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.
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.
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.
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.
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.