It's been about one year since global financial markets went into a freefall following the collapse of Lehman Brothers in mid-September 2008. Equities around the world plunged until early March 2009, when they abruptly changed course and started a remarkable recovery. Similarly, most global fixed income sectors tumbled until late 2008 or early 2009 and then unexpectedly rallied as government measures to increase lending activity began to work.
T. Rowe Price recently assembled a panel of portfolio managers to offer their thoughts about what lessons investors and investment professionals have learned from the past year’s events and to discuss strategies in each of their portfolios. The panelists were Bob Smith, manager of the International Stock Fund; Steve Huber, manager of the Strategic Income Fund; and Jeff Arricale, manager of the Financial Services Fund.
To gain insights from each portfolio manager’s point of view on last year’s financial meltdown, watch the video.
Each portfolio manager agreed that individual investors and financial professionals alike were surprised by the severity of the market downturn. Nevertheless, they advise investors to stick with their long-term investing strategies and not let emotions dictate their investment decisions.
Looking back at how dramatically non-U.S. equities have rebounded in 2009, Smith notes, “It would have been devastating to have pulled back risk [i.e., move out of higher-return/higher-risk positions] at the wrong time in any of our portfolios.” He suggests holding onto those investments in which you have the highest conviction during difficult periods for the market, rather than letting poor market sentiment push you to the sidelines and prevent you from participating in any upturn.
Huber offers the perspective of a fixed income portfolio manager who last fall saw credit spreads—the differences between yields of U.S. Treasuries and yields of fixed income securities that have credit risks—widen to historic levels as lending activity between financial institutions ground to a halt. As credit spreads have narrowed significantly in 2009, Huber looks back and offers two crucial lessons: First, it isn’t enough to rely exclusively on risk models when managing a fixed income portfolio. “I think a lesson coming out of this is the importance of having judgment or a subjective overlay on top of any risk models.” Second, he says liquidity—the ability to sell a security in a given market—matters more than most people thought.
Arricale’s portfolio of financial services companies has endured perhaps the most severe equity market volatility over the last year. Financials suffered significantly after Lehman Brothers collapsed, but they rebounded the most since early March 2009. He suggests investors look carefully at what history tells us about periods of extreme sentiment, “It almost always pays to be optimistic when everyone else is wildly pessimistic, and vice versa.” He also notes that diversification, rebalancing, and dollar cost averaging are very important tools to help investors cope with market volatility.
While the equity and fixed income markets have shown great improvements since early this year, Smith, Huber, and Arricale still see attractive valuations in their respective markets. They describe how their funds navigated through the crisis and how they are now positioning for opportunities ahead. Watch the video.
Each of the portfolio managers sees good reasons to be optimistic. Smith and Arricale point to current liquidity as a strong driver of equities. “There’s a lot of money that’s in safe places that will find itself in higher-risk, higher-reward assets,” says Smith. In the fixed income markets, Huber also sees liquidity playing a positive role: “Short-term liquidity will just drive returns; it should be very positive for returns.”
All funds are subject to market risk, including possible loss of principal.
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