The first quarter of 2020 was startling in so many ways, but mostly in the sudden manner in which our lives have changed on both a professional and personal basis.  Stepping back for a moment, Cambiar Investors would like to extend our best wishes to all of our clients and partners; the focus on numbers and financial statements can sometimes obscure the fact that this is also a people business.  We hope you and your families are staying safe in these uncertain times, and to those who experienced personal loss in the current health pandemic, please accept our heartfelt condolences.

After hitting an all-time high in February, the S&P 500 Index went into a tailspin during the second half of the quarter – falling 24% from its high-water mark and posting a return of -19.6% for 1Q.  The catalyst for the sell-off in all risk assets was rising concerns regarding the COVID-19 health pandemic.  Market participants have had to quickly shift their mindset from guessing when the bull market will end to now thinking about when the bear market will end.  The rapid monetary and fiscal responses from the government and central banks provided much-needed liquidity to mitigate additional losses (particularly in the credit market).  Yet questions remain on whether these actions will be sufficient, with a strong likelihood that additional stimulus measures will be forthcoming.

Bear markets typically come in one of three forms: event-driven, cyclical, or structural.  The current period is an event-driven bear market, with the coronavirus as the obvious spark.  There may also be some cyclical underpinnings to this bear market, as it is taking place in the latter stages of a long economic cycle.  Unlike a market correction that is relatively shallow in magnitude and shorter in duration, bear markets can be much more disorderly and volatile, as the move to the sidelines results in reflexive selling activity.

Recognizing that no two bear markets are alike, the ‘good’ news with an event-driven bear market is that they typically tend to be faster in/faster out in nature.  Although the extent of the current contraction is still unknown, many strategists are calling for a rebound in global growth for the second half of 2020, and a continuing re-normalization of economic activity in 2021.  Cambiar generally agrees with this outlook, although our efforts remain more focused at the company level, vs. calling the market bottom.  It is clear the world is very much on the timeline of the COVID-19 virus.  As such, a stabilization in new patient cases will be an important marker for investor sentiment, while recognizing that the economic fallout in the form of lost jobs and shuttered businesses will continue to linger.

So how does one navigate a bear market?  One observation is that the quality of price signals in panic markets is inherently poor – with moves to the downside (and upside) exacerbated by a more indexed market structure.  Given the wide dispersion of stock returns that accompany a bear market, the current environment provides a significant opportunity for active managers such as Cambiar.  The objective at Cambiar is not to jump at those names that have incurred the biggest price dislocations.  Rather, we are looking to ‘quality up’ the portfolios in select companies that had been previously unattainable for valuation reasons.

Recognizing the step back in investors’ account valuations, Cambiar believes that staying the course remains the prudent choice for long-term investors.  While never pleasant, the retracement in stocks brings with it some silver linings.  The reflexive selling in the markets results in a well-stocked shopping cart of potential investment opportunities for the Cambiar strategies.  The bear market may also trigger a re-evaluation of investors’ passive investment allocations.  Passive vehicles provided a low cost alternative to participate in the rising tide market environment over the past 11+ years; however, these strategies also guarantee that investors participate in 100% of the downside as well.  Cambiar is working hard to provide protection of principal during the current decline, as well as positioning our portfolios to participate in the eventual recovery.  Cambiar’s domestic strategies posted solid margins of outperformance against their benchmarks in the quarter, and although the excess return is on a relative basis, we believe that digging shallower holes in downturns is critical to generating strong returns over a cycle..