A test of resilience
Pedro van Gaalen
Market volatility reveals weaknesses in strategy for many, writes
The Covid-19 pandemic has unleashed untold economic devastation across the globe. The uncertainty and impact of lockdowns sent markets into tailspins. The resultant market volatility exposed potential weaknesses in an asset manager’s risk-adjusted strategy.
“The crisis definitely tested the industry’s resourcefulness and the resilience of individual asset management approaches,” says Sangeeth Sewnath, Deputy MD at Ninety One.
“It tested every aspect of the business, from a client management to a business continuity perspective. An asset manager’s strategy and its agility in the circumstances largely determined how well they weathered the crisis, and some asset managers have come out stronger than others.”
The local economy’s tenuous state before the Covid-19 crisis created additional pressure points for the sector as the economy had struggled to grow by much more than 1% since 2015.
“Ninety One realised that global investments would become a growing requirement for local clients. Our global expertise, combined with measured and affordable risks, contributed significantly to the returns delivered to clients.”
And when the crisis hit, Ninety One stuck to its established principles of long-term, quality investing, with a tilt towards capital preservation.
“It wasn’t the first time we went through a crisis. Having people in our business who had experienced similar market conditions before ensured level heads. We applied lessons learnt through different crises and stuck to our proven approach to create resilience.”
Experience gained through previous crises served many asset managers well, believes Mohamed Mayet, CEO at Sentio
Sangeeth Sewnath … lessons learnt
Capital Management.
“Where the 2008/2009 global financial crisis was a slow train wreck underpinned by structural weakness, the Covid-19 crash was quick and deep, similar to the 1998 emerging-market crisis. While the underlying factors differed, they had the same effect.”
In any market crash, Mayet says, an asset manager’s processes and psychology are vital to navigate the fallout, and an asset manager’s current position is heavily influenced by how they entered the sell-off.
“With the right processes and mindset, asset managers were able to remain calm and act quickly and decisively when making calculated decisions. Those on the back foot would have found it tough to react. And that position will also influence how an asset manager is behaving now.”
Rayhaan Joosub, director at
Sentio Capital Management, adds that those with strong risk management processes would have fared better in this crisis.
“Portfolio construction guided by prudent risk management delivers structurally welldiversified funds that offer some capital protection to risk events. Asset class, factor and stock diversification have been effective in reducing cyclical risks.”
Lebo Thubisi, head of manager research at Alexander Forbes Investments, says that engagements with more than 50 investment managers, representing more than 100 strategies, revealed that the value-add of being invested in a diversified solution becomes particularly obvious in these markets.
“It’s an insistent lesson from most bear markets in our his
tory. Many local managers prefer to hold shares that derive earnings from offshore investments so that, when the rand weakens relative to the major currencies offshore, their portfolios benefit as they have foreign currency earnings.”
Among value investors, diversification, maximum offshore exposure, dynamic asset allocation, and exposure to gold, short-term SA bonds and rand hedge names have been the general modus operandi, says Thubisi.
“The asset managers that we expected to defend in downward trending market environments have done so through skilled, dynamic derivative protection funds.”
This includes high cash
Lebo Thubisi … derivative protection
allocations in funds that typically have lower equity allocations than the traditional balanced funds.
“Managers who use derivative protection were keen to point out that they sold S&P 500 Futures and have purchased put options, locally and globally, to protect portfolios effectively. Guaranteed return products are designed to never experience negative returns in down markets. These managers have all stated that the capital protection mechanism (insurance policy) has provided necessary protection that guarantees up to the level that members have elected (maximum 100%).”
Sentio’s approach was to remain underrisked relative to benchmarks, a more conservative approach that has served clients well in the crisis. This gave the asset manager “dry powder” to buy weaker assets into the sell-off, and it has taken selective opportunities in quality equities that are underleveraged with strong balance sheets, as these will be less affected by the lockdown.
Sewnath says the crisis tested balance sheet strength. “Holding strong companies with robust balance sheets in a portfolio would have positioned asset managers favourably going into this crisis.”