March’s coronavirus crash hit the £821m BMO MM Navigator Distribution fund harder than most, with its managers conceding that no other event over their lengthy careers left them prepared for that particular sell-off.
The fund – which is run by Rob Burdett and Gary Potter’s longstanding multi-manager team – lost 17.58 per cent in March, making it the second-worst performer in the IA Mixed Investment 20-60% Shares sector.
Burdett and Potter are among the best-known multi-managers in the business and next year will mark 25 years of them working alongside each other. But Burdett said they were still blindsided by the crash, despite their years of experience.
Performance of fund vs sector in March
Source: FE Analytics
“Unfortunately, none of that really helped. March was our worst relative month ever. In pretty much every other bear market we've outperformed, especially in the sharp downward months,” the manager said.
“The overused ‘unprecedented’ word is hard to get away from when we look at the entire shutdown of an economy. And that clearly renders most of your diversification efforts worthless. In some ways, it exacerbates them.” 
This heavy underperformance is something of a rarity for BMO MM Navigator Distribution. On a 12-month rolling basis, calculated quarterly, the fund has only been in the bottom quartile four times – and all of these periods occurred in the fairly recent past.
What’s more, the relative return that hit the fund is by far the worst it has delivered since launch in October 2007. Its second-worst monthly underperformance was in August 2011, but then it lagged it average peer by just 2.2 per cent.
Burdett (pictured) said that March’s underperformance was down to several factors, but among the main ones were the underweights to government bonds and expensive growth stocks like the so-called FAANGs (Facebook, Amazon, Apple, Netflix and Google-parent Alphabet).
Both of these areas held up in the sell-off, while pretty much every other asset tanked. The manager said this meant that efforts to build a truly diversified portfolio essentially worked against the fund.
BMO MM Navigator Distribution’s 1yr rolling sector ranking
Source: FE Analytics
“Things like government bonds, with the UK 10-year gilt was yielding about 0.7 just before this crisis, are sort of uninvestable on a sensible risk-reward outlook,” he said.
“The only way you cannot lose money in government bonds over 10 years is through the ‘greater fool’ theory, or somebody else paying more for them later. And that is one of the few areas that went up dramatically in the crisis.
“We've also seen the sort of FAANG effects in the US and versions of that to a greater or lesser degree in other markets. [The market] was close to peak levels: whether it's value to growth, cyclicals to defensives, all these things are stretched. But although we try to have a balance of styles, unless you were all-in those areas, you were going to underperform.”
Other factors that impacted BMO MM Navigator in the sell-off include falling interest rates hampering the value investing style, widespread cuts from the biggest dividend payers in the market and an “absolute hammering” for some of the alternative income investment trusts it owns.
“Could we have done something different?” Burdett said. “We spent a lot of time looking at the virus outbreak in January. We concluded wrongly that it did show signs of following the pattern of SARS and bird flu. Clearly that turned out to be wrong.
“But in defence of our situation going in, we were already neutral equities with a balance of styles and in credit we didn't have any high yield direct exposure. We felt we were relatively conservatively positioned.
“What makes our fund for so poorly over the long term at the moment is a lot of things we've talked about in the crisis have been happening for a while – falling government bond yields, rising FAANG stocks and the like. Style diversification was a hindrance rather than a help. It has been a very binary market.
“The tidal wave of March washed over a lot of hard work and outperformance of the preceding 11 years, unfortunately. Our other funds have been less affected but the Distribution fund in particular has been in the eye of all of those storms.”
Performance of fund vs sector over one month
Source: FE Analytics
However, the fund has beaten its average peer in the IA Mixed Investment 20-60% Shares sector over the past three months, moving into the top quartile of the peer group, as the coronavirus recovery favoured areas other than quality-growth and government bonds.
“Things have got a lot better in relative performance but they need to continue for us to cover that gap,” Burdett said.
“But I think we've definitely seen the move to value come through. We've seen credit start to behave in various forms in a rational way. And I think a key area where active management should do well is bonds, where there is an asymmetric risk-reward.
“There's a bright future, I think, for diversification but we've got a lot of work to do to deal with the washback of the March hiatus.”
In coming articles, Trustnet will look at why the BMO multi-manager team is positive on the outlook for the value style and believes we are on the brink of having a “healthy” bond market after a decade of distortion, as well as the funds they hold in these areas.
“In terms of the future we're in an environment where these scenarios generally lead to some form of regime change, be it economically, fund management style, politically or in consumer attitudes and behaviours,” the manager said.
BMO MM Navigator has moved underweight equities as the team expects the markets to enter another volatile period in the not-too-distant future. Its managers noted that history suggests there are many more 3 per cent plus daily moves in markets in the year or so after a crash like we have just had.
“There's going to be a lot of noise,” Burdett finished.
“At the moment, the market seems to be totally sentiment-driven, certainly talking about equities. It wants to respond to loosening of lockdown, reduced infection rates, possible medical developments or extra government stimulus. It's taking all those positives as hopeful for the future.
“But it seems to have complete fatigue, ignorance or acceptance of big negative numbers in almost any data point. They've almost all been worse than even any prediction but the market is so much higher than it was three months ago.”