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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
We’ve just experienced a period of unprecedented volatility and its underlying cause is still with us. Now, we find ourselves in a situation where there’s no way to be certain whether a stretch of relative calm is a return to “normal” or a second chance to batten down the hatches.
Money is in motion amid this uncertainty as portfolio managers and plan sponsors alike position their portfolios to take advantage of opportunities while accounting for the many risks that remain. We believe active decision-making should guide this activity. Though indiscriminate panic selling took us from all-time highs to bear market territory in record time, we don’t think indiscriminate buying will lift us to the next bull market.
Consumer behavior, corporate supply chains and government policy are changing rapidly, putting the world’s capital markets through a stress test that is exposing many weaknesses. With this in mind, we believe active security selection and portfolio management are particularly important for three reasons.
In the months ahead, we expect some company management teams to use COVID-19 as an opportunity to explain away deeper issues. Therefore, a key challenge will be to differentiate between high-quality companies experiencing transitory headwinds from companies that are severely impaired. We’ll be looking for financial stability and the ability to grow through economic booms and busts.
The ability to generate sustainable results is highly coveted as many corners of the economy shut down. During this time of uncertainty, it’s crucial to thoroughly assess the viability of the business model behind every security and its ability to bounce back from disruption. This is also a time to look for companies with self-help characteristics such as strong competitive advantages and business models that can sustain their results without the benefit of a sharply rising economic backdrop.
Actively managing risk through portfolio construction and security selection are important in this uncertain environment. Though the downturn has reduced valuations broadly, an attractive price alone isn’t a good enough reason to buy. The question is whether low-priced securities are true opportunities or mistakes waiting to happen.
Though a passive approach may make strategic sense for certain aspects of our clients’ portfolios, we don’t think this is the right time to own the entire market. From here, we believe investors will differentiate on a security-by-security basis with a preference for higher quality, sustainable results and more attractive risk profiles. Therefore, we believe this is the time for active security selection and portfolio construction decisions.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.