Market Insights

The only thing more striking than the depth of the recent market rout is its speed. It took the S&P 500 just 22 days to fall 30%, the quickest drop of that magnitude in history. The fast freefall has left little time for equity strategies touting downside protection to deliver it … but give it a moment. Stock selection can help navigate equity market downturns, but it provides greater value over a longer period than three panic-stricken weeks.

At Dana, we pride ourselves on the ability to outperform in sustained bear markets and our strategies did so through both the tech bubble and great financial crisis. This is largely what we would expect, given our investment process. We focus on high-quality companies that trade at a discount to their peers. These companies tend to outperform when the economic outlook sours and the rest of the market gravitates toward companies with stable balance sheets and steady earnings growth.

We see early signs the market is once again starting to differentiate between high and low-quality companies. But a bias toward smaller companies and a tilt toward value hasn’t yet helped us in the current downturn.

As stocks slid from record highs to bear market territory in a matter of days, not months, the thing that would really make a strategy shine in the current market environment is to increase one’s allocation to cash. We view this as a market timing call, however, and it’s simply not what we do.

Is Your Manager a Timer or an Investor?

In the earliest stages of a bear market – particularly this one – the best way to cushion the fall is to hide in cash or short equities. Undoubtedly, there have been some long-only managers that have probably benefited from holding excessive cash positions during the recent rout.

With stocks crossing into bear market territory, it’s been a tough period for equities. But credit the market sell-off for one thing: it’s been discerning. Stocks are down broadly, but lower-quality companies bore the brunt of the sell-off.

The volatility underscores why we take a high-quality approach to stock selection. In volatile periods the market typically recognizes stocks of companies with greater earnings stability and stronger balance sheets. Conversely, companies with higher debt levels or speculative growth models are typically punished harder in market downturns and have been again in March.

We believe holding a portfolio of these higher-quality companies leads to outperformance in periods of market stress, and, in turn, better relative performance over a full market cycle. The recent volatility underscores the value of this approach.

We’re proud to announce that our Dana Large Cap Equity Fund - Investor share class (DLCEX) hit its 10-year track record on March 1st, 2020. The Fund has returned 218.38%, an annualized return of 12.28% over this period.¹

“10 years ago, we chartered a new course to serve investors with a mutual fund offering. In these volatile times, we are proud to reflect on our accomplishments this past decade and pleased to have generated such strong positive performance for our fund shareholders. We believe in today’s current environment it is more important than ever to stay focused on the long-term goals.” Mark Mirsberger, CPA, Chief Executive Officer

Fear is the virus on which the news media thrives.

Viruses are with us everywhere and always. Illnesses defined under the umbrella of influenza kill between 10,000 and 50,000 Americans each and every year. Total annual deaths in the U.S. are about 2.8 million, so influenza makes up less than 2% of those deaths. Video of personnel in gowns and masks carrying sprayers invoke the fear response.

Past influenza epidemics include the 1957-58 Asian flu, the 1968 Hong Kong flu, and the 2009 Swine flu. The H1N1 Swine flu appeared in the United States first. There were estimated to be 60 million U.S. cases, but only 12,000 deaths. Worldwide, the Swine flu is estimated to have killed 200,000-500,000 people. 80% of those deaths were people under the age of 65.

So what do we know so far about the current Coronavirus? 

What a difference 15 months makes. In the fourth quarter of 2018, the market was down almost 20% through Christmas Eve and had dropped over 10% in just the middle two weeks of December. Jerome Powell had just led the Federal Reserve to the fourth interest rate increase of 2018. Regardless of the market drop, Powell seemed to have a ‘what, me worry?’ attitude. He said that the balance sheet reduction was on autopilot.

Throughout 2018, we feared that the Fed was an unwitting enemy of both the markets and the economy, and that became clear at year-end. Powell tempered his tone, and the Fed embarked on what seemed like an interminably long pause until it cut rates at the end of July 2019. During that period, the ten-year Treasury yield fell below short-term rates in late May and remained there until early October. The equity markets traded in a range through the summer and fall, and only moved to new highs just before the last Fed cut in October. Since then, the move upward has continued with markets constantly nearing all-time highs. The Fed has since telegraphed an ‘on hold’ policy going forward.

The once red-hot market for unicorn investments has turned chilly. These start-up enterprises with a value of at least $1 billion have enjoyed relative easy access to private capital this cycle. Robust growth, easy credit and a fair amount of hype combined to elevate the early valuations of these companies. Peloton Interactive, Inc. (PTON), the maker of stationary bikes and treadmills, marketed itself as “selling happiness.”  Ridesharing company, Lyft, Inc. (LYFT) claimed it was “at the forefront of societal change.” Corporate real estate leasing company WeWork aimed to “elevate the world’s consciousness.”  

With over 75% of individual investors expressing an interest in sustainable investing, it is clear that investor demand for  Environmental, Social and Governance (ESG)  investments is real and growing¹. Yet, remarkably, only 36% of financial advisors are currently offering an ESG solution to their clients and less than 8% of co-sponsored retirement plans offer even a single ESG fund².  In that disconnect lies opportunity.  

The three main concerns advisors have with environmental, sustainable and governance investing are a lack of  transparency,  performance  concerns and client  demand.   

Asset flows into money market funds have accelerated considerably since the selloff in late 2018, as illustrated by the graph below. According to the Investment Company Institute, more commonly known as ICI, total money market assets (including institutional and retail funds) currently stand at $3.4 trillion as of 9/18/19, which is the most recent available date.¹

Michael Burry, whose firm Scion Asset Management made approximately 489% betting against the housing bubble during the Global Financial Crisis, recently made headlines again. This time, he is of the opinion that another bubble exists today, and passive investment vehicles are to blame.

“The bubble in passive investing through ETFs and index funds, as well as the trend to very large size among asset managers, has orphaned smaller value-type securities globally,” said Mr. Burry.¹

As demand for environmental, social and governance (ESG) and socially responsible investing (SRI) investment products grows, advisors are tasked with sorting out the good options from the bad. Unfortunately, there are many problematic products, many of which have been “greenwashed” or marketed in a way that makes the fund appear more ethical or responsible than it really is, which could result in tough conversations with clients.

Here are two approaches you should be careful with: