FEATURE: LONG-TERM INVESTING LESSONS FROM 2020
INVESTING
DAVID KNEE Chief Investment Officer, Prudential Investment Managers
Moving everything offshore: A perilous call?
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here is currently a narrative among some investors that holding local assets has always been a complete disaster for South African investors, and that now is the time to save whatever crumbs are left and move everything into the safety of offshore assets. Following are some observations on this view, which may give investors pause for thought. The question is, is this narrative fact or fiction? And either way, is the outlook as pre-determined as this bleak narrative suggests? We need to be circumspect about relying on our emotions when it comes to investment decisions; human beings are poor judges of facts because our emotions colour our interpretations and recollections of the past. Recent poor experiences can receive disproportionate attention that blurs prior history. Our feeling is that things are really bad now, they must always have been like this and are therefore likely to continue forever into the future. There is no doubt South African investors have had a grim time of it more recently, but is this a full and fair exposition of history? A quick looks tells us no. From the end of 1996 until end-August 2020, FTSE/JSE ALSI returns matched the MSCI World Index almost exactly in rand terms, at 13.0% p.a. vs 13.1% p.a. And from end August 1999 until end August 2020, the ALSI outperformed the MSCI World by 2.9% p.a. It is more recently, from 31 March 2009 (the low point for global equities during the GFC) until end August 2020, that the ALSI has lagged the MSCI World, underperforming by 5.8% p.a.
SA valuations relatively cheap So the facts show that South Africa has in the past offered exemplary returns. Could it do so again? Today we find ourselves in a similar situation as late 1999 in terms of relative market valuations. With a price-book value ratio (P/B) of 1.65X, the ALSI is offering a 40% discount compared to that of the MSCI World at 2.75X. This suggests analysts already expect a far more favourable environment for developed markets, whereas a good deal of pessimism sits in South African valuations. The distribution of potential return outcomes from this starting point favours South Africa. Of course this is not a guarantee that local equities will outperform developed markets going forward, or even that returns will be high versus their history on an absolute basis. However, it certainly challenges the notion that there is nothing on offer for investors in South African equities. Investors can seek to justify the current ALSI valuation on the basis of poor fundamentals, a hollowing out of our industrial capacity, of institutionalised graft, of policy paralysis that prevents much-needed economic transformation and reform. One must remember, however, that it is more or less impossible to buy an asset with a good story at a cheap price, and recognise that one has formed a view that this history of outperformance isn’t going to repeat. Then ask: “How hard do I want to back my view of the future relative to anyone else’s; why do I think I am better at forecasting the future than the market?” Placing all your eggs into the offshore basket, against what the valuations suggest and on the back of a view, is a big call.
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CRAIG ABBOTT co-head of institutional discretionary fund management, RisCura
Guiding your clients to a better 2021
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t’s that time again, when we reflect and begin to plan our path for the new year. Safe to say, 2020 has been tough for most, and with the year being such a whirlwind of economic ups and downs, it can be worthwhile to recap some important strategies. These not only pay off for clients but are useful refreshers to keep in mind for any investors. Expected returns Making changes to investment portfolios off the back of a tough year like 2020 is not an easy decision. There is often the risk of leaning towards a more emotional choice than a rational one. That is why taking a three- to five-year view, or longer, is recommended to understand how a portfolio measures up, relative to its benchmark and its peers. Based on last year’s returns, you will be able to see how much volatility or risk is built into a portfolio, and that should provide clarity for going forward. Cost of funds Try to obtain a portfolio that allows you to generate alpha, while remaining mindful of costs. Passive funds are cost-effective, but often buying the market beta does not allow you to generate growth alpha. Having too many portfolios that are blended, on the other hand, can also be expensive, depleting any alpha after costs. Often a blend of passive and active funds can be structured through an active multi-managed portfolio, but price sensitivity should remain. It is also important to understand how your performance fees work, when they are taken and how they are benchmarked, as these count as an additional layer of costs, deducted from the return.
Change is as good as a holiday There are a wide range of portfolios that still offer a ‘vanilla strategy’, built when it was appropriate. Today, many investors are still in the same portfolios, with little change in their investment exposure. They need access to alternatives that can enhance the value of existing investments. For example, exposure to China has increased recently, given its optimistic growth outlook. Alternative asset classes, impact investing and ESG are all essential considerations for a robust investment portfolio. Combating too much choice Too often individual members that make their own investment choices (for example, in an employee pension fund) will go by brand to make their selection. It is difficult to choose an unfamiliar name, especially when there are many choices available. This is why it is always advisable for an independent financial adviser (IFA) to guide the process of understanding the different funds, their performance, expectations and risks. A multi-managed option could provide a solid foundation as it encapsulates many different managers, which provides diversification through style, manager, stock selection and geographical location. Diversification can be the choice between getting the right exposure and missing out altogether. Keeping the above in mind, while ensuring the correct exposure according to risk profile is factored in, will go a long way this year and beyond.
