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