Leading asset managers lack conviction about which investment markets will deliver good returns in the future and, as a result, say diversification is key in the current difficult environment.
At a recent Morningstar investment conference in Cape Town, Sandy McGregor, a portfolio manager at Allan Gray, said that, after more than 20 years in investment, he has never known a time when investment professionals were as perplexed as they are now, because they lack conviction about the global markets.
Herman van Papendorp, the head of macro research and asset allocation at Momentum Asset Managers, told the conference that the traditional asset classes of equities, bonds and cash are likely to deliver lower returns than those to which we have been accustomed, and therefore multi-asset (or balanced) funds need to cast their nets wider and invest in additional asset classes.
Meanwhile, Paul Stewart, the head of fund management at Grindrod Asset Management, said in a recent commentary that one of the big risks of investing offshore is that it is unlikely that foreign assets will produce nominal returns in excess of South African inflation.
Offshore returns will be lower, because economic growth rates are low and the entire eurozone is “mired in economic woes”, he says. Equity, property, bond and cash yields are also very low, and equity valuations are at a premium in most parts of the developed world.
Van Papendorp, McGregor, Dave Foord, the founder, director and chief investment officer of Foord Asset Management, and Nazmeera Moola, an economist and strategist at Investec Asset Management (IAM), were all members of a panel at the conference that agreed that diversification is currently the best investment strategy.
McGregor says the South African economy won’t grow unless the country increases its exports. Until 2012, exports were growing because of the demand from China for commodities. Now that the Chinese economy is entering a phase in which its demand for commodities is lower, South African growth is not good, he says.
Investors need to find the “new game”, McGregor says, but the “new game” is not in South Africa.
Foord says he would not take an all-or-nothing bet on offshore versus local, and investors need to consider their circumstances, including their investment time horizons and whether their future liabilities will be local or offshore.
But, he says that Foord’s worldwide flexible fund, which can allocate freely between local and offshore markets, has 70 percent of its portfolio invested offshore.
Foord says his best investment bet currently is Chinese equities listed on the Hong Kong stock exchange, because earnings prospects are good and prices are cheap.
Van Papendorp says he prefers offshore equities to local equities, but he does not prefer all offshore asset classes over South African ones, with both domestic fixed income and domestic cash likely to provide superior returns in the coming years, compared with their global equivalents.
Moola says she is also concerned about the lack of economic growth in South Africa, but deciding where to invest offshore is difficult, with Europe still a very uncertain investment destination.
In his commentary, Stewart says only if there is substantial rand depreciation will your offshore investments achieve the same returns that many South African companies and listed property securities are likely to deliver.
McGregor says the key in the current uncertain environment is to own a bit of everything and to be diversified across geographic regions and asset classes.
John Green, who leads IAM’s client group, told the Morningstar conference that diversification and volatility (the ups and downs of returns) are hot topics in the international investment community.
Green says South Africans have relatively few opportunities to diversify their portfolios if they invest only locally, but they can use their offshore exposure effectively to improve their spread of assets.
He says that international investment firms have conducted extensive research into improving diversification after discovering that asset classes they believed were uncorrelated (would deliver good and bad returns at different times) had, in fact, behaved similarly during the global financial crisis.
A new international post-crisis investment trend is diversified growth strategies, which aim to ensure that investments grow, but are a lot less volatile than traditional equity funds, he says.
Diversified growth funds have, in many instances, replaced hedge funds in investors’ portfolios, because they are regarded as performing a similar role to hedge funds but at significantly lower fees.
Green says that diversified growth funds have not yet been fully tested in a time of market stress and therefore the real effect of this new approach to diversification remains unconfirmed.
After the global financial crisis, volatility was identified as enemy number one, he says.
In many parts of the world, institutional investors, such as large pension funds, have adopted low-volatility investment strategies, some of which involve significant investments into defensive shares and other instruments that are expected to deliver more stable returns and perform well despite market downturns, Green says.
Several low-volatility exchange traded funds have been launched, but they have under-performed equity markets, which have been strong, he says. This under-performance is driving some investors to switch out of these strategies at what could be the wrong time, Green says.
This demonstrates that you should always have a good reason for investing in a fund, and you should avoid selling when it is behaving as you expect, even if it means you must endure a period of under-performance, he says.