While markets have experienced significant ups and downs in the past, including the financial crisis more than 10 years ago, nothing could have prepared investors for the rollercoaster and uncertainty of 2020 as markets reacted to the coronavirus pandemic and lockdowns of economies across the globe.

The shock crash and surprisingly, rapid recovery have taught us valuable lessons to take with us as we make investment decisions and set our investment goals for 2021 and beyond.

Amplify Investment Partners highlights the most important lessons and how they will shape investment decisions in 2021.

  1. Ride the Storm

While the economic lockdown was arguably the most economically disastrous event in living memory, the JSE All Share Index and major global indices have recovered to similar, and in some cases, higher levels than before the crash started in mid-February, even though the pandemic continues to wreak havoc on economies.

“At the beginning of the crisis, the JSE, and most other markets, fell dramatically and there was a major sell-off across the board. But the recovery was relatively swift, and those who sold out into the decline made significant losses,” says Marthinus van der Nest, head of Amplify Investment Partners.

“While the extent and sustainability of the recovery remain unclear, equity markets have become increasingly resilient over the years and selected top portfolio managers, such as those who manage our funds, are more agile and capable of navigating any storm,” says van der Nest.

“Declining interest rates provided strong returns on bonds over the last six months; however, equities deliver the best prospects for inflation-beating growth over the long-term and continue to show that they weather storms.”

“As much as we keep saying that keeping a cool head is the cornerstone of investing, many investors act impulsively when faced with a crisis, believing that the current event is different to those of the past. 2020 showed us that even an event that takes down all economies simultaneously could be ridden out as equity markets are resilient, with agile and responsive fund managers who continue to find opportunities.”

The Amplify SCI* Defensive Balanced Fund, for example, has achieved CPI plus 3.14% since inception in 2014 over various economic cycles.

  1. Diversify

It is critically important to spread risk. Amplify believes multi-asset unit trusts continue to offer a wide choice, are easily accessible and are well-diversified as they are composed of a basket of equities, bonds and money market instruments. These should form the basis of an investment portfolio.

However, diversification is necessary to spread risk, and Amplify believes that hedge funds, which can make use of short-selling, leveraging, and derivatives, can provide superior risk-adjusted returns, especially during times of uncertainty.

Van der Nest says that long-only managers tend to perform poorly during events that create volatility when security prices are not aligned to fundamentals, as was evident this year. “This is why we also recommend including hedge funds in your investment portfolio. As these offer an additional source of diversification, significantly improving the overall risk profile of a broader portfolio,” he says. “Hedge fund managers can go long undervalued securities and short overvalued securities in equity or fixed income markets.”

An equally weighted portfolio of four of Amplify’s Fixed Income Hedge Funds returned 15.35% growth for the year to end-October 2020 against -7.12% for the JSE All Share index, and 2.72% in the All Bond index. Over three years, Amplify’s blended portfolio reported 13.23% annualised growth compared to the All Share’s -1.26 % growth and the All Bond’s growth of 8.49%.

Amplify has four retail hedge funds specialising in fixed income, and it is looking to add more during 2021.

  1. Keep Some Cash

Many people don’t keep cash reserves, and if they lose their job, or their business is not doing well, they are forced into knee-jerk reactions and selling investments at the worst possible time.

“We saw this with the lockdown when people suddenly found themselves with no cushion, and they sold at exactly the wrong time. As soon as they did not have a salary coming in or their business needed cashflow, they were in trouble. This could happen within days or weeks, and anyone needing to cash out during February and March would have made a substantial loss. But the recovery was sharp, and we are currently seeing similar levels to those prior to the declaration of a national disaster.”

“If they had three months’ worth of salary in cash, they could have ridden it out,” van der Nest says.

“When equities have just fallen 40%, you don’t want to be in a position where you are having to sell your unit trusts and then watch the market recover soon thereafter. If you can give yourself a bridge over a few months, you would not have made a huge financial mistake and your long-term investments would remain intact.”

Over the past five years, the conservative Amplify SCI* Strategic Income Fund has provided an annual return of 8.06% consistently beating cash by 1%.

  1. We Need to be Adaptable and Agile

Companies that pivoted and adapted during 2020 have survived, and people most able to adapt and be flexible have managed to weather the storm in terms of their jobs, their businesses, their mental strength and their capacity to help others.

During 2020, the top fund managers were those that successfully managed ongoing risks while taking advantage of the significant opportunities presented by the volatility.

As these opportunities are often presented in mispriced assets not available to larger managers, investors are increasingly relying on boutique managers that have a relatively large investible universe.

Investors should go into 2021 feeling secure that the people responsible for investing their money are agile and responsive to opportunities and that they react quickly to unexpected risks. “Our relative outperformance during 2020 indicates that our managers can move quickly in and out of positions and continue to outperform during black swan events such as coronavirus,” according to van der Nest.

Amplify relies on hand-picked next-generation top asset managers to manage its range of top-performing unit trusts and hedge funds and preserve and grow clients’ funds in order to secure their futures.

For example, the Amplify SCI* Balanced Fund took only 17 trading days to recover to its opening value at the beginning of crisis and continues to be a top quartile performer relative to its peers.

  1. Change what you Value

The pandemic has forced us to think about the economy we want to rebuild, and investors are increasingly questioning the investment practices of the past and re-evaluating the concept of meaningful contribution.

Given the uncertainty of the past months, people are becoming increasingly aware of the critical importance of growing their retirement savings, leaving a legacy and making a meaningful impact on surrounding communities.

“The pandemic has reminded us of how fragile we are, and I believe we will increasingly look at how we can combine economic growth with more resilient societies and a more sustainable environment.”

Amplify believes that saving for the future includes leaving a better world for the next generation, embodied in its support for conservation initiatives focusing on wildlife, and uplifting the communities living alongside these conservation areas.

“We help our clients save and prepare for the future and want to play a role to ensure the future is worth saving for. For us, saving for the future means leaving a better world for future generations.”

Van der Nest says: “We believe that when you know you are saving for a goal or purpose, you will be reluctant to sell out and will have a more level-headed and longer-term approach to your investment.

“We see the new year as a new opportunity to start preparing for a better future, taking the lessons we have learned to change what we value and act on that change.”