Building portfolios fit for purpose in a fast-changing world
In an uncertain global economic environment, investors should structure portfolios that can weather the storm of a changing investment landscape. “The world is in a permanent state of change, and instead of forecasting asset portfolio performance, we need to build investments fit for purpose,” says Adrian Saville, investment specialist at Genera Capital, and professor of economics, finance and strategy at the Gordon Institute of Business Science.
Speaking at the High Street Auctions networking brunch last week, Saville said preparedness was not about forecasting, but building investment portfolios that remained relevant to changing circumstances.
With global headwinds such as stubborn inflation likely to persist, investors and businesses would need to think differently about how to operate in a changing environment, he said.
To illustrate the changing world and how forecasting often misses the point, he said that at the beginning of 2020 no-one could have foreseen the effects of the Covid-19 pandemic. In 2021 inflation rose globally, and in 2022 and this year the Ukraine war and ChatGPT are buzzwords in the business and economic environment.
He said it was important to understand how economic indicators such as GDP, inflation and interest rates affected the performance of different asset classes. Equity earnings, for example, were driven by GDP growth, while inflation did serious damage to bonds. Drivers of listed property growth and earnings were similar to equities — these assets tended to favour low, stable inflation, and because property is a real tangible asset, it benefited from inflation.
FREE LUNCH
“Diversification is ‘ one free lunch’ in investing — hence it’s critical to build a basket of assets that behave differently to economic variables,” Saville said.
Regarding investment opportunities, it was wise to look at assets and geographies. Portfolios could include a bit of everything, including global bonds, equities, listed property and inflation-linked bonds.
He believed listed property, a powerful driver of returns for SA investors, had a place in any portfolio. The SA listed property index (SAPY) and the all-property index (ALPI) recorded total returns of 19.32% and 18.17% respectively in 2022.
Since the Covid-19 pandemic many funds have been selling noncore assets to reduce debt, strengthen balance sheets and rebalance portfolios.
Ian Anderson, portfolio manager at Merchant West Investments (formerly Counterpoint Asset Management), said in the past 20 years SA listed property had outperformed SA equities in terms of total annual returns. The sector’s current forward yield was 9.3% with a comparable yield of 11.1% and an average payout ratio of more than 83%.
Anderson said the sector should be able to cope well with higher interest rates and experience moderate growth in profits and dividends over the medium term, though these were unlikely to exceed inflation.
In Merchant West Investments ’ managed local and global portfolios Anderson said the relevance of assets was favoured over perceived quality. Locally managers liked convenience and neighbourhood retail as opposed to large shopping centres. Geographically, it continued to favour the Western Cape where it saw untapped opportunities.
Its SA portfolio comprises listed property funds including Accelerate, Delta, Dipula, Equites, Emira, Fairvest B, Safari, Spear Reit and Stor-Age.
Its global portfolio has investments in the UK, Europe and North America, with diversified assets including residential, retail, logistics, self-storage, healthcare, offices, towers and data centres.
“The SA listed property market is dominated by office and large malls, so to capture opportunities our portfolio needs to look very different to themarket composition,” Anderson said.
In SA, auctions have become popular platforms to buy and sell prime real estate as they generate demand from buyers, enabling the seller to take advantage of the best offer. Auctioneers say this drives up the price and ensures the best possible return for the seller.
“We are seeing an increase in property from individuals to listed funds transacting through auctions, andwith rising interest rates we expect this trend to continue,” High Street Auctions director Greg Dart said.
John Jack, CEO of Galetti Corporate Real Estate, said buyers generally sought properties where they could generate a yield upliftment, such as a retail centre with poor tenant mix and high vacancies. Investors could add value to these assets through refurbishments and tenant mix, and demand for space in these types of malls drove higher asking rentals.
“Supply still outweighs demand, hence buyers are on the hunt for vacant properties that they can purchase and occupy themselves. In future, once the market recovers, they should be able to generate a profit on this investment too,” Jack said.
Turning to JSE-listed stocks, Genera’s Saville said SA as a broad market was in fair-value territory — equities did not look overvalued and government bonds were attractively priced compared with other emerging market bonds.
In addition, he said, there had been a distinct bias in favour of large SA companies away from smaller ones.
Saville looks at infrastructure instead of cyclical drivers when structuring investment portfolios. SA has huge investment opportunities in infrastructure, hospitals and energy in the next 10 years.
Growing urbanisation and SA’s young population will continue to support a strong consumer market, making a case for investment opportunities.
However, he said load-shedding was a big risk for investment as it had increased the cost of doing business, making it difficult for some businesses to remain operational without alternative power.
Saville said the danger stemmed from what we had not seen, such as declining investment appetite, and he pointed out that the figures were substantial. He said SA needed clarity and consistency in policy implementation and the SA private sector had often shown that it remained a critical part of the solution.
He said the “six-pack ” factors for a growth model included markets with a culture of savings and investments, demography, policy and institutions, education, health and openness.
Investors should focus on effectively positioning portfolios in line with the changing investment landscape, which could still deliver returns, he said.
IT ’ S CRITICAL TO BUILD A BASKET OF ASSETS THAT BEHAVE DIFFERENTLY TO ECONOMIC VARIABLES
Adrian Saville
Genera, investment specialist