Sofa, self-isolation and … S&P 500 put options

A while back, in the Before Times, I wrote about how I’d planned a family holiday for June. All I can say is, thank God I bought the insurance.

I thought I was ever so organised locking in that much-needed dose of vitamin D, but fate has conspired against that. Now my wife and I are left pondering how to keep the kids occupied while we’re confined to our homes – no mean feat with an eight-month-old and a two-and-a-half-year-old, let me tell you!

But at least most of my losses on the holiday can be recouped, given I shelled out for the travel insurance. It would be foolish to say we foresaw just how much of an impact COVID-19 would have on the world and our lives. The extent of the pandemic came out of the blue. But that’s really the point isn’t it? Buying insurance is about protecting against the unexpected. We can’t see what is in our future, but it’s sensible to have something to protect you when the unexpected happens. I’m certainly glad we did.

Thankfully, we took the same approach in our multi-asset portfolios: for many months we have held a slug of S&P 500 put contracts. These gave us the option to ‘sell’ the benchmark US equity index at a prearranged level. For all intents and purposes, they act like an insurance policy on our US stocks. These put contracts were pivotal to our funds’ resilience in the face of dramatic market falls. They also helped us add exposure to the American market quickly at a time when prices were low. Because these contracts are cash-settled, we could sell them instantly. This immediately increased our overall exposure to the US stock market by removing some of the ‘short’ position and left us with a bunch of cash that helped implement our COVID-19 reinvestment plan. As the man gracing the $100 bill so fittingly said, “If you fail to plan, you plan to fail.”

At the very beginning of this outbreak, our multi-asset team formulated a clear plan of how we would navigate markets. Setting a plan is one thing, sticking to it is another. Buying a company whose stock has fallen another 20% on the day to new lows while doom and gloom are all around you feels uncomfortable, yet it’s utterly vital. While we don’t know whether we’re buying at the bottom or if there will be another leg down, we add because we believe those companies will be trading higher in three or so years’ time. If we didn’t have the discipline to follow the plan, or worse still did not have one at all, we would not be doing the job our investors pay us to do and would end up riding markets down and not having enough in equities to then participate in the rebound when it comes.

So what to buy? When it comes to economic and market crises personally this is not my first time – and it’s not the first time for David or Will either. When the global financial crisis struck in 2008 I was in commercial banking. I spent a lot of time visiting unfortunate mid and large-sized businesses that were very much feeling the pinch. I saw up close how businesses were trying their best to remain afloat and pay their staff and suppliers. I saw the stress on management and the toll it took on them first-hand. I saw businesses that had taken on too much debt, or that were trading on razor-thin margins, others with dwindling cash and too many suffering from all three. So many were doomed to never recover. Seeing these first-hand impacts in the real world and away from just the Bloomberg screens makes the impacts of economic crisis more tangible, and also helps you form a picture of how you should navigate them from an investment perspective.

I mentioned those three factors I saw 10 years ago pushing many businesses into very rough waters: high debt, thin margins, and low cash. We believe companies with these attributes will struggle through any crisis. That’s why these attributes have been our focus as we regularly review our investments.

Meanwhile, I’m going to stick to my plan on the home front, too. I’m rebooking the family holiday for next year when travel is (hopefully) back on the agenda. And yes I’ll be retaining the insurance, just like we’ve still kept some put contracts in our funds!

While it’s frustrating that I’ll be trying to keep the kids from tearing the house down this year instead of sitting by the pool with an umbrella in my drink, a cancelled holiday pales in comparison to the hardship many are facing. A little perspective is always a good thing.