SOUTH African investors are understandably cautious with their money at a time when local and global conditions give even the most hardened money managers the jitters.
While a stay of execution has been won on a mid-year sovereign ratings downgrade, the distressing contraction in first-quarter economic growth will have done little to change the belief that the light at the end of the tunnel is anything else than a heavy-goods train intent on smashing any inkling of optimism. This view may appear unnecessarily cynical, but pragmatism is more likely to serve investors’ interests than donning rose-tinted glasses.
Yet money is still flowing into the market at a steady pace. What is new is the destination of those flows: defensive positions in the form of multi-asset funds.
Association for Savings and Investments SA (Asisa) figures show that these funds now account for 51% of all assets under management, with R72bn flowing into these portfolios in the 12 months to March 31. By comparison, R35bn was invested in SA interest-bearing money market portfolios and only R3bn went into South African equity portfolios. "After the shock of 2008 and the crash of the markets, many were probably saying they don’t want all their exposure to equities," says Leon Campher, Asisa CEO.
"Aggressive investors who can afford it will always find room for a pure equity portfolio in their portfolio, but that would be the exception rather than the rule. We were spoilt a few years ago with 20% to 40% returns, but I don’t see that being repeated."
Capital preservation rather than accumulation is the new watchword, and returns from these more conservative funds bear out the wisdom of this stance. Asisa figures show that multi-asset high-equity funds have returned 11.6% in the past five years compared with 11.8% for the benchmark, while multi-asset low-equity funds returned 9.9% for a period in which consumer inflation averaged 5.5%. Over 10 years, general equities returned 11% compared to the 10.2% and 8.7% of the high-and low-equity multi-asset funds.
"In a volatile market it pays to be in a multi-asset fund. The little return you sacrifice is made up by the lower risk," Campher says. "The 10 biggest management companies outside of the money market funds represent 75% of all the assets in the market. Most of them seem to be doing well."
This risk aversion poses different challenges for asset managers. Tasked with delivering alpha for their clients, stock picking becomes even more important in funds with a lower emphasis on the potentially higher returns that equities have offered in the past. Maintaining returns above the market average therefore is also a test of an asset manager’s strategy.
Long-term value investor Allan Gray, for example, feels vindicated in the returns it is producing as a result of this approach. "One thing that is truly different in our strategy is our long-term approach and the fact that we’re quite happy to look past what is happening in the short term and what we can predict," says head of product development Richard Carter. "We’re prepared to take pain in the short term to be right in the long term and many of our long-term positions are really paying off and showing superior performance."
This performance has resulted in the company growing its assets under management in the year to the end of March by 7.45%, reducing the gap to the largest asset manager, Coronation, to little more than R3bn. Its battle for the title of the largest manager by assets was helped somewhat by Coronation shedding almost R1,7bn in assets over the same period.
Is this shift in flows indicative of changing investor behaviour? Hardly, Carter says. "Many investors follow performance rather than believing the Allan Gray long-term value story and investing smartly," he says. "Our performance has improved, which is reflected in the flows into our funds, and that will continue."
One of the largest gainers over the year to the end of March is Foord Asset Management, which grew assets under management by nearly 18%. Director responsible for investment strategy William Fraser ascribes this growth to a combination of increased market penetration and confidence in its fund performance. "Past returns have no doubt played a part in the recent success of the business. However, we are also encouraged by the growing number of investors who have stayed with Foord through periods of underperformance. Our philosophy of capital preservation in real terms resonate with most of our investors."
Foord’s performance, he adds, is largely on the back of more defensive holdings. "A more defensive positioning was established in the past 18 months, if not slightly longer. A preference for nonresource rand-hedge businesses remains evidenced in portfolios. Years of returns well in excess of expectations, after inflation, is behind us. It is now the time to consolidate and, in time, compound returns. We will continue to focus on capital preservation and have a large component of cash in our local portfolio," he says.
Even Chris Freund, an avowed equities hawk, admits to wariness in light of current market conditions and uncertainty. "We are more cautiously positioned than we’ve been for many years, which is not the usual position we find ourselves in," he says. "I’m not expecting a bear market in the short term, but there is now a lousy risk-reward trade-off. So we’re holding less equity and more cash than we’ve had in our portfolio for years, and the types of shares are reasonably defensive as well. But that position can change quite quickly."
With these high levels of uncertainty and the threat to political instability, the retreat to lower risk is likely to be the default position for the foreseeable future. It is clearly a prudent strategy.