there.
Burgundy’s decentralized investment approach has been quite effective in this environment. As you know, Burgundy portfolio managers are empowered decision-makers who are working hard to make investment decisions in the best interests of our clients. The teams have functioned well this week.
In the last analysis, clients probably want to be given some certainty about this new, atomized world we inhabit. I have very few certainties to offer at this time. We are doing our best to look over a valley that has been widening and deepening daily for the last month. In as little as a couple of weeks we should have a better idea of what we are up against with this virus. That is the sad reality of exponential daily growth in infections.
In the meantime, we can make some observations. The companies we are invested in have very strong financial positions and good management teams. After this business hiatus, they have the potential to restore operations fairly rapidly when they get the all clear. But this is going to be a process and there will be a distinct lack of good news until that process starts. We do not have positions in businesses that will be massively subsidized or de facto nationalized.
Equity markets have plummeted over the past month and most are now down about 30%. Some of our “Dream Team” companies are coming into range, but they were very expensive and it will take time for them to come back to Earth. We know these companies well, and we are ready to buy them at the right price.
We are well aware that returns have been less defensive in this downturn than in previous ones. We believe that will correct in coming months. We are totally focused on delivering the returns you expect.
In this environment, health must be everyone’s first priority. We hope and pray that you are all home and healthy. We are aware that Burgundy is only a part of your lives, and that many of you are facing challenges in business and family life. We are doing our best to ensure that you can rest easy and concentrate on those other concerns.
Richard Rooney, FCPA, FCA, CFA
President, Chief Investment Officer
This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints or financial needs. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy funds or portfolios may or may not hold such securities for the whole demonstrated period. Investors are advised that their investments are not guaranteed, their values change frequently and past performance may not be repeated. This post is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and is subject to change without notice. Please refer to the Legal section of this website for additional information.