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.
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