Solution visibility can be tough when we’re pummeled with daily reminders of downside risk. However, it’s entirely possible to sketch a blueprint of our bridge back to normalcy, or some semblance of it. That task is much more doable in May than it was in just April or March. The interconnecting trusswork to this design is unparalleled global scientific collaboration, and the tools being used to construct it include near-endless pools of compute power, cheap genome sequencing costs, widened communication pipelines among research institutions, and access to stockpiles of intellectual property previously held captive in the vaults of big pharma. As an NYT article succinctly stated, “While political leaders have locked their borders, scientists have been shattering theirs, creating a global collaboration unlike any in history. Never before, researchers say, have so many experts in so many countries focused simultaneously on a single topic and with such urgency. Nearly all other research has ground to a halt.”
Our institutional approach to asset management affords invaluable insights to the granularities of how businesses deploy capital. This in turn informs our conclusions on issuers better poised for disproportionate value creation, which is the crux to alpha generation in our actively managed strategies. This exercise becomes even more imperative during times when macro clouds impair ground visibility. In today’s case, the global scramble for pandemic mitigation can obfuscate how troops on the ground are reassembling to capture massive demand shifts underway. Without careful study of these bottom-up efforts, critical components to our eventual economic recovery would be overlooked, leading to avoidance of upside participation for investors.
As part of our customary quarterly review process to the SWS Growth Equity strategy, which we benchmark against the Russell 1000 Growth Index, we delve into the fundamental justifications of our portfolio’s top contributors and detractors. The following two stocks are samples of the best and worst performers during 1Q2020, extracted from our strategy’s full quarterly review, available for download here.
The following is an excerpt from our SWS Growth Equity quarterly update, our internally-managed strategy based upon an institutionally-designed investment process.
Our Market Take
Our daily lives are fully consumed by all aspects of the same risk causing disruptions in the equity markets. This is yet another "first" for our modern era, as prior systemic disruptions were largely perceived to be confined to financial services balance sheets (2008/2009) or among technology cohorts (2001/2002). Every single human on this planet is aware of the daily sacrifices necessary to navigate today's dislocation. This makes the task of sifting through news even tougher, as we must live through the same noise that's clouding our vision of our path through it. Yet these are the precise conditions of uncertainty that every dislocation of the past has marked its bottom in terms of equity prices, as we highlighted in our first piece in early March.
As we move from stage one of the pandemic response—a blunt force shelter-in-place mandate across major US geographies—to stage two of increased response precision, it's critical to assess how the magnitude of the financial response relates to the level of economic impairment. Both sides involve moving targets, but we have enough evidence to increase our degrees of confidence in drawing market conclusions. That said, there's no way to candy-coat it—we missed the call of a precipitous drop in equity market pricing. Now, the key is shrugging off analysis paralysis as we enter the eye of the COVID-19 storm. The particular challenge to the Level 5 hurricane that is this pandemic: its market impact arrived 4x faster than any prior recession since the 1960s (as we outlined here last week). As every prior downturn has taught us, we need to move past the headlines and study the second and third derivatives. In our constant exercise of gathering and assessing evidence, it's increasingly apparent that the main drivers of economic output are not permanently impaired. Undoubtedly, they will show deterioration in the coming weeks and quarters, but it's imperative to consider these scenarios relative to what the market has reflected in its (34%) price correction.
Periods of dislocation like we are currently experiencing can try the patience of investors— especially American investors who are brought up from birth to believe we can affect the market by our actions—because we feel like we should be doing something. It’s the American way, as Neal McDonough says in that now-infamous Cadillac commercial: “You work hard, you create your own luck, and you gotta believe anything is possible!”
So where does that leave us during this current downturn? For those of you who are veterans of our blogs and market analyses, you know that SWS Partners leans heavily on cogent fundamental analysis and a dispassionate view of portfolio management. We are paid to be out in front of the market, so we have spent the last few days pouring over the precedent for the current market so that we can provide some insight into where we go from here.