Finweek English Edition
Heading investments during volatility
Adriaan Pask, the chief investment officer at PSG Wealth, talks about his tactics to weather storms.
the role of a chief investment officer primarily involves understanding, managing, and monitoring a firm’s portfolio of assets and setting the investment strategies for growth, among others. During the global pandemic, the biggest such event since the Great Depression, which hit the global economy and public markets hard, Adriaan Pask, PSG Wealth’s CIO, stuck to diversification as one of the key investment strategies to weather the storms and continued to recommend the use of multi-asset portfolios to withstand the volatile market climate.
“People talk about diversification so often that it is almost taken as a cliché of a topic,” says Pask, but in the current environment, “it is super important, because what we expect to see is a lot more volatility.”
Regulatory crackdowns standing out
Apart from some of the huge knockon effects emanating from the global pandemic, Pask has regulatory quarrels on his radar as one of the key drivers behind volatility, most especially at present.
There are multiple regulators out there keeping an eye on what is happening regarding anti-trust litigation in the US among some of the biggest companies. The other key driver of volatility has been Chinese regulators, from a similar perspective, looking at these mega-cap and very powerful firms that have access to personal information and things that typically make the regulators quite uncomfortable, he says.
The question is, at what point do the companies become too powerful?
“We know that China is not a capitalistic state by nature. Though it has adopted some capitalistic policies over recent years, it is still squarely focused on socialism and the greater good of the people.
“I think anything that would come at the expense of the greater good of the people is what they would take on. They will take capitalism on if they think it will compromise any of the social benefits that they aim to achieve.”
Multinational asset manager BlackRock recently took a neutral stance on Chinese equities, citing the ongoing regulatory crackdowns on dominant companies as important aspects of China’s efforts to improve the quality of growth, which is starting to slow.
Trees don’t grow forever
In the South African context, people often talk about the economy and how that translates into companies’ ability to generate earnings. When they take a look at the SA economy, especially the high unemployment, they ask themselves how it will be possible for businesses to generate earnings in such an environment and are then quick to think of taking their money offshore.
“We have seen in recent years a lot of capital flow either going into fixed-income or money market types of investments to reduce risk or just taking money offshore,” recounts Pask.
He says we must also remember that there are other drivers of returns when we look at equities. It is not so much the economic growth and earnings backdrop, but also the valuation component of that.
“If you consider that our market is essentially trading at single-digit multiples on a price-toearnings (P/E) basis, by the time that you remove Naspers* and some of the bigger counters in there with higher multiples, it does look like there is significant opportunity for rerating.” Conversely, in the US, what has been seen is that the economic backdrop is so positive, especially in light of all the monetary and fiscal stimulus, that people are assuming that earnings will
just continue to increase. “Trees don’t grow forever, that is the way we look at it,” says Pask. “We have got to think of how sustainable is that growth rate.”
He says if one looks at the multiples, they currently reflect growth into perpetuity, with no hiccups whatsoever. And that is because the sentiment is so much better than what it is in comparison to SA and other emerging markets, for example.
“If you consider the S&P500 and the way it is structured at the moment, there is a significant probability that we will see deratings there and the negative impact of the derating could well set off any earnings gains that you might see. So, if you consider that, we are quite optimistic around the outlook for SA investments, which may be a bit controversial given the economic backdrop.
“It is more of a valuation argument, and we are concerned about US valuations. We think that investors are expecting way too much out of the US. Things won’t be rosy forever and multiples will need to come back to more realistic levels, and that could be quite painful.”
Binary approaches to diversification
The other side of things is that the diversification component is critical for running an effective portfolio. Pask says investors have moved into this space where they look at things in a very binary fashion, where you must either have your money in SA or offshore.
What Pask advocates is diversification given the discrepancy in views in relation to local and offshore investments. “What we have seen is investors take this binary view and we think that is very dangerous because what they have ultimately done is that they have given up on diversification and taken a one-sided bet on US markets only.”
Pask’s example of finding a more prudent approach to diversification is to always introduce risk to investment decisions.
For example, yields on SA bonds are quite attractive, given the risks. They offer great value if you also compare yields on SA bonds not only to developed markets, which are at very low levels, but even against emerging markets, he says.
So, what is the risk that you take? “SA’s fiscal situation is not great, there is still a lot of talk around corruption and all those things that weigh on people but the right way to offset some of that risk is with some offshore exposure. If we do see a massive catastrophe in SA and the bonds take a hit, then the currency should depreciate, allowing you to benefit on the offshore side of things.
“If things go well and improve in SA, your bond yields will generate a great yield and you should find some capital appreciation there that will probably coincide with some strengthening of the rand as well. The local component in your bonds will start to offset some of the losses on the offshore side.”
It is, therefore, about thinking carefully in terms of how you should structure your portfolio and how it will behave in various market conditions.
Good research and diversity
The ideal portfolio should not be structured for one season only but should be able to withstand a multitude of market conditions. Investors that typically do well are individuals who appreciate the natural cyclicality of the investment environment, according to Pask.
Though, he says, there is no asset class or geography that always performs well, you must understand that typically “when things are under pressure, it makes for better investment outcomes”.
Looking at industry flows, for example, he says last year was in many senses a bit of a disaster for many investors because 90% of the flows went to cash, money market and fixed-income investments in the unit trust space. “Investors were fearful.”
If you had invested in the MarchApril period last year and held on during the difficult period when things looked uncertain, Pask says you would have essentially generated an 80% to 200% return on your investment.
“You have got to push yourself a little bit to assess the risks properly but also never fall into a trap where you are not seeking opportunities anymore. This also accentuates the value of good research.”
He says you have to have a team there that is doing the research which could provide some peace of mind that this is going to blow over, the world needs to go on and eventually lockdowns will be lifted, and economies will start growing.
“What we have seen, as teams that do well, is that there is strength in diversity. There is something to be said for diversity in an investment team, when you have individuals bringing different things to the party.”
There must be individuals who are more opportunity-seeking and maybe a little bit more risk-tolerant, and the devil’s advocates or cynics that always spot the risks. Pask says that somewhere between these two contributions in a team, you typically get to a more level-headed answer, because you have a considered approach in which you took risks and opportunities into account.
Pask says investors have moved into this space where they look at things in a very binary fashion, where you must either have your money in SA or offshore.