OFFSHORE SUPPLEMENT
30 November 2019
WHY DEFENCE MAKES SENSE
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any commentators are talking about an increasing risk of recession. Our own recession probability models agree, suggesting a more than 50% chance of a recession happening in the next two years. As recessions are typically associated with much worse market returns, this increasing risk has led investors to look for defensive strategies that emphasise drawdown management. However, we believe that even outside of periods of increased recession risk, defence makes good sense for investors – particularly for those whose investment horizon is limited. We think the nature of markets has evolved since the global financial crisis. Our analysis of markets since 1987 (the year of the Black Monday crash) shows that before 2009, outside of the bear markets often associated with recessions – when stock markets drop 20% or more from recent highs – investors tended to see drawdowns that were ‘well-behaved’: an equal weighted bond-equity portfolio suffered very few drawdowns of more than 5%, and never as much as 10%. By contrast, in the current cycle we have so far seen six episodes of more
than 5% drawdowns, including one of more than 10% – an unprecedented frequency and magnitude of drawdowns for a bull market over the last 30 years. Is a changing market structure to blame? We think there may be multiple drivers of this increased fragility across asset classes: • The rate of economic growth has been slower over this cycle than in past cycles, meaning the global economy has teetered closer to the edge of recession (and therefore to the risk of severe drawdowns) than it did before • To deal with this, central bank market intervention has become more significant and creative than it was previously, potentially leading to a ‘feast or famine’ environment for liquidity • The ability of private sector banks to absorb risk has been curtailed by regulation and shareholder demand for their business models to become more dependable • Passive ETFs/tracker indices make up a greater proportion of the investor base, potentially leading to more
herding into and out of positions, thereby exacerbating market moves. The impact of these changes is evident in the number of ‘flash crashes’ – instances when asset values changed significantly over a short period of time – seen in this bull market. These flash crashes aren’t just confined to equity markets and are likely a consequence of liquidity becoming more susceptible to drying up than before. This changing market structure and the resulting increased frequency in drawdowns has a significant impact for investors, particularly for those whose horizons are not aligned to the economic environment, but rather to their own specific needs for returns, as their assets may not be able to recover from a drawdown in time to meet their liabilities. One cohort of investors particularly impacted are retirees, or those approaching retirement. These investors are not able to rely on future earnings to fund shortfalls caused by investment losses, and so must depend on the assets they have already built up through their working life.
With the world population ageing later, these investors are living for longer and so need to make their wealth last for longer. For them, drawdowns can be fatal to their investment objectives. For investors, the benefit of investing in a defensive fund during a recessionary period should be clear, as the aim to reduce drawdowns in significantly falling markets makes it easier to regain capital in the future. However, with market structure changes leading to the increased frequency and magnitude of bull market drawdowns and flash crashes, a defensive strategy has an important role in an investor’s portfolio throughout the cycle, particularly for those investors with nearer-term liabilities and needs. We believe this is why defence always makes sense.
John Stopford, Head of MultiAsset Income, Investec Asset Management
GOING OFFSHORE: HEDGING YOUR INVESTMENT BETS Offshore investing is an essential ingredient in any discerning investor’s overall portfolio. In tumultuous times, it allows you to hedge against both domestic political and economic risk, and potential currency depreciation. Alwyn van der Merwe, Director of Investments at Sanlam Private Wealth, looks at different ways of accessing the global market.
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esides protecting against risk, global • Our London-based global equity team can put diversification provides an opportunity for together a customised share portfolio for you. You investors to gain exposure to growth across can transfer your funds onto our platform, and different markets as well as asset classes. It may the team will construct a tailor-made, segregated also allow you to benefit from portfolio of individual companies opportunities not available listed on international exchanges. GLOBAL locally, including certain high• You can invest directly in the quality assets. award-winning Sanlam Global DIVERSIFICATION Every international investment High Quality Fund. The fund nvests PROVIDES AN strategy starts with your own in quality blue-chip companies unique set of circumstances, that have diverse sources of OPPORTUNITY FOR however. Depending on your revenue in terms of product line, INVESTORS TO risk profile and investment geography and currency. It has GAIN EXPOSURE TO objectives, Sanlam Private built an enviable track record since Wealth can create a stand-alone its inception five years ago, and in GROWTH ACROSS offshore solution for you, or one it was named Best Fund in the DIFFERENT MARKETS 2018 that complements your South City of London Wealth awards, Best AS WELL AS ASSET African investment portfolio. Fund Manager in the European You can use your offshore Wealth Briefing awards and the CLASSES allowances to transfer your winner in both the Investors Choice funds abroad, or you can make use of our asset swap and Private Asset Managers awards. capacity, or invest in rand-denominated options. • If you’re restricted from going the direct route, or If it’s pure equity you’re after, Sanlam Private if it’s simply not practical for you to do so, you can Wealth has a global equity offering, which can be invest offshore via the rand-based Sanlam Private accessed in three ways: Wealth Global High Quality Feeder Fund, which
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provides convenient access to the Sanlam Global High Quality Fund. If you’d rather not go the equity-only route, Sanlam Private Wealth also has a global multi-asset class offering, as well as a strategic bond fund – both funds have excellent track records. A final option for investors who can’t or don’t want to physically take funds out of South Africa is to invest in dual-listed or rand hedge companies on the JSE. For these investors, Sanlam Private Wealth can put together a customised portfolio consisting of high-quality companies that have a significant portion of their operations or income generated in foreign jurisdictions. In a nutshell, Sanlam Private Wealth has all the building blocks you’ll need to increase your global investment exposure. Supported by fiduciary and tax experts, our portfolio and wealth managers will work with you to design a customised offshore solution based on your personal financial circumstances, and your dreams and plans for the future. To find out more, email info@privatewealth. sanlam.co.za
Alwyn van der Merwe, Director: Investments, Sanlam Private Wealth
