HENK VILJOEN: Balanced investing provides protection in ‘interesting times’
Remember the phrase: “May you live in interesting times”? That is the case for investors now. After the market upheavals of 2020, there has been a notable recovery in most global economies and an acceleration of growth momentum. However, Covid-19 and its variants are still causing some concerns in various countries, which has implications for asset prices.
In SA, there has been a strong recovery in commodity prices over the past year. Latest Stats SA data shows that the mining sector’s production has reverted very close to its January 2020, pre-Covid-19 level.
Commodity prices are retracing from recent peaks, which bodes negatively for earnings growth in various sectors of the SA economy, not just mining.
The fear of inflation running out of control remains a global backdrop, but we believe it is more supply bottlenecks that are causing inflation levels to spike in many economies. We expect global growth rates will moderate from current levels, but they will not drop dramatically. In SA in particular, we anticipate economic growth will be about 2.5% in 2022, barring any specific policy changes or another upswing in commodity prices. We also believe inflation in SA will moderate over the next 12 months.
The Stanlib Balanced Cautious Fund is positioned to maximise opportunities in this environment. It can invest up to 40% of its assets in equities. Within this allocation, we prefer global equities over SA equities. In global equities, we have some weighting towards a general global equity fund and hold quite a significant allocation to emerging market equities and Europe. In SA equities, we have been pulling back on commodities in favour of the financial sector, particularly banks, where we see potential for an earnings recovery.
Balanced funds
On our 60% fixed income allocation, we had confidence that the SA government would cut back on its auction sizes, which it did, with a positive effect on yields. We also foresaw government finances turning out better than most of the market expected due to higher commodity prices. This has also happened, with the government now expecting to generate about R100bn of extra revenue from that sector.
Many of these trends have played out, so we have pulled back slightly on our domestic bond position. We have allocated 5% to inflation-linked counters and still hold 6% in property, which we think has a good recovery story. We also have a 7% allocation to global emerging market debt through Brandywine, a global firm that has a good track record in managing currency and emerging market bond exposure over time.
We believe balanced funds remain relevant over time. It makes sense for investors to stay invested with an asset manager or fund that delivers its objectives consistently and remains committed to its stated philosophy, rather than chasing the latest top-ranking manager. Asset managers are confronted daily with change and expected to invest to achieve the stated objective of the fund.
Money market
There has been a remarkable recovery in SA equity prices, and the steep bond curve offers a real yield (percentage yield over the inflation rate). Compare this with money market types of investments that many cautious savers are holding. As they are not earning any real yield, it becomes attractive to invest less conservatively.
Investors holding a large exposure to riskier equity assets may consider pulling back, taking some profits and allocating to a slightly more conservative fund. The Balanced Cautious Fund, with 40% equities and 60% fixed income, presents a good diversification opportunity over the short to medium term.
The case for global diversification remains strong. SA is not a favourite investment destination for foreign investors, which is clearly reflected in our dwindling weighting in global indices, persistent sovereign debt downgrades and continuous foreign selling down from their historic exposures to the country.
But it still makes sense to hold SA assets that are delivering comparatively more attractive returns than are available elsewhere. For example, the steep yield curve, which reflects negative perceptions about SA government finances, presents a great opportunity for local rand investors to earn very attractive real yields.
The best way for an investor to protect investments against future uncertainty is to hold a diversified portfolio. The mix of assets depends on a number of factors, such as the age of the investor and the size of his or her portfolio.
• Viljoen is senior portfolio manager of the Stanlib Balanced Cautious Fund.