How have Asset Managers followed their Investment Strategy before, during, and after Covid-19?

The market volatility during the COVID-19 crisis was unprecedented. It not only revealed areas that could be improved, but it also highlighted tactics and practices that active Investment Managers could utilize with the help of digital and advanced technologies to become more responsive and resilient.

The use of automation and how it has been deployed to help investment companies manage and stress test their portfolios can’t be overstated in a volatile year. Excel sheets and old methods have proven to be unsustainable. In a new modern world, automation is now the norm and business processes need to serve clients on their terms in the future.

As part of their transition to more streamlined cross-border operations, Luminor, the third-largest provider of financial services in the Baltics, recently announced a technology partnership with FA Solutions for its Asset & Pension Fund business segment. We had the opportunity to sit down with Tarass Buka, CFA, Luminor Asset Management IPAS Fund manager, to talk about how COVID-19 has changed investment strategies in the Baltics.

“Given how turbulent 2020 was, we made no major strategic changes to our investment strategies – we are continuing to offer pension funds with varying expected returns and levels of risk, suitable for clients with varying risk appetite and of different age groups.
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We have, however, made a number of tactical moves in how we manage our portfolios.”
Tarass Buka, CFA, Luminor Asset Management IPAS Fund manager

What were the pre-COVID-19 investment trends that changed in 2020?

Before 2020, the acceleration of longer-term trends such as falling yields, and the outperformance of big tech names in the Developed Markets equity were already ongoing. For example, Amazon and Apple stocks were up more than 75% in 2020.

Given how turbulent 2020 was, we made no major strategic changes to our investment strategies – we are continuing to offer pension funds with varying expected returns and levels of risk, suitable for clients with varying risk appetite and of different age groups. Because of the rigorous process, we go through when selecting the appropriate risk level for our clients, we believe that short-term market volatility is not a good enough reason to make changes to long-term investment strategies.

We have, however, made a number of tactical moves in how we manage our portfolios.

How have you rebalanced your portfolios during the pandemic?

As active managers, we were on the watch to protect portfolios against heightened volatility and did rebalance the portfolios to reduce the risk at the beginning of 2020 and later this year to gradually add the risk back as markets started the recovery and continued improving.

Additionally, COVID-19 has accelerated the need for the automation of portfolio management. Without the appropriate tools in place, rebalancing using old methods such as Excel would be too cumbersome and take far too long. The use of automation also helps us to treat each and every client with much more parity, as by automatically rebalancing all of the accounts at the same time, there’s no queue system that may impact the performance of the funds.

We are not yet completely out of the woods yet in terms of Covid-19’s impact on the markets, but the markets recovered from the negative feedback loop which drove prices so much lower in March 2020. Later in 2020, we started seeing the impact of the evolving situation on the results of the companies (and the prices of their stocks) and global economies and societies, and the initial uncertainty of “unknown unknown” slowly transformed into “known unknown”, with obvious and not so obvious multiple risks on the horizon but markets seemingly looking through the near-term into more distant future and pricing in much better outcomes than in the midst of the March 2020 turbulence.

How are you seeing the future of the investment strategies (among all the black swan events and in general)?

In pension investments, nothing will replace the discipline of having a clear strategy and sticking to it. Going forward I see the reduced role of fixed-income investments, both as yield and risk hedging instruments, with equity investments and non-listed alternative investments also becoming more important in the strategic allocations of the professionally managed portfolios.

How much does the rebalancing function with an automated platform optimize your work?

I have been using the FA Platform to fully manage funds since the beginning of the last year, with the rebalancing module being one of my favorite tools. By taking steps to fully set up this functionality, I can now clearly separate the various levels of investment decisions – both selection (i.e. choosing the most appropriate instruments) and allocation (choosing the right level of risk for the portfolio and its components) and quickly implement investment decisions to the portfolios.

"I have been using the FA Platform to fully manage funds since the beginning of the last year, with the rebalancing module being one of my favorite tools."
Tarass Buka, CFA, Luminor Asset Management IPAS Fund manager

What do you have to consider in order to succeed in the future?

When it comes to markets at a high level, I subscribe to the theory advocated by Andrew Lo, who says that markets are neither rational nor irrational, but are adaptive. Things that worked yesterday will not work tomorrow and the other way round as markets continue evolving. Therefore it is crucial to stay open-minded, willing to challenge both conventional wisdom and one’s own biases while maintaining discipline and objectivity.