SPECIAL PROJECTS

SALES REPRESENTATIVE: ELMARIEMARTIN WRITER: ALF JAMES How far is it possible to anticipate such developments by structuring your investment portfolio suitably, and how might one do this? Is this a worthwhile exercise, in your view? Peter Brooke, head of the MacroSolutions boutique at OLD MUTUAL INVESTMENT GROUP says: “In line with our philosophy, we specifically look at investment themes and integrate them into our fund positioning”.

“Themes determine whether the environment is improving or deteriorating and, hence, if the investment will face headwinds or enjoy tailwinds. We blend this with valuation to determine conviction and position size. However, we typically focus on our time horizon of five years. Unless themes are going to have an impact on markets in that time period, they are intellectually entertaining but not pertinent.” Charles de Kock, senior portfolio manager at CORONATION FUND MANAGERS says the company has a long-term, valuation-driven investment philosophy that does not rely on getting major macro forecasts right.

“We follow a bottom-up investment process, where we try to establish a fair value for each asset we analyse. One thing we have learnt over many years is how companies with good product, smart management and a culture focused on creating value can adapt to changing times.

“A great example is Naspers, a company that has evolved from being a publisher of Afrikaans newspapers to a global media business with interests in pay-TV and the internet that now dwarf its print division.

“As much as we have focused on the unknowns in question one, there are of course many things that are unlikely to change. We will still eat, drink, work, travel, get ill, listen to music, pay for entertainment, have families, build homes and so on.

“Many of the core businesses we invest in, and are likely to continue investing in, are businesses that supply into these basic needs of people.

“We just need to make sure we pay appropriate prices for these assets. Our disciplined, valuation-driven process that has served us well over the past twenty years gives us the comfort that we will be able to struc- ture investment portfolios that can do well in an uncertain future.” Herman van Papendorp, head of macro research at MOMENTUM ASSET MANAGEMENT says investment portfolios should have exposure to emerging markets, commodities, discretionary spending and healthcare, while the risks associated with exposure to government bonds needs to be recognised.

“Early-mover advantage could strongly benefit the returns from investment portfolios that are already exposed to alternative asset classes and non-developed markets once there is a flood of pension fund money into these assets.

“Unfortunately, the lack of liquidity on sub-Saharan Africa stock exchanges is a major challenge for investors, deterring many from involving themselves directly in African equity investing. Sub-Saharan Africa investable companies of reasonable size are predominantly in the cement, brewery, bank and telecoms industries.

“In order to overcome the illiquidity issue of direct African investing, investors can look to use South African companies that have exposure to African economies as an investment conduit to gain exposure to the fundamental Africa story.

“A related investment strategy considered by some global investors to address the illiquidity problem of investing directly into African stocks is to invest in global multi-national companies that have African exposure.” Michael Power, strategist at INVESTEC ASSET MANAGEMENT says in equity investing, unlike bond investing, company will increase in importance at the expense of country as companies evolve from being merely multinational to supranational.

This will be the practical way in which home bias will lessen over this period. Watch for Scandinavian investors to be the pioneers in this field.

“More and more, companies will need to deal with specific country risk issues on behalf of investors, from currency to tax, from politics to interest rate policy. That said, small cap investing will still involve a greater degree of investors assessing both country and company risk as many smaller companies will not be so geographically diversified.

“Of course the flavours of the companies will change too as more emerging market investors become global players and the distinctions between what it means for a company to be from a developed country versus an emerging one narrow.

“That said, investors will need to educate themselves on country differences in areas like accounting policies, tax and the exchange rate risk of the unit of account.

“Indeed, watch for the emergence of currency as a clearly defined asset class in its own right, not merely an overlay on other asset classes; for truly global investors, cash management will be virtually indistinguishable from currency management.

“Separately, expect ESG considerations to increase for all market players, whether investor or investee.

“The range of investment vehicles – from index to hedge funds – will continue to multiply, with the commoditizing influences of the former gradually extending themselves up the value chain with the aid of improving technologies and the application of ‘big data’ techniques.

“The effect of these twin influences will be to reduce charges levied by asset managers and other financial intermediaries. For asset managers, increasing AUM will be an essential response to compressed margins.

“Structuring the right investment vehicle will be of paramount importance with the growth of individual tailoring where specific needs are matched to specific solutions. Indexes will proliferate to serve this need. Again, improving technologies will facilitate this drive towards personalization of the risk-reward equation.

“In the realm of asset allocation, the multi-asset approach will grow from strength to strength, in part reflecting the globalization of the investment universe for not just institutional investors and family offices but even individuals.” Daniel Malan, CIO at RE:CM says for us it is far more important to invest in companies with a proven ability to successfully handle change. When change happens we trust that they can handle the risks and exploit commercial opportunities.

Thinking about these bigger changes serves to clarify our questions to investee companies and in evaluating new investment ideas. So one can say we prefer companies with a culture of honest introspection with flexible structures that can adapt, take decisions and move quickly.

“Our process and philosophy is predicated on the fact that we do not believe that we, or anybody else, have the ability to predict the future with any accuracy or consistency.

“We rather invert from the prevailing prices of assets the likely future that is priced in, and act when these prices are overly optimistic or overly pessimistic.

“We therefore do not spend a lot of time or energy on long-term thematic drivers – specifically not pertaining to trying to predict how these will unfold.”

Mohamed Mayet, MD at SENTIO CAPITAL MANAGEMENT says looking at the business cycle globally and locally over the last 50 years, it has been consistently getting shorter and durations of each phase shorter through time.

Some of the reasons for this are: increasing role of technology, increasingly global world, increasing complexity of financial markets and increased coordination on regulation across the globe.

“In our view, these trends will persist and indeed even strengthen. So what this implies is that while we might have a small glimpse as to the direction of major global trends, what is unclear is how the world responds to them.

“As the time taken to respond to disruptive change by the globe shortens and with it errors compound, so anticipating investment performance even two decades forward becomes somewhat vague.

“Thus we place less emphasis on trying to predict or forecast the actual disruptions for if one does that, one has to also factor in the responses that are likely and the resulting investment effect of those.

“In our view, it is far more useful to look for the investment thesis that is resilient to disruption and to factor sensitivity into our portfolio.

“We would use the following simple expression to describe our approach: change is constant so it is far better to look at countries or companies that are good at responding to it rather than building portfolios that try to predict change.”

Tony Bell, CIO, VUNANI FUND