It’s been 20 years since the bursting of dotcom bubble and during that time global markets have gone through two more big crashes: the 2008 financial crisis and the ongoing coronavirus crisis.
But what investing lessons should be taken from them?
Trustnet asked managers who have steered a fund through all three crashes for the lessons they’ve learnt from managing money during the biggest financial downturns in history.
“At the end of the day, you need diversification”
First is Aberdeen Standard Investment’s Harry Nimmo, who has managed his ASI UK Smaller Companies fund since 1997.
A veteran of the UK small-cap space, Nimmo said a lot of his peers “kind of lost their heads” during the dotcom bubble, trying to keep pace with the demand for US internet names.
According to Nimmo (pictured), the frenzied popularity of unproven but popular US internet-technology stocks made fund managers forget the first rule of investing: diversification.
“They basically turned their small-cap funds into technology funds or TMT [technology, media and telecommunications] funds. And they just lost their heads. They’d have 70-80 per cent of their assets in technology stocks in one state or another,” he said.
“So, I think that, at the end of the day you do need some diversification in your portfolio. Kind of rule number one but some managers forgot it at that stage. Diversification is important.
“You do need to have diverse portfolios and it’s a danger not to.”
“Don’t buy ‘blue sky companies’”
Having worked through the dotcom crisis and seeing the mistakes his peers made, Nimmo said one rule he consequentially brought into his investment process was “don’t buy ‘blue sky companies’”. 
“Companies that are based on an idea and don’t even have any revenues or anything like that are just an idea. I think they’re pretty dangerous actually. When the market goes against them they can fall to precipitous rates and become penny shares, or worse,” he warned.
Nimmo uses his Matrix investment tool to help find companies with high-quality characteristics operating in growth markets with a positive business momentum, thereby avoiding these unproven companies.
“I prefer to invest in proven models than blue sky companies,” he said.
Be wary of high valuations
One of the main characteristics of these ‘blue sky companies’ is that some investors can be willing to pay high valuations for them. This is something which Franklin Templeton Investments’ Colin Morton believes is a risky investment practice.
Morton, manager of the £810.9m Franklin UK Equity Income fund and the longest-serving manager in the IA UK Equity Income sector, said one of the lessons he’s learnt is the danger of paying high valuations and being caught out when they correct to a normal level.
And it’s something worth bearing in mind during the current crisis, he added, since US tech stocks are again at record highs.
“One of the big lessons of both of those crises - dotcom bubble and 2008 - was paying a lot of money for stocks,” Morton (pictured) said.
“In the dotcom bubble in particular, you had a lot of relatively unproven companies trading on incredibly high ratings and obviously when that all ended you ended up losing a lot of money
“The tech bubble proved that the majority of those companies ended up losing you lots and lots of money when the music stopped. And that hasn’t happened yet, but we’re seeing these new all-time highs and everything that’s going on.”
Morton caveated that a key difference between the dotcom and coronavirus crisis is that the tech companies with high valuations today, like Microsoft or Apple, are not ‘unproven companies’. Indeed, they’re quite the opposite and these high valuation companies have been some of the most successful the past few months, he noted. 
But this doesn’t mean it’s a sensible thing to be paying 30,40 or 50 times earnings, if the past is anything to go by, Morton said.
“That’s something which comes back to being very painful when you’ve done that,” he said.
“When that music stops and you end up having paid lots amounts of huge valuations for companies, if they just come back to more normal valuations it can lose you a lot of money.”
“Liquidity, liquidity, liquidity”
One final truism to managing money through all three of these crises has been investing in liquid assets, according to several fund managers.
Liontrust’s Robin Geffen, Invesco’s Paul Causer and Paul Read, Aegon’s Colin Finlayson and Premier Miton Investors’ David Hambidge all said that liquidity was essential for navigating a crisis.
Geffen (pictured) managed his Liontrust Balanced fund through all three crises and said: “The three lessons I have learnt are liquidity, liquidity, liquidity. Every crisis I have been through emphasises the importance of investing in liquid stocks.
“During the bursting of the dotcom bubble, the global financial crisis and the Covid-19 pandemic, liquidity dried up in parts of the small and mid-cap markets. “
Hambidge, who heads up Premier Miton Investors’ multi-manager team, added that one thing investors need to do is not panic.
“Accept that financial markets can be irrational at times and that there can often be a disconnect between the fundamental value of an asset and the quoted price,” he explained. 
“Make sure that your portfolios have plenty of liquidity and that you remain committed to managing each mandate in line with its stated objective.”
Hambidge said he had applied his own advice to the £1.2bn Premier Multi-Asset Distribution fund at the start of the coronavirus crisis, quickly raising cash in late February/early March.
“Although, with the benefit of hindsight, we could have raised more,” he said.
“However, by the end of March, we had re-invested the majority back into corporate bonds and other credit strategies. This has worked out very well for both income and total return investors.”
This isn’t just important for equity investors, but bond portfolios too, according to Finlayson.
Liquidity is also important for bond investors. Finlayson, manager of the Aegon Absolute Return Bond fund, said: “The key lesson I learned is to stay liquid.
“Liquidity is always important for bond funds and by holding tradable, liquid assets in a crisis, you are much better placed to manage cashflows and take advantage of the opportunities that the crisis brings. Markets tend to overshoot and its key to able to take advantage of this.”
Causer and Read, who run the Invesco Corporate Bond fund, seconded this: “The lesson is, that as worrying as each of those crises felt at the time, they have also been the periods of greatest opportunity.
“What was critical was that you were not taking excessive risk going into those crises and that you had liquidity to deploy.”