3 steps to pandemic-proof your portfolio

The pandemic has turned many portfolios topsy-turvy. But as investors, we have the chance to right the ship.

Taking a good look at your stocks is a good place to start.

Some may have done well, others may not.

But what used to be a promising stock may turn out to be a dud, as the disease alters human habits and practices.

Some of these, such as social distancing, may be temporary.

But others, such as the need to continually clean and disinfect surfaces, or working from home, may well be permanent.

With these changes in the way industries and supply chains function, you may also have to revisit the investment theses of the companies you purchased.

It was impossible to predict the extent that the pandemic will change our lives.

But what we can do, as investors, is to ensure we are ready if any kind of crisis hits.

In other words, we need to be prepared and ready in case a swift, sudden downturn occurs.

Here are three steps you can take to pandemic-proof your portfolio.

Diversification

It’s important to ensure your portfolio is not too concentrated in just a few industries.

As the pandemic has shown, some industries have been badly hit while others have not only survived but have thrived as well.

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For instance, if your portfolio was mainly centred around hotels, tourism or airlines, it would suffer a sharp decline as these industries are directly impacted by lockdowns and border closures.

But, if your portfolio also contained essential services companies such as Sheng Siong Group Ltd, healthcare glove companies such as Riverstone Holdings Limited, or financial companies such as iFAST Corporation Limited, then these would provide some buffer.

By owning a wide swath of industries, not only are you exposed to growth trends that are present in multiple sectors, but you also protect your portfolio’s performance in the event of a crisis.

Meanwhile, sectors such as electronics continue to post decent growth despite the pandemic.

Companies such as UMS Holdings Limited and AEM Holdings Ltd continue to report rising profits.

Stick to conservative companies

During good times, it may be tempting to chase companies that take on tons of debt to grow.

However, this pandemic has shown that demand can dry up suddenly, leaving debt-laden businesses with a ton of loans to service amid dwindling cash flow.

Many of the oil and gas companies had taken on massive loans to sustain their operations, leaving them floundering when oil prices crashed back in April.

Companies that are managed prudently, with large cash reserves and little debt, have a much better chance of riding through the pandemic unscathed.

Take Boustead Singapore Limited for instance.

The engineering conglomerate was never one for fanfare. Neither did it manage a business that was deemed sexy or interesting.

However, the group did have total cash of $281.7 million on its balance sheet at the end of its fiscal year 2020, against total debt of $119 million.

If we add in highly-liquid investments amounted to around $18.3 million, cash and investments will total roughly $181 million.

$181 million constitutes around 50 per cent of the Boustead’s market capitalisation of $360 million, allowing the group to confidently tide through the pandemic without much worry.

Track record matters

It’s also instructive to observe how companies had managed previous downturns, and what they have learnt from them.

A good track record gives investors the confidence that the company can tide through another crisis.

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Of course, a company must have been listed for at least a decade to be able to observe how it had managed the adverse conditions during The Great Recession in 2009.

The local banks , for instance, managed to hold their own and emerged from that crisis even stronger than before.

Well-managed REITs such as Frasers Centrepoint Trust  and CapitaLand Mall Trust  also emerged unscathed from the last crisis.

These retail REITs had to cut their distributions to fund tenant support measures, but this should be a temporary phenomenon as their occupancy and rental rates are still holding up during the pandemic.

Get smart: Remain calm and keep investing

The above steps are some of the ways you can protect your portfolio when a pandemic hits.

Granted, the portfolio may still suffer some level of loss, and some companies may inevitably have to slash dividends to conserve cash.

But as long as you’ve set your portfolio up properly, these losses will be temporary as sentiment drives share prices in the short-term.

Just remember to keep calm and carry on investing.

It is, after all, a marathon, and not a sprint.

This article was first published in The Smart Investor. Disclaimer: Royston Yang owns shares in iFAST Corporation Limited and Boustead Singapore Limited.