How Investment Firms Should React to the Coronavirus: 5 Things to Do

March 2, 2020 - Stephen Van de Wetering

The coronavirus may negatively affect investment performance and company revenue, but if wealth and asset managers want to weather the storm, rational thinking and decision-making cannot be ignored.

The beating the market has taken as a result of the coronavirus (COVID-19) cannot be understated:

Fear as a result of the coronavirus could lead to a global recession, further accelerating a downward spiral in the markets.

While the impact on investments is real, the psychological impact of the coronavirus can be just as concerning.

Should fear dictate one’s thought process, questionable (and regrettable) investment decisions could be made. Clients might be in panic, but investment firms must stand firm, demonstrating level-headedness and control in a time of uncertainty.

Of course, how well prepared (or lack thereof) a firm is will play a role in the fear they experience, but no matter a firm’s situation, here are some tips for hedge funds, wealth and asset managers in the wake of the coronavirus.

5 Things Investment Firms Can Do In Response to the Coronavirus

Stay Calm

It may sound cliché, but it’s an important reminder to stay calm amidst a “sky is falling” sentiment among investors and the public at large.

Yes, the market has dropped significantly in a short period, but this is not the first time markets have fallen sharply.

Even if the closest comparison is to 2008/2009, take comfort in knowing that here we are, over a decade removed from that time, and those who remained in the market have done exceptionally well.

And if we look at stock market performance history after previous viral outbreaks, the market has ultimately rebounded.

While we don’t know how long the coronavirus will maintain its grip on global markets, we do see trends of eventual rebounds. The question is how patient are investors willing to be.

As it relates to public health, stay calm as well. Continue to wash hands frequently, use disinfectant wipes as needed, maintain a distance from others in public, minimize physical contact, and wear a mask in public if you know you are exhibiting signs of the flu or a cold.

Allow Staff to Work Remotely

While there is reason to be hopeful that eventually everything will calm down, we have to acknowledge the reality that for the time being, the virus can spread rapidly.

Should the situation become more serious, why run the risk of infecting the entire workplace?

To the extent work can be done remotely, let that work be done remotely.

Investment management firms should develop policies around remote working, which may include regularly scheduled meetings with team members and other measures to ensure employees will remain productive and accountable during their time out of the office. Should clients need to know your remote work policies and if the changes influence their interactions with the firm, let them know.

Remote work has increased notably over the last decade, and if there is one thing the coronavirus has done, it has only accelerated the remote working trend.

Assess Client Risk Appetite

While the markets have fallen sharply, some clients, particularly older ones, are more vulnerable to downturns than others.

We have talked about dealing with natural disasters; perhaps it is time to have plans in place for global health crises.

If clients are close to retirement age, maybe it’s time for advisors to put their clients on a more conservative investment path. A recent Fidelity study showed that 37.6% of Baby Boomers are overly invested in the stock market for their 401(k) accounts, of which 7.9% are invested 100% in the stock markets.

For clients with longer investment horizons, they can continue staying on course, as history has shown it pays to stay in.

Identify Investment Opportunities

Though the stock market has taken a hit and fears of a global recession are on the rise with the coronavirus, there is still money to be made for those who are smart and patient.

As investors sell off in a panic, that means opportunity to buy on the cheap.

“It’s safe to assume that if you have a 10 or more year time horizon, this is a good buying opportunity, said Andy Panko, owner of Tenon Financial LLC.
“[Stocks] may get cheaper now and you may lose out in the long term.”

Consider the following trends as a result of the coronavirus:

Pay attention to how consumers adjust their spending habits and where companies allocate their resources and activities in the wake of a public health crisis.

Learn From the Past. Prepare for the Future.

For some investment firms, it’s not enough to “stay calm” when the organization’s finances are in a precarious position due to a volatile market.

Even with our recommendations, it might be too little and too late to make changes without incurring pain. At this point, the only thing one can do is learn from this situation and prepare for similar future scenarios.

We are a full decade removed from the 2008-2009 financial crisis. As time passed, the markets improved, and 08-09 feels like a distant memory.

But even if economic indicators did not suggest a return to 2008-2009, we can learn that threats can come from other sources, be it terrorism, a trade war, and now a viral outbreak.

That’s why it is so important to build up cash reserves in good times. When disaster strikes, investment managers need the funds to withstand prolonged periods of crisis.

And it’s not just about having the funds to scrape by; it’s about having resources available to buy on the cheap when others sell off in fear.

Another thing investment firms should do is reduce their internal risks (i.e. inefficient business practices). When markets head south, internal inefficiencies will exacerbate an organization’s existing struggles.

For firms still on legacy portfolio accounting systems, maybe it’s time to move to a cloud-based turnkey investment management platform. Working remote effectively requires access to all the same systems available in the office, and if staff is dependent on locally stored legacy software, then remote work won’t be as effective.

Automating routine, mundane tasks and outsourcing operational functions to a third-party can increase efficiency, reduce errors and lower overall costs.

Running an efficient organization from the beginning will serve a firm well, especially when times get tough.

Lessons from the Coronavirus: Be Ready Today

While the health and economic threats from the coronavirus cannot be dismissed, neither can the importance of rational thinking and decision-making be dismissed.

Staying calm is important, as history has shown the market has rebounded after various crises.

As the coronavirus could require employees to work remotely, firms need a plan in place to deal with that change.

Of course, not all clients have long investment horizons to withstand a prolonged downturn, so investment managers should assess clients’ risk appetite. In addition, keep an eye out for investment opportunities when stocks are cheaper and consumer spending habits have changed.

Finally, be a student of history. Learn from the past. Build perspective. Take a long-term approach. When times seem endlessly good, use that to build up a cash reserve for the lean times.

If the coronavirus is one of those moments of reckoning for investment managers, now is the time to learn.