An an­swer to the mas­sive South African eq­uity volatil­ity

The Old Mu­tual Max­i­mum Re­turn Fund of Funds is an op­tion for those in­vestors who are sav­ing for a long-term goal.

Finweek English Edition - - FUNDFOCUS -

of the big­gest dif­fi­cul­ties for many in­vestors to­day is the abil­ity to man­age their per­sonal port­fo­lios ef­fec­tively in the face of enor­mous global share mar­ket volatil­ity, mas­sive com­mod­ity and cur­rency swings, and economies verg­ing on re­ces­sion.

Another ma­jor con­cern, says Peter Brooke, head of Old Mu­tual In­vest­ment Group’s MacroSo­lu­tions bou­tique, is that the South African eq­uity mar­ket is par­tic­u­larly vul­ner­a­ble to global events.

“As a small open econ­omy with one of the most liq­uid emerg­ing-mar­ket cur­ren­cies, we are like a cork in the ocean. Wors­en­ing our volatil­ity is the make-up of our mar­ket with a very large re­source com­po­nent and large lo­cally listed global stocks. Even gold shares have dis­played moves of over 500%.

“Volatil­ity on the JSE dur­ing the past six months, in fact, has been higher than it has ever been his­tor­i­cally. What we cur­rently see on a daily ba­sis, we once ex­pected to see in a month, and what we see in a month, we once ex­pected to see in a year.” When he talks about volatil­ity he is re­fer­ring to “cross-sec­tional dis­per­sion”, mean­ing volatil­ity be­tween dif­fer­ent shares rather than the mar­ket as a whole.

Brooke states that mar­ket sta­bil­ity is not likely to come im­me­di­ately from strength in the global econ­omy. “Growth is not that strong that it can break into sus­tain­able growth, but there is enough global liq­uid­ity in­jec­tion that it will not lapse into re­ces­sion. This is likely to con­tinue for the fore­see­able fu­ture. One can see from the bond mar­ket that in­vestors are not ex­pect­ing much im­proved growth.

“The fact that global growth is lower means the prob­a­bil­ity of re­ces­sion is higher, which leads to mar­ket volatil­ity as in­vestors ob­sess about short-term growth in­di­ca­tors. This ‘re­ces­sion on and re­ces­sion off’ is much the same as ‘risk on and risk off’ in Europe in 2011.”

Credit to Brooke’s bou­tique, it launched the Old Mu­tual Max­i­mum Re­turn Fund of Funds in 2013 to con­struc­tively ad­dress this kind of dilemma. The ob­jec­tive is to gen­er­ate the max­i­mum pos­si­ble re­turn over a longterm in­vest­ment hori­zon, and es­pe­cially save in­vestors the night­mare of hav­ing to strate­gi­cally al­lo­cate their dis­cre­tionary money.

Most as­sets are in­vested in growth as­sets over the longer term, even to the ex­tent of 95%, Brooke ex­plains. It is a dis­cre­tionary fund, not a Reg­u­la­tion 28 fund, and ideal for peo­ple sav­ing for a long-term goal, like univer­sity fees, or leav­ing it to the next gen­er­a­tion.

It has R369m un­der man­age­ment and has gen­er­ated a com­pound growth rate of 14.7% since in­cep­tion.

“The main sell­ing point in my mind is that it pro­vides a so­lu­tion to two key chal­lenges in the per­sonal dis­cre­tionary space,” says Brooke. “One is, ‘Should you be in­vested do­mes­ti­cally and/or off­shore?’ The other is, ‘Should you be in eq­ui­ties and/or al­ter­na­tive as­set classes?’

“The Max­i­mum Re­turn Fund’s beauty is that it is in the world­wide cat­e­gory and it can go 100% in SA or 100% off­shore. The fund man­ager has that flex­i­bil­ity and can ad­just as the facts change rather than be­ing stuck in a spe­cific cat­e­gory. It has a con­sid­er­ably big­ger op­por­tu­nity set than, say, a spe­cial­ist eq­uity fund.”

Typ­i­cally, the fund man­ager would look to al­lo­cate in mar­kets where they are in­ex­pen­sive and the en­vi­ron­ment is im­prov­ing.

As a fund of funds, the Max­i­mum Re­turn Fund is in­vested pri­mar­ily in a se­lec­tion of Old Mu­tual Group col­lec­tive in­vest­ment scheme port­fo­lios. There is no min­i­mum or max­i­mum that it must hold in South African or in­ter­na­tional as­sets.

Its com­po­si­tion at present is OM Flex­i­ble Fund 21.4%, OM In­come Fund 11.1%, OM Bond Fund 14.8%, OM Global Eq­uity Fund 14.5%, In­ter­na­tional Eq­ui­ties 29.6%, In­ter­na­tional Prop­erty 5.3%, and Liq­uid As­sets 3.3%.

Cur­rently, Brooke and his team are over­weight off­shore eq­uity, un­der­weight SA eq­uity, over­weight SA in­ter­est-bear­ing as­sets, and un­der­weight off­shore­bear­ing as­sets.

“This is based on where we see the best risk-ad­justed re­turns,” he ex­plains. “We’re see­ing high yields in SA, but eq­ui­ties are go­ing to be chal­lenged by high volatil­ity and mul­ti­ples, while off­shore eq­ui­ties are of­fer­ing bet­ter yields than bonds and cash. We are also run­ning with more cash than we would nor­mally hold, and are more pos­i­tive on the rand than be­fore.”

“Volatil­ity on the JSE dur­ing the past six months, in fact, has been higher than it has ever been his­tor­i­cally.”

Peter Brooke Head of Old Mu­tual In­vest­ment Group’s MacroSo­lu­tions

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