In­vestors re­main cau­tious

Un­cer­tainty and in­sta­bil­ity are be­hind the flight to less risky as­set classes, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Feature: Unit Trusts -

The growth in mul­ti­man­ager and mul­ti­as­set funds is seen in some quarters as a nat­u­ral re­sponse to in­vestors’ pref­er­ence for less risky as­sets.

This pref­er­ence seems an ob­vi­ous choice in th­ese times of ex­treme volatil­ity, though in­vestors would have sac­ri­ficed sig­nif­i­cant growth had they not made the right JSE bets.

“One of the things I’ve been scratch­ing my head about for the past two years is the shift to risk-off as­sets, specif­i­cally cash,” says Leigh Köh­ler, head of re­search at Glacier by San­lam. “The bal­anced funds, namely the multi-as­set, high­e­quity ones, are still the big­gest cat­e­gory of funds in SA at al­most R500bn, and money mar­kets are now sit­ting at more than R300bn.

“I do think there’s been a bit of a shift and if you look at some­thing like the Absa Money Mar­ket Fund that’s been tak­ing in a lot of flows, I think it’s be­cause peo­ple are scared about the volatil­ity and gen­er­ally flat mar­kets over the past three years.

“One must con­sider whether that’s the right be­hav­iour. That’s what we spend a lot of time try­ing to un­der­stand by speak­ing to fi­nan­cial ad­vis­ers and as­set man­agers. A lot of the strug­gle they face is the dif­fi­cult con­ver­sa­tion around client port­fo­lios and clients want­ing to move to cash.

“While there is merit in mov­ing to cash, in­vestors must al­ways ask them­selves about their in­vest­ment time hori­zon.”

Il­lus­trat­ing the de­struc­tion that can be wrought on a port­fo­lio, he says that an in­vestor could have grown a R100,000 in­vest­ment in the JSE to about R1.5m over the past 20 years.

That pic­ture would look very dif­fer­ent if one had tried to time the mar­ket and missed key up­ward move­ments.

If an in­vestor had missed five of the best days on the JSE over that 20-year pe­riod, Köh­ler says the R100,000 in­vest­ment would now be worth about R1m.

Miss­ing 10 of the best days would have re­duced the re­turn to about R750,000.

“If you had missed 50 of the best days over the past 20 years, it is very pos­si­ble that the in­vest­ment value would now be around R155,000. So there is def­i­nitely a case for not try­ing to time mar­kets and un­der­stand­ing your risk pro­file, and in­vest­ing ac­cord­ing to your time hori­zon,” he says.

Ja­son Swartz, head of port- fo­lio so­lu­tions at Sa­trix, is also con­founded by the flight to less risky as­set classes, call­ing it a “sys­tem­atic pref­er­ence by as­set man­agers to be more cau­tious”.

He says this has be­come more marked in the face of global threats to po­lit­i­cal and eco­nomic sta­bil­ity, along­side the mul­ti­year trend in lower mar­ket cer­tainty and clar­ity.

While Köh­ler’s ex­am­ple of value de­struc­tion is spe­cific to mar­ket mist­im­ing, Swartz says the re­turns from safer havens like money mar­kets have not been shoddy.

“The re­turns from money mar­ket funds have been in quite a tight range, with the low­est fund re­turn­ing around 7% and the high­est 8%,” he says. “I think it’s still rea­son­able to be beat­ing in­fla­tion by 2% to 3%, and there are some op­tions in money mar­ket as­sets that play in the credit space that could pick up an­other 100 ba­sis points in the more flex­i­ble man­dates.

“For the short term, money mar­ket funds are ap­pro­pri­ate, but on a longer view, we would en­cour­age clients to look at multi-as­set and bal­anced funds, and those with much longer hori­zons to look at more eq­uity and growth-based prod­ucts.”

Turn­ing to what in­vestors can ex­pect in the near fu­ture, Swartz says the right choice of fund or as­set class de­pends on whether mar­kets and eco­nomic growth con­tinue at the same muted pace.

“If we con­tinue to have low lev­els of clar­ity and high lev­els of un­cer­tainty, we could see con­tin­ued per­for­mance out of the more cau­tious as­set classes. Bal­anced funds are a good op­tion be­cause they of­fer some di­ver­si­fi­ca­tion,” he says.

“In the past year we saw a lot more in­ter­est in more de­fen­sive eq­uity strate­gies that fo­cus on choos­ing shares with good prof­itabil­ity, high yields or low lever­age.

“I’m not try­ing to call a de­fen­sive mar­ket go­ing for­ward, but the past two years have been quite de­fen­sive and there’s been a tus­sle be­tween cycli­cal and de­fen­sive strate­gies, where the more de­fen­sive as­sets have ac­tu­ally done very well.”

Given the tremen­dous un­cer­tainty that was un­leashed by the US’s de­ci­sion to exit the Iran nu­clear deal ear­lier this month, it would not be sur­pris­ing to see the more cau­tious mind-set pre­vail­ing.

The right choice of fund or as­set class de­pends on whether mar­kets and eco­nomic growth con­tinue at the same muted pace

Ja­son Swartz … Eq­uity in the long term

Pic­ture: 123RF — BLUEXIMAGES

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