Sound investing for first time buyers
ALTHOUGH the global economic recovery is in its ninth year, global economic growth is in a very different space from what is usual at this stage in a recovery phase. Bond yields remain low for now; inflation is low too.
What is customary at this stage in the recovery is for inflation and bond yields to be rising, as central banks raise interest rates time and again.
Several global equity indices are at or near record peaks. However, just because a market, as a whole, may look overpriced, doesn’t mean there isn’t value to be found in certain, well chosen stocks. Kyle Wales, one of the Boutique Heads of Old Mutual Titan, Old Mutual Investment Group’s new active fundamental global equity boutique, says: “It just means you have to look harder to locate them.
“This is where taking a bottom up, valuation driven approach can prove particularly useful as it focuses at a company specific level, rather than working down based on a macro overview.
“Among some of our top stock picks are consumer staples such as Heineken, Mondelez (which owns Cadbury, among other assets) and British American Tobacco.
“Because these stocks are defensive in nature, they are less sensitive to market sell-offs. This reflects our view that markets are looking quite expensive at the moment,” adds Wales.
In this environment, given the JSE and many offshore markets are at an all time high, Old Mutual Unit Trusts Managing Director Elize Botha offers some guidance for new investors on how to enter the market and select an appropriate fund or fund manager in such a way as to reduce their risk of over-paying.
“Depending on individual circumstances, one of the optimal ways for someone new to be investing is to put their money into a multi asset fund, also called a balanced fund. The different asset classes that make up this kind of unit trust, such as cash, property, local and foreign equities, all perform differently in a particular economic environment.
“They have different return profiles that do not behave the same year to year: sometimes equities have performed best, while in other years it has been property, bonds or foreign equity,” says Botha.
“Just as stock picking can add concentration risk to a portfolio, single asset classes will underperform periodically depending on the market nuances. However, in an active asset allocation fund mixing and moving between the various asset classes can be a significant alpha generator.
“A diversified solution fund (like those offered by MacroSolutions or Old Mutual Multi-managers) is designed to outperform inflation and minimise downside risk.
“Portfolio managers have the time and expertise to analyse the economy and market environment and understand the impact on the portfolios they manage.
“For example, 2016 showed a low return on our market of only 2.6 percent, but on an underlying share level there was a huge dispersion in returns caused by a massive rotation.
“Global investors moved away from growth style investing to value orientated shares and away from defensive to cyclical shares.
“Active management can take advantage of these types of movements in order to reflect value in the balanced funds,” explains Botha.
She suggests that having offshore exposure is essential for diversifying risks in a balanced portfolio and “the amount of offshore exposure will be determined by the fund mandate and the portfolio manager’s view of this asset class”.
Unit trusts that are classified as South African portfolios may not hold more than 25 percent of the fund’s assets to be invested offshore, with a further 5 percent that can be invested in Africa excluding South Africa.
“Emerging markets are rising up to become economies which can no longer be ignored – they are fast becoming the driver of global growth and present the fastest growing economies with young populations and the largest potential consumer market in the world,” says Botha.
They make up 74 percent of world land mass, 81 percent of the world’s population, 37 percent of world’s GDP and 31 percent of world equity market capitalisation. By 2020 emerging markets are estimated to account for 50 percent of world GDP.
“While these numbers are impressive, these emerging markets can still be seen as volatile and investors need to understand the risks involved before investing in them.”
She also notes the importance of investment costs. Returns over the past three years or so are not what they have at times been historically, and in this environment it is important for investors to check the matter of fees.
“Fees are important as they have a direct bearing on the net investment return. Unit trust funds are transparent in the fees charged within the fund and each fund must disclose the total expenses, including transaction costs, charged for.
“This is expressed as a percentage of fund value per annum and makes it possible to compare the fee structure between various funds. As with everything, there is competition and funds with abnormally high fees compared with similar funds will generally soon be disregarded by investors, and their advisers.
“There is also usually a difference between the retail price and the wholesale price for the same fund.
“The access point into the fund will most often determine whether a wholesale or retail price is applicable, and depending on whether an adviser is involved, an advice fee may also be applicable,” says Botha.
One low fee option for first time investors (or any investors) is passive unit trust funds, which are available at a lower fee than actively managed funds.
“We believe there is a place for both and suggest a blending approach as it provides the investor with an opportunity to reduce the overall level of fees charged within a unit trust portfolio,” she says.
Botha adds: “The investment philosophies differ between our fund managers at Old Mutual Investment Group (OMIG) and Old Mutual Multi-Managers (OMMM). OMIG selects and invests in underlying securities while OMMM selects a range of asset managers to invest with.
“However, the following principles are central to the way in which the funds are managed by both OMIG and OMMM: We are committed to generating real wealth for clients and believe this is best achieved if aligned to advice and a clear financial plan.
“We take a long term view – we invest responsibly for the long-term, growing our funds while also contributing to the planet and our community,” says Botha.
Improving economic fundamentals, low interest rates, good earnings and positive leading indicators should continue to support shares.