Building a Portfolio with Resilience in Mind

Resilience

/rɪˈzɪlɪəns/

noun

1. The capacity to recover quickly from difficulties; toughness.

“the often remarkable resilience of so many Australian institutions”

2. The ability of a substance or object to spring back into shape; elasticity.

“nylon is excellent in wearability, abrasion resistance and resilience”

In this recent Australian company reporting season, it was clear to me that the “IN” word used most often by CEOs and CFOs was resilience. Supply chain resilience. Staff resilience. Balance sheet resilience. etc etc. This gave way to much thought about portfolio resilience, what does it mean, how can I insert investment resilience into my investment portfolios? So the next day I forged a bee line to our portfolio managers and asked a few questions: outside the tried and tested diversification argument, what does a resilient investment portfolio mean to you? How does this play out in your eInvest portfolio?

Emilie O’Neill, Deputy PM for eInvest Future Impact Small Caps Fund (Managed Fund) ASX:IMPQ, had some great takeaways about her views of resilience from an investment perspective.

“Resilience is about backing companies with great management teams who can take calculated risks, manage headwinds and make the appropriate strategic decisions for the benefit of long term shareholders” defines Emilie.

She goes on, “Companies in structural growth industries will be more resilient than those in industries facing structural decline – for example, fossil fuel and carbon intensive industries will face regulatory, social and investor pressure”.

I could not agree more. Choosing what not to invest in is probably more important that choosing what to invest in to ensure preservation of capital. Investing in growth industries will also increase the “elasticity” (as defined above) of the portfolio and its ability to bounce back after market hiccups along the way.

Emilie reminds us: “One benefit of active management is the ability to pivot into opportunities as they arise or being able to navigate a changing market, economic tilts or stock specific risks – accessing an investment professional who is able to construct a more resilient portfolio as outlooks and risk curves change over time, is important to increasing the resilience of your own portfolio.”

Indeed, the very nature of active management is the ability to take advantage of opportunities, rebound and alter paths from buoyant or even challenging markets to invest elsewhere or have higher (or lower) conviction in companies than what their market cap states. As the definition of resilience states above, this ability to alter tact can mean that your portfolio can spring back into shape over time.

Justin and Mark, PMs for ECAS, ECOR and EMAX

Obviously bond investors see the world in a slightly different way to equity investors and when asking Mark and Justin’s view of portfolio resilience, it is clear there is a slightly different take on it than what Emilie discussed above.

“Investment resilience is a portfolio that participates as fully as possible in equity upside while limiting drawdowns. In practice, this means focusing really heavily on and diversifying your downside risk” confirms Justin.

Mark echoes this view and adds “High levels of information integrity and transparency help to limit any opportunity for negative surprises and increases portfolio resilience. This is one of the most important goals in our fixed income portfolios”.

Adding the “toughness” (as defined above) into your portfolio is critical to investment resilience. As bond investors, downside risk is their single focus – Mark and Justin are constantly asking themselves what is the possibility of a coupon not being paid or even a major default? Why would this happen? What information do I need to determine this? Does this company provide me transparency to determine this? How do I limit this risk to the highest degree?

And indeed, how do we, eInvest, provide transparency to our clients so that they have conviction in our portfolios to determine their own portfolio toughness? At eInvest we aim to do this in spades by such things as portfolio disclosure, INAVs provided at 1 second, performance numbers, written commentary each month, many articles such as this that can provide you with the upmost conviction.

So what have I learnt about portfolio resilience after talking with our Portfolio Managers?

Elasticity and toughness. The ability to bounce back and recover quickly from difficulties. So ask yourself, does your portfolio have elasticity and toughness? Does your investment portfolio have resilience?

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