3. Asset manager views – a look at South Africa’s exposure to emerging market regions

The discussion of portfolio vulnerabilities is an ongoing one and based on conversations with our underlying managers, we understand that several South African companies have exposure to Russia and China amongst other emerging market regions. These exposures come in the form of owning Russian businesses or the establishment of operations (generating a revenue source from the regions) in Russia or China. The managers are weighing up Russian exposure through underlying companies as well as asset allocation decisions in terms of attractive asset allocation from emerging markets.

• The exclusion of Russia from various benchmarks, albeit minor weights to begin with.

• The devaluation of Russian equities.

• The impact on commodity prices, including wheat, maize, corn, oil and gas.

• Further sanctions and the resulting macroeconomic headwinds on energy prices and geopolitical risks.

• Heightened volatility and its impact on portfolios.

• Autocracy risks associated with Turkey’s and China’s involvement.

• The exclusion of oil. If oil and gas are excluded as a sector over the next year (for example, if this is applied as a rule for all global allocations), then investors would forgo their financial returns, post-Covid (53% total return for the energy sector in the US).

• Excluding countries penalises companies on the basis of political risk and not an ESG integration approach where companies may not have otherwise held a political stance.

The table below shows our exposure to Russia across the range of some of our portfolios.

Our purposeful diversification approach means that we spread risk effectively by investing in a broad range of asset classes and investment strategies to effectively navigate rough markets for our clients.

At a time when critics of ESG question its relevance, we argue that ESG is not a definite and complete solution, but rather a tool which brings additional nuance to investments. It is a separate lens that works alongside and complements traditional investment risk and return considerations. We would prefer to use it by integrating it in our investment process than to be sidetracked by detractors.

The full impact of food, energy and supply chain disruptions is going to be inflationary, but the magnitude of the impact will only be evident in the forthcoming quarter. We are also monitoring growth forecasts together with inflation so that we are able to take acceptable levels of risk. Our multi-managed investment approach aims to limit drawdowns, compared to other market-linked investments, through careful risk management and diversification. With this approach, we take more responsibility in the construction and management of risks within our portfolios. Our stewardship approach means that we are more continuously proactive about how our underlying asset managers engage with investee companies, regardless of wars or geopolitical events.

Some people anticipate their next move. How they balance risk and reward ensures a winning strategy.