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Amber Sinha, senior portfolio manager, global equities, at CIBC Asset Management.
How do we actually manage our portfolios, given the times? So, I’ll address a few points there. First of all, like I said, we’ve been able to see the opportunity to further high-grade our portfolios because, at the second stage of the decline, we actually see quality stocks go down as well. So we are trying to further high-grade our portfolios and make them even better than they were.
In terms of managing through a bear market, I think number one would be debt. So debt, like I said, becomes a problem very quickly in a crisis. So we are further stress testing our company balance sheets. It’s one thing to have a good quality franchise, but it’s another to be able to survive the crisis. And the survivability question becomes very important when you have a lot of debt on the balance sheet.
So we are trying to shy away to the extent possible from companies with high debt that might not be able to live through the crisis. So, again, stressing balance sheets is one thing that becomes very important in a crisis or in a bear market.
The other thing is, we want to stick with dominant franchises. Now that’s something we traditionally do in our portfolios anyways. But once we do come out of the bear market, we want to be positioned with the companies that are dominant and will become stronger at the other end of the crisis. So what we’re trying to do here is trying to stick with companies that will eventually come out stronger.
And the other thing, again, is that we’ve had some parts of the portfolios where the stress has been more than in other parts of the portfolio. So, for example, like I said, travel, transportation, tourism, leisure, these are activities that will remain depressed for a while. So, in the short term, we want to manage our exposure, or at least be cognizant of our exposure, to these parts of the market. So as much as I like aerospace, for example, you only want to have limited exposure to that part of the market in a given portfolio.
When we do come out of the bear market, we do realize that not all parts of the economy, not all sectors, will have the same kind of recovery in terms of the scope, size, and speed. So, while we want to be defensive right now, we also want to make sure that the portfolio is positioned correctly for the eventual recovery after the bear market.
So we want to have exposure to those parts of the market that we think will recover the fastest, will see a healthy recovery, and try and shy away from other areas of the market that might take a while to come back. So, while we kind of try and hunker down and be defensive in this portfolio, you also want to make sure that we are there to capture some of the upside in the market.
So, as defensive as we want to be, investors invest in the stock market, not only to lose less money, but to actually also make money. So we want to make sure that we use this time to also build a portfolio that will actually have that right exposures for when the recovery eventually comes.
In terms of dominant companies taking advantage of this crisis, our economy is kind of designed where the big companies tend to do better than smaller companies over time. So, provided they can survive the crisis, if you stick with companies that have structurally competitive advantages, that have a track record, that have a good balance sheet, and they can ride out the crisis, I mean, those guys will eventually win because … Don’t get me wrong. There will also be a lot of casualties in this crisis, and those casualties, for whatever reason, will tend to be the weaker companies, the smaller companies. So if you stick with dominant franchises, I think that would be a very profitable exercise.