A strong strategy can see a company through the toughest of situations. We sat down with Juhana Heikkilä, Senior Portfolio Manager, and Juhamatti Pukka, Head of Fixed Income, to discuss how the unprecedented COVID-19 pandemic has affected their work as Evli portfolio managers.
How would you compare the COVID-19 crisis with previous crises?
Juhamatti Pukka: The financial crisis of 2007–2008 is a prime example of an uncertainty-driven drop in the market. It was driven by one single sector and that caused all the others to suffer because it was freezing out the liquidity and the movement of capital. When we talk about coronavirus, it was freezing the movement of both people and industrial production, as well as product demand.
Juhana Heikkilä: So far, I don't see this as deep as some of the crises I've seen over the years. They are all different, but experience has shown me that open economies have flexibility and recovery tends to be relatively fast, so long as there is liquidity and money floating around. I'm not deeply worried that things will totally fall apart.
What are your clients' concerns and how are you allaying those fears?
JP: They're worried about being too late to buy or to sell—the timing issue is difficult. Everybody agreed that the prices didn't make any sense in March and that was the message we delivered to clients. Therefore, we have been advising our clients to take the long view, rather than focusing on short-term volatility. This allows them to see the long-term value in the market.
JH: When crises hit, I tend to be more active towards customers. Usually, we report only once a month but, especially for the larger customers, I write comments weekly and have had many phone conversations. While the longer-term investors are not that jumpy, there is a group that are. They tend to be the ones entering the market late or are in it for a short time. Previously, when there was some market volatility, the short end was a safe haven. It wasn't this time around. Everything melted.
What factors are considered when assessing a unique situation like this?
JP: We had to make certain that the risk level in the portfolio was able to weather all possible outcomes. It was critical to look through all the names and find those I didn't want as we went into the crisis. No matter how bad it feels to sell positions that you have put so much time and effort to build up, you have to put the emotions aside and plan your trades. This is how it goes in times of distress, with clients showing the need for liquidity through redemptions.
JH: Portfolio management is like a marathon. You can't just place your bets for the next quarter. You must be comfortable with the names in which you are investing long-term and believe that the balance sheets can weather the storm. If you have done your homework, there shouldn't be too many that would be drastically affected by short-term issues, at least in the case of a liquidity issue rather than a balance sheet issue.
How have you changed your strategy to adapt to this scenario?
JP: I have kept the initial strategy intact and that means not targeting crossover trade policies. It's not changing and I know that it's offering the best upside-downside potential for the investor. While there is a lot of fallout, you must endure the volatility and look to the horizon to collect the fruits of your long-term investment strategy.
JH: My strategy started 2006 in the short fund that I am still running. It has weathered several storms and each one was a chance to look at whether there are things to reconsider or do differently. Down the line, there are some things I may do slightly differently, but the major way of doing things will remain as they are.
What is your view on becoming an 'index hugger'?
JP: There are some markets that are easy to mimic with passive instruments, but the majority of the corporate bond market, for example, is not easy – or even possible – to replicate as a passive investment. People think that passive investments are liquid and are easy to trade, but it's not really the case. The transaction costs can be quite significant when you are playing with the baskets.
JH: I'm not a big fan of indexing. It is good that there is no direct index that we can rely on or follow because that makes work more interesting and clients are not referring to it all the time. I'm managing a government bond fund where indexes are key, and they sometimes cause trouble when certain names become very heavy.
What new risks and opportunities have emerged during the pandemic?
JH: Over the past year, I've looked at different investment companies and investment funds, such as capital investors buying smaller companies and creating these larger units and operators, especially in the service markets. You see it in the Nordics and around the world, where their balance sheet is overstretched, and they are dependent on cash flow to survive. Before the crisis, I wasn't keen putting money into them and now it has proven that they are risky. It is a clear message that will affect my way of thinking and I will continue to avoid such segments and companies.
JP: After March, it was a once-in-a-decade opportunity to grab quality from the markets at incredibly cheap valuations. We stressed to the clients that typically you do not see these sorts of yields or spreads for the high-quality companies. It was truly a market when you had to show some balls and be ready to put your money to work.
Juhamatti Pukka is the Head of Fixed Income at Evli and specialised in corporate bond portfolio management. He manages the very successful fund Evli Short Corporate Bond. Juhamatti joined Evli in 2008 and has been working with fixed income since start.
Juhana Heikkilä is a Senior Portfolio Manager at Evli, specialised in money markets and Nordic credits. He has been in the industry since 1994 and with Evli since 2009.