Investor Message February 2020

Feb 25, 2020

Dear Valued Client:

Financial markets have come under pressure as they assess the impact of the coronavirus (COVID-19) outbreak. We wanted to take a moment to share our thoughts on the current market activity, provide perspective on this recent volatility, and invite you to contact us for additional discussion. As of today, the major U.S. indices have retreated ~6% from historical highs. To provide some context, however, this drop follows the 200%+ advance U.S. stocks have posted over the last decade and the 30% return of 2019. As we have discussed many times, market volatility such as we are currently experiencing is quite common. Historically, corrections of 10% or more occur about once every eight months. We have had sixteen such declines since the Great Recession of 2008-09.

Although new information on the coronavirus continues to arrive daily, the peak magnitude of the epidemic and the full extent of the economic implications are still unknowable at this point. The number of reported coronavirus cases is rising outside of China, with the disease now having spread to approximately 30 countries. Meanwhile, in China, recent evidence suggests that the growth of the epidemic may have begun to abate, and some production has come back online.

Many comparisons have been made between the current outbreak and the SARS (Severe Acute Respiratory Syndrome) epidemic in 2003. Many consider coronavirus to be more prolific than SARS was, increasing the likelihood that it will persist for much longer. It is highly contagious and has a long asymptomatic incubation period of up to 14 days. By contrast, SARS could only be spread to others after symptoms appeared, making it less likely to be unwittingly transmitted.

Despite the number of variables regarding the coronavirus that continue to perplex the global medical community, the IMF forecasts the global impact of the coronavirus to be minimal, shaving off an estimated 0.1% from international activity. The drag to China’s economy (which represents 16% of global gross domestic product (GDP) is projected by the IMF to be four times that level, reducing growth for the Chinese economy to 5.6%. Other estimates have projected a more sizable 1% cut to China’s growth from 6% to 5% in Q1. Even these more gloomy estimates do no translate into a global recession.

The markets, however, are reacting to more pessimistic forecasts focused on the size and global reach of China’s economy, as well as its integral role in global supply chains. In just the few weeks since the outbreak of the coronavirus, supply chains have begun to feel the effects of factory shutdowns in China. We suspect that many companies, from diverse industries and countries around the world, will report reduced revenue and profits during the affected period. As a result, we can expect that market volatility will persist until we have greater evidence of containment.

As with every significant market event, the latest weakness provides anxiety, but also opportunity which we hope to use to our advantage. Many of you have heard us say that ‘stocks are the only things that people don’t like to buy on sale.’ For the time being, we believe the prudent strategy is to monitor the situation and not become embroiled in emotional selling. We are fortunate that we have been reserving some excess cash in the portfolio in advance of days like these. As always, we will continue to review your portfolio holdings, and raise additional cash if appropriate, while looking for more attractive entry points.

If you would like to speak about your particular situation in greater detail, please do not hesitate to reach out to me or any member of the team. We are here to help provide as much clarity as possible.

As always, Thank you,

Thomas S. Kim, CFA Managing Partner & Chief Investment Officer