What will in­vestors look for in 2017?

With un­cer­tainty the or­der of the day, the in­vest­ment com­mu­nity is in­creas­ingly mov­ing to­wards cer­tain in­vest­ment ve­hi­cles to en­sure its cap­i­tal grows.

Finweek English Edition - - MARKETPLACE - *SOURCE: SPIVA Statis­tics and Re­ports. Fig­ures as at 31 De­cem­ber 2015 (net of fees) SOURCE: The As­so­ci­a­tion for Sav­ings and In­vest­ment South Africa (Asisa). edi­to­rial@fin­week.co.za This is an ex­tract from Winds of Change, the 2017 in­vest­ment out­look re­por

ohn Gilchrist and Grant Wat­son, bou­tique heads of cus­tomised so­lu­tions at Old Mu­tual In­vest­ment Group, gives five ideas in the com­pany’s 2017 In­vest­ment Out­look:

1. Cap­i­tal preser­va­tion and risk management

In­vestors are in­creas­ingly cau­tious against a back­drop of un­prece­dented po­lit­i­cal un­cer­tainty and fi­nan­cial mar­ket volatil­ity.

Why?

Global and lo­cal macroe­co­nomic risks ap­pear to have been in­creas­ing at an alarm­ing rate, par­tic­u­larly over the past year. As a re­sult, ex­pect to see a con­tin­ued, sig­nif­i­cant in­crease in de­mand for risk management that goes be­yond the rel­a­tively sim­ple di­ver­si­fi­ca­tion of­fered by a bal­anced fund.

The 2008/09 fi­nan­cial cri­sis, dur­ing which the av­er­age bal­anced fund lost 22%, made it clear that di­ver­si­fi­ca­tion alone is in­suf­fi­cient to pro­tect cap­i­tal dur­ing a bear mar­ket.

In this higher risk en­vi­ron­ment, the ben­e­fits of cap­i­tal pro­tec­tion, and the sig­nif­i­cant ben­e­fits as­so­ci­ated with com­pound­ing off a higher base fol­low­ing a pe­riod of cap­i­tal pro­tec­tion, are front of mind for most as­tute in­vestors.

2. In­dex investing on the rise in South Africa

In­dex investing is in­creas­ingly seen as a vi­able, cost-ef­fec­tive in­vest­ment so­lu­tion for South African in­vestors.

Why?

Al­most 75% of South African eq­uity funds un­der­per­formed the S&P South African Do­mes­tic Share­holder Weighted (DSW) In­dex over five years.* This con­tin­ued un­der­per­for­mance has in­vestors look­ing be­yond just the ser­vices of ac­tive man­agers. Na­tional Trea­sury has been re­view­ing the cost of sav­ings and in­vest­ments in the re­tire­ment in­dus­try. Since in­dex investing is in­her­ently lower in to­tal cost, draft reg­u­la­tion pro­poses that all de­fault in­vest­ment port­fo­lios need to con­sider in­dex investing as part of their in­vest­ment strat­egy. Sig­nif­i­cant in­vest­ment flows are go­ing into funds that give in­vestors ex­po­sure to fac­tor investing/smart beta funds.

Why?

Re­search is de­mys­ti­fy­ing al­pha and re­veal­ing that much of it is in fact due to fac­tor ex­po­sures. In­vestors can get ex­po­sure to value, size, mo­men­tum and qual­ity fac­tors through cheaper, sys­tem­atic “smart beta” of­fer­ings. In other words, rather than pay­ing ac­tive man­agers high fees to out­per­form an in­dex, in­vestors can utilise com­bi­na­tions of smart beta funds to de­liver sim­i­lar gross re­turns, but at a lower cost. This has led to sig­nif­i­cant growth in smart beta investing, with ap­prox­i­mately $500bn in­vested in these strate­gies glob­ally (up from $50bn five years ago).

We be­lieve there is space for pas­sive investing, smart beta and fun­da­men­tal ac­tive investing. A blended com­bi­na­tion of these three ap­proaches should de­liver the best net risk-ad­justed re­turns for clients. Blend­ing not only of­fers lower costs, but also cre­ates greater cer­tainty of out­come by re­duc­ing re­liance on ac­tive man­agers de­liv­er­ing on their al­pha ob­jec­tives. A blend­ing ap­proach also al­lows for al­lo­ca­tions to higher con­vic­tion fun­da­men­tal man­agers. More in­vestors are in­cor­po­rat­ing en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) fac­tors into their in­vest­ment de­ci­sions – and this has pre­cip­i­tated the in­tro­duc­tion of ESG in­dices and prod­ucts in the mar­ket. Sus­tain­able/ESG investing is ex­pected to con­tinue to ex­pe­ri­ence sig­nif­i­cant growth in the next few years.

Why? 4. ESG in­vest­ment in­dices

In the past, so­cially re­spon­si­ble investing was syn­ony­mous with eth­i­cal investing, which in­volved ex­clud­ing “un­de­sir­able” sec­tors. The ap­proach has now changed from screen­ing out sec­tors that “do harm” to one that pro­motes sus­tain­able eco­nomic de­vel­op­ment by bal­anc­ing the needs of the planet, its peo­ple and the abil­ity for com­pa­nies to make a profit. This ap­proach makes good busi­ness sense. The numbers speak for them­selves: the UN Prin­ci­ples for Re­spon­si­ble In­vest­ment (UNPRI), an ini­tia­tive that pro­motes the in­te­gra­tion of sus­tain­abil­ity fac­tors into in­vest­ment de­ci­sions, has grown to 1 200 sig­na­to­ries rep­re­sent­ing as­sets worth more than $34tr. This is be­cause re­search and a num­ber of trend analy­ses have proven that pru­dent sus­tain­abil­ity prac­tices have a pos­i­tive in­flu­ence on in­vest­ment per­for­mance.

5. In­creased flows into multi-as­set class funds us­ing in­dex­a­tion/pas­sive build­ing blocks

In 2015, multi-as­set class strate­gies at­tracted more than half of the net flows of rules-based funds into the as­set management in­dus­try (R4.3bn of R8.1bn) – part of an on­go­ing trend. And all in­di­ca­tions are that this is set to con­tinue. Multi-as­set class funds are able to in­vest across the in­vest­ment land­scape and may in­clude eq­ui­ties, bonds and cash. This pro­vides a greater de­gree of di­ver­si­fi­ca­tion. Many in­vestors look to multi-as­set class funds to pro­vide a lower-risk in­vest­ment than a pure eq­uity fund, but with greater prospects for growth than a pure bond fund. The di­ver­si­fi­ca­tion through a multi-as­set class strat­egy also en­hances the po­ten­tial for investing in a best-per­form­ing as­set class while re­duc­ing the im­pact of a worst-per­form­ing as­set class.

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