Prospects for 2019
In times of uncertainty and volatility, there are alternative options, writes Pedro van Gaalen
“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