From adversity comes strength: Product evolution in a COVID-19 world

Thursday 2nd April 2020 Penny Pryor

As markets have capitulated over the past month, and investors struggle to keep their heads above water, many are desperately seeking investments with the potential to offer security during such an insecure time.

Volatility as an asset class

With all global equity markets and most asset classes being impacted, many investors have turned to cash as a safe haven. However, there are other opportunities that can offer investors some sanctuary and even potential for positive returns.

“If you think about volatility, if you can consider it as an asset class, it’s certainly a great opportunity to be harvesting that and be generating a real return from the volatility,” Wheelhouse Partners, managing director and portfolio manager, Alastair MacLeod (pictured), says.

“The more of that you can capture, you are much better placed than most other asset classes.”

Wheelhouse uses systematic option selling strategies, or a Buy-Write trading strategy, in which an investor buys a stock, which has options traded on it, and sells a call option on the same stock. If the stock falls in value, the income received from selling the option defends against losses.

“At the moment we are receiving about 5 per cent a month for every option that we are selling,” MacLeod says.

Given that the current volatility is expected to be around for some time, MacLoad expects other players to consider offering similar investment opportunities.

“I wouldn’t be surprised if people look at our performance an think well actually these conditions are going to be around for a while [and consider this strategy],” he says.

Social opportunities

Volatility is not the only ‘asset class’ that may do well out of the crisis. COVID19 is expected to create new models for just about every aspect of our lives.

First Sentier Investors recently appointed head of investment product, Hendrie Koster, says that what’s really telling about the current pandemic is that it is truly global in nature and directly impacts every single person. (Read our Q&A with Koster here.)

“It does not differentiate between developed and emerging markets, the rich or the poor,” he says. In some early thoughts on potential investment opportunities, he says that responsible investment may have a big role to play in terms of a heightened societal impact on populations around the world.

“This potentially creates opportunities for investment solutions that directly aim to address the ‘Social’ in ESG,” Koster says.

In fact, a recent survey commissioned by the Responsible Investment Association Australasia (RIAA) found that that 9 in 10 Australians believe our finance sector has a role to play in generating positive social, environmental and economic outcomes for the country.

“The COVID-19 crisis is reinforcing how interconnected our societal wellbeing is with business and our economy. It’s no longer acceptable for a company to single-mindedly safeguard its profits to the detriment of its staff, the community, or our environment” Simon O’Connor, RIAA chief executive officer said.

Investment managers will have a very important role to play in rebuilding our economy and society, both during and after COVID-19.

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