Prospects for 2019

In times of un­cer­tainty and volatil­ity, there are al­ter­na­tive op­tions, writes Pe­dro van Gaalen

Financial Mail - Investors Monthly - - Front Page -

“There is a grow­ing need to in­clude lower-risk, sta­ble in­vest­ments in a port­fo­lio to en­sure a de­gree of se­cu­rity

Sta­ble fixed-term in­vest­ments of­fer a safe haven from the volatil­ity that has char­ac­terised lo­cal and in­ter­na­tional mar­kets in 2018.

These op­tions should there­fore ap­peal to in­vestors pur­su­ing a longer-term strat­egy, par­tic­u­larly given the com­pa­ra­ble re­turns on of­fer from fixed-rate de­posit ac­counts and a grow­ing num­ber of in­no­va­tive al­ter­na­tive in­vest­ments.

“Di­ver­si­fi­ca­tion should re­main the un­der­ly­ing phi­los­o­phy of any long-term in­vest­ment strat­egy. How­ever, di­vest­ing from spe­cific as­set classes due to poor per­for­mance to in­vest in other op­tions would be a mis­take,” says Fed­group CFO Shel­don Fried­er­ick­sen.

“It would be more pru­dent to re­bal­ance port­fo­lio al­lo­ca­tions in 2019 by shift­ing con­tri­bu­tions to spe­cific as­sets that of­fer op­por­tu­ni­ties for guar­an­teed re­turns.”

Based on this ap­proach, down-weight­ing al­lo­ca­tions to eq­ui­ties in 2019 would in­su­late long-term in­vest­ment port­fo­lios from the im­pact of a po­ten­tial stock mar­ket shock or cor­rec­tion.

“The re­cent slump in the value of shares in com­pa­nies pre­vi­ously con­sid­ered main­stays in the port­fo­lios of as­tute in­vestors and lead­ing fund man­agers has high­lighted the vari­abil­ity in risk in­her­ent in a con­cen­trated eq­uity in­vest­ment ap­proach,” says Fried­er­ick­sen. While in­vest­ing in eq­ui­ties has long been con­sid­ered one of the best ways to achieve above-av­er­age re­turns, in the pre­vail­ing mar­ket con­text Fried­er­ick­sen be­lieves there is a grow­ing need to in­clude lower-risk, sta­ble in­vest­ments in a port­fo­lio to en­sure a de­gree of se­cu­rity and cer­tainty.

Fixed-rate de­posit op­tions abound as banks and fi­nan­cial ser­vices providers look to boost liq­uid­ity. In­vestors are be­ing re­warded for their as­so­ci­ated loss in liq­uid­ity, with many in­sti­tu­tions of­fer­ing dou­ble-digit an­nu­alised re­turns on de­posits. “Even cer­tain money mar­ket ac­counts are look­ing at­trac­tive against the mar­ket av­er­age,” Fried­er­ick­sen says.

What’s more, in­vestors are no longer lim­ited to vanilla fixed-term de­posit ac­counts. Numer­ous al­ter­na­tive in­vest­ment op­tions have emerged and are grow­ing in pop­u­lar­ity as they of­fer op­por­tu­ni­ties for cap­i­tal growth or in­come gen­er­a­tion.

“In­vest­ments such as so­cially re­spon­si­ble im­pact [SRI] in­vest­ing, sec­tion 12J ven­ture cap­i­tal fund in­vest­ments and par­tic­i­pa­tion bonds all of­fer eq­ui­table or bet­ter re­turns when com­pared to the CPI plus 2%-3% that many fund man­agers are chas­ing. More im­por­tantly, these re­turns can of­ten be re­alised with­out the risk.”

Hy­wel Ge­orge, di­rec­tor of in­vest­ments at Old Mu­tual In­vest­ment Group, be­lieves that an emerg­ing gen­er­a­tion of in­vestors who want to do good while mak­ing money will spur de­mand for SRI in­vest­ments in 2019.

“This trend is driv­ing a fun­da­men­tal shift in the in­dus­try. Fund man­agers need to in­te­grate var­i­ous SRI op­tions into their client of­fer­ing, and this ethos must also re­flect in the types of com­pa­nies they choose to in­vest in if they in­tend to main­tain their rel­e­vance in the mar­ket­place.”

Be­yond the al­tru­ism of this in­vest­ment phi­los­o­phy, Fried­er­ick­sen also be­lieves that al­ter­na­tive in­vest­ments are ap­peal­ing as they re­move some of the com­plex­ity as­so­ci­ated with in­vest­ing di­rectly in as­sets that of­fer a store of value and can also gen­er­ate in­come.

“Im­pact in­vest­ing cre­ates op­por­tu­ni­ties to in­vest in as­sets that are coun­ter­cycli­cal, such as re­new­able en­ergy, sta­ple goods or crops that are ex­ported into global mar­kets. This en­sures that a more sta­ble and re­silient in­vest­ment can be in­cluded in a diver­si­fied port­fo­lio.”

Sim­i­larly, for­ward-look­ing se­cured in­vest­ments, which of­fer a set rate for five years and are se­cured against a bas­ket of as­sets in­stead of a sin­gle prop­erty also re­move sig­nif­i­cant risk.

“While there may be volatil­ity in terms of the in­come that se­cured prop­erty in­vest­ments can gen­er­ate, these struc­tures of­fer guar­an­teed cap­i­tal pro­tec­tion. These types of col­lec­tive in­vest­ment schemes are also reg­u­lated to pro­tect in­vestors.”

Ac­cord­ing to Fried­er­ick­sen, the com­bi­na­tion of these fac­tors has made these types of sta­ble in­vest­ments more ap­peal­ing to a grow­ing num­ber of re­tail in­vestors, par­tic­u­larly dur­ing times of un­cer­tainty and volatil­ity.

“The fact that they also pro­vide good div­i­dend yields — of­ten more im­por­tant than growth in a volatile mar­ket — is set to boost the rel­e­vance of these in­vest­ments amid the un­cer­tainty of 2019.”

Hy­wel Ge­orge … in­vest­ments di­rec­tor at Old Mu­tual In­vest­ment Group

Shel­don Fried­er­ick­sen … chief fi­nan­cial of­fi­cer at Fed­group

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