Life comes at you fast. The number of countries with confirmed cases of Covid-19 has exploded from 41 to 108 in the 15 days since we first wrote at length about the situation. And, in the span of a single half-hour today, the US banned travel from Europe, the NBA suspended its season, and we found out that Tom Hanks tested positive — while here in Australia.
Markets have understandably not taken this news well. The ASX 200 is down about 26% from its highs reached only four weeks ago, which is a stunning drop for such a short amount of time. Volatility happens, though, and is the price of admission for the long-term success of the share market.
We cannot control volatility in the share market, however, we can control our response. For starters, we have reduced risk in some areas while being opportunistic in others. In terms of managing risk, we have pruned positions in companies where we have concerns about demand shocks, supply chain disruption, issues with business continuity during a period of social distancing, and general balance sheet health.
Meanwhile, we have opportunistically increased our holdings in companies that could prove medium-term beneficiaries including market leaders who we think can strengthen their position during a recession or digital-first businesses who should see engagement and adoption pulled forward because of social distancing.
An example where we’ve reduced risk is via cutting Booking Holdings. Our team reduced the Lakehouse Global Growth Fund’s stake in the online travel giant in late January as we became very concerned that downside risks were mounting but the share price had yet to really move in response. We continued to follow the escalating situation closely until earlier this week when, after concluding that the consensus view among analysts was that room nights would only be down 4% for the full year was downright fanciful, we decided to exit entirely. Only hours later, Booking withdrew its recently issued guidance and analysts have since slashed their forecasts.
We have been busy buying elsewhere, as well, and have initiated new holdings in both funds, though we’ll hold off on saying much on those for now as we’re still growing positions. Still, despite being net buyers over the past month in both funds, each is conservatively positioned with cash allocations at 13.7% in the Lakehouse Small Companies Fund and 12.6% in the Lakehouse Global Growth Fund, as of their most recent respective pricing dates.
We have also been proactively engaging with portfolio companies to provide our own feedback on how to best navigate such times. For example, for some small and younger companies, we’re encouraging them to take the crisis and financial contingency planning seriously. More optimistically, we’re encouraging other companies that have more cash than is required to consider upping the dosage on share repurchases and investing aggressively against the cycle to come out stronger on the other side.
Lastly, we are very much keeping our long-term perspective.
Our core strategy of investing in growing, high-quality companies for the long-haul remains as true today as ever. And, yes, while the economy will probably get worse before it gets better, we remain rational long-term optimists and note that the local market’s having pulled back 26% in only four weeks has created new opportunities and chances to top-up on some of our favourite companies at discounted prices.
Thanks as ever for your time and trust.
Chief Investment Officer
Disclaimer: This report has been prepared by Lakehouse Capital Pty Limited (ABN 30 614 957 603, authorised representative of AFSL 400691) and by its officers, employees and agents (collectively “Lakehouse”) for the sole use of its clients as a record of the performance of their investment.
The information included in this message has been prepared without taking account of the reader’s objectives, financial situation or needs. All of the commentary, statements of opinion and recommendations contain only general advice. Past performance is not indicative of future performance.
The responsible entity for both the Lakehouse Small Companies Fund (ARSN 615 265 864) and the Lakehouse Global Growth Fund (ARSN 621 899 367) is One Managed Investment Funds Limited (ACN 117 400 987) (AFSL 297042). The information contained in this document was not prepared by OMIFL but was prepared by other parties. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information contained therein cannot be warranted or guaranteed. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should read and consider the Funds’ product disclosure statements, which are available online, before deciding to invest in or redeem units from the Funds.