STAY CALM …

… and keep in­vest­ing

Financial Mail - Investors Monthly - - Contents -

In­vestors would have been per­fectly jus­ti­fied in throw­ing up their hands in de­spair at the be­gin­ning of the month. Pravin Gord­han had just been fired, and ratings agen­cies had down­graded the coun­try’s debt to junk.

Not even 18 months prior, the firing of Nh­lanhla Nene had sent mar­kets into a tail­spin, the rand had tanked and in­vestors had pan­icked.

What fate awaited SA in­vestors this time? An­other rand plum­met? How badly would the mar­kets re­act? If all the pre­dic­tions were to be be­lieved, a blood­bath was due.

Ex­cept that it wasn’t. There was pain, but less blood than ex­pected as the rand shed about 10% by the end of the first week in April. The JSE Alsi was ac­tu­ally up more than 1% in that same week.

The muted re­sponse to this lat­est cri­sis was sur­pris­ing. But based on re­cent global events and out­comes, who can say what “nor­mal” is any more?

“We shouldn’t have ex­pected a blood­bath,” says Peter Brooke, fund man­ager of the Old Mu­tual Flex­i­ble Fund. “The rea­son for that is there is the pos­si­bil­ity of a good out­come. Mar­kets are look­ing for­ward and say­ing, ac­tu­ally this could re­sult in change, and change is good news.

“If you look at Brazil as a case study for that, in­vestors have learnt that buy­ing Brazil ahead of Pres­i­dent Dilma Rouss­eff’s im­peach­ment was a very good in­vest­ment.”

The muted mar­ket re­ac­tion is in an­tic­i­pa­tion of a “good” out­come. Brooke says we are at a cross­roads, with the high road lead­ing to change and pros­per­ity, and the low road to de­cline and de­spair.

Should we spi­ral into greater fis­cal and eco­nomic trouble, Brooke says it would be pru­dent to have max­i­mum off­shore ex­po­sure in in­fla­tion­pro­tected as­sets. In the op­po­site sce­nario, the fo­cus should be on lo­cal as­sets in­clud­ing bonds, prop­erty and banks.

While this advice makes per­fect sense, it also il­lus­trates the two ex­tremes that in­vestors face. Find­ing the right mix to achieve a bal­ance is giv­ing in­vestors the jitters.

The pop­u­lar­ity of bal­anced and multi-as­set funds is ev­i­dence of the de­fen­sive shift. The As­so­ci­a­tion for Sav­ings & In­vest­ment SA says as at the end of 2016, multi-as­set port­fo­lios made up 51% of all as­sets in­vested in the lo­cal col­lec­tive in­vest­ment schemes in­dus­try. This was fol­lowed by eq­uity port­fo­lios (in­clud­ing real es­tate) 24%, money mar­ket port­fo­lios 16%, and other in­ter­est-bear­ing port­fo­lios 9%.

Mark Ap­ple­ton, head of SA strat­egy and multi-as­set man­age­ment at Ash­bur­ton In­vest­ments, says the econ­omy is cur­rently vul­ner­a­ble. So the firm has re­duced its ex­po­sure to lo­cal fixed in­ter­est prod­ucts from a pre­vi­ously over­weight po­si­tion, as a pre­cau­tion.

“We’ve been re-em­pha­sis­ing our con­ser­va­tive ap­proach be­cause the event risks are still quite high,” Ap­ple­ton says. “We have the ANC elec­tive and pol­icy con­fer­ences com­ing up, and there are global threats. So there’s still a lot of un­cer­tainty.”

In­vestors’ re­ac­tion to this is marked by two dis­tinct events. The first was the knee-jerk re­ac­tion af­ter Nene’s firing that led to money be­ing off­loaded into off­shore ac­counts or in­vest­ments. The sec­ond is the steady shift to more de­fen­sive po­si­tions in the likes of bal­anced funds.

Izak Oden­daal, in­vest­ment strate­gist at Old Mu­tual Mul­ti­man­agers, says this shift has been both clear and pru­dent.

“I think there is some evi- dence in the growth of mul­ti­as­set funds that in­vestors are tak­ing the di­ver­si­fi­ca­tion mes­sage to heart,” he says.

This de­fen­sive ap­proach is the cor­rect one, though Oden­daal says un­cer­tainty of some sort has al­ways been ev­i­dent in the coun­try’s his­tory.

“It feels very un­cer­tain now, but if you look at the re­turns of the all share in­dex over the past 15 years and plot the big geopo­lit­i­cal events, it’s clear that un­cer­tainty is not new. If you think this is bad, the 1980s were a lot worse. That is part and par­cel of in­vest­ing.”

He jok­ingly points out that in­vestors have had their share of cat­a­clysmic events over the past two years to gain some ex­pe­ri­ence in deal­ing with the coun­try’s cur­rent trou­bles.

This ap­pears to be the ap­proach his team is tak­ing. Rather than mak­ing rash de­ci­sions in the wake of the down­grade, they have been mulling over the im­pli­ca­tions.

In­vest­ment pro­fes­sion­als, he says, have this lux­ury (and the proven pro­cesses and an­a­lyt­i­cal tools) to make a ra­tional de­ci­sion de­spite ex­pe­ri­enc­ing the same emo­tional re­ac­tion to events such as the down­grade.

“It’s a case of look­ing at the is­sues as coolly and ra­tio­nally as pos­si­ble. In­di­vid­u­als act­ing on their own don’t have the same frame­work or guide­lines. But, hope­fully, the mes­sage has sunk in that you need to take a long-term view and stick to your fi­nan­cial plan.”

This idea of stick­ing to a plan is echoed by PSG As­set Man­age­ment CEO Anet Ah­ern. She says that hav­ing a di­ver­si­fied port­fo­lio and act­ing calmly are the keys to rid­ing out dis­rup­tive events

“For in­vestors, di­ver­si­fi­ca­tion means they should have ex­po­sure to global mar­kets, as well as across dif­fer­ent as­set classes, sec­tors and even across dif­fer­ent as­set man­agers,” she says.

Anet Ah­ern… rid­ing out dis­rup­tion

Mark Ap­ple­ton … con­ser­va­tive

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