When is a Pandemic a Problem?

Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

For David Fingold, vice president and senior portfolio manager at Toronto-based 1832 Asset Management LP, his 15 eventful years as lead manager of Dynamic American are helping him remain sanguine about COVID-19-inspired market volatility.

For the seasoned, bottom-up investment manager who is also lead manager of Dynamic Global Dividend Fund and Dynamic Global Discovery Fund, it’s business as usual. If anything, the impact of the coronavirus on the economy and human behaviour has served to accentuate trends already in place and where he has positioned the fund to capitalize.

A Familiar Fear
“A lot of people are being bombarded in the news by things they’re not used to hearing about, and they feel what’s going on is unprecedented,” he says. “But in the past, we’ve seen other serious influenzas and disruptive geopolitical events affecting things like oil prices.”

His reaction to COVID-19 has been to take a dispassionate view. When significant events occur, he asks himself the following questions:  

“Is the portfolio being hurt, and if so is it a temporary or permanent impairment to capital? Are there any benefits?”

The trends he sees accelerating are an increase in online activity, particularly shopping, and the resulting negative impact on demand for bricks and mortar real estate. The applications of cloud technology are also evolving and expanding.

“Certain pre-conditions were in place, and COVID-19 is an ‘accelerating event,’” he says. “There’s a vacancy issue in certain kinds of real estate, and real estate companies tend to be highly leveraged. The trend to work at home is bad for office properties, and malls are seeing declining footfall as shoppers stick to online purchases.”

Steady As She Goes
The $774 million Dynamic American Fund F has enjoyed category and index-beating returns during both short and long periods. It skated through recent market volatility relatively unscathed with a top-quartile year-to-date return at May 27 of 1.25%.

The fund also boasted a five-year average annual compounded return of 13.13% and a 15-year top quartile average return of 10.08%, beating Morningstar’s U.S. equity fund category by 2.6 points and the benchmark index by 0.60.

Fingold previously held some holdings in residential real estate in the fund, thinking that the consumer would benefit from lower energy costs and falling interest rates.

“Then the mortgage market went haywire with lack of access for borrowers, so we’ve backed off anything associated with the housing sector,” he says.

A Selection He Can Hold A While
Fingold runs a highly concentrated portfolio of 18 to 25 stocks. He focuses on high-quality, adaptable companies with the potential to grow at a healthy pace for the next three to five years. They have a record of consistent profitability and capital growth and are unfettered by too much debt.

While Dynamic American had some exposure to the consumer and banking sectors in early 2020, Fingold has trimmed these areas.

“We reduced our banking exposure as interest rates fell and the curve flattened – we decided to get the heck out of Dodge,” he says. “When banks are working they typically only work for a while and then you give back performance rapidly, so you have to be right twice. We’d rather buy things we can own for a few years.”

Tech and Health Bets Have Legs
His favourite sectors are technology and health care. He views technology as ‘the best performing sector of all time” and health care as second best. Technology companies can continue to grow as new functions come into play and equipment needs to be replaced. Health care tends to have a “great risk/reward tradeoff” and holds up well in bear markets, Fingold says.

At April 30, the fund had 32% of assets in health care and 30% in information technology. The fund doesn't need to be in all 11 sectors of the U.S. stock market, Fingold says. However, he makes sure the fund has exposure to at least five sectors for diversification purposes.

“I like to have an element of bar-belling in the portfolio to level out the volatility,” he says. “There’s always a vulnerability to a flash-crash in a sector like health care if some politician comes out with something.”

Another of Fingold’s risk-moderating strategies is to raise cash when markets look treacherous, and the fund had close to 25% of assets in cash in March. As stocks stabilized, he redeployed money in companies navigating the turbulence effectively.

“We looked at what’s done well and have bought more of the winners,” he says. “It’s a process of trimming weeds and buying flowers.”

Among Dynamic American’s top holdings are two companies that Fingold refers to as “pick and shovel providers.” These are MSCI Inc. and Danaher Corp., and they offer products that facilitate particular business activities, profiting in the same way as providers of prospecting equipment did during the gold rush without having to actually find gold.

Danaher Corp. (DHR) is a diversified life sciences company. It provides manufacturing equipment used by the pharmaceutical industry and recently acquired General Electric’s biopharma business. Its diagnostics and testing arm makes instruments for healthcare bodies such as hospitals and laboratories to research diseases, and its environmental and applied solutions division specializes in water treatment methods.

MSCI Inc. (MSCI) services the investment industry by providing financial market index data and portfolio management software to money managers and investors.

Other top holdings in the fund include Amazon.com Inc. (AMZN), an obvious beneficiary of the explosive growth in online shopping. Amazon is also branching into other services such as cloud computing through fast-growing subsidiary Amazon Web Services.  In the technology area, Microsoft Corp. (MSFT) is another key holding due to its expertise in cloud technology. 

In the consumer area, Fingold likes Dollar General Corp. (DG), a small-format grocery retail chain concentrating in U.S. rural areas. “It’s a highly resilient business and has grown through past recessions,” Fingold says. “Customers need groceries and it’s a best-in-class operator.”

He recently sold off aerospace and defence product manufacturer Raytheon Technologies Corp. (RTX) due to its connection to the commercial aerospace business. “I have no confidence that the air travel businesses will improve any time soon,” Fingold says.