WITH uncertainty around the health of the global economy and SA in a precarious position, what are asset managers doing to weather the storm? It is evident that their hand is being forced to some extent by strong inflows into multi-asset funds that limit exposure to the equity volatility.
The challenge for asset and fund managers is that aversion to equities is hardly an investment strategy. While needing to limit risk, the overarching expectation of above-market returns drives their decision-making and requires prudent selection of sectors or counters that have the ability to produce these returns.
"There has been a huge shift in sectors and styles in the past six months compared to the past 24 months, with some lagging fund managers now leading," explains Chris Freund, co-head of Investec Asset Management’s multi-asset business. "The big differentiator in funds’ performance essentially revolved around positions in resources and commodities and whether they had any exposure. "Many people were underweight in these, which was the correct position, so the industry did pretty well compared to the overall JSE performance."
One of the big shifts has been the preference for rand-hedge stocks such as BAT, SABMiller, Naspers and Steinhoff, which generate a considerable proportion of revenue offshore. Given the sluggish local economy and the weakened rand, this seems sensible and has influenced both asset managers’ and individual investors’ decisions.
This preference for rand hedge stocks or global equities, however, is not a silver bullet.
Allan Gray’s Richard Carter says that many of its offshore funds have had to close to new investments as the company has reached its forex allowance limit.
"We’re allowed to put 35% of funds in the asset management company offshore, so we would expect to take more money offshore as more funds flow into the overall pool. In the short to medium term we will monitor this situation," he says.
Individuals can work around this by using their R1m forex allowance that can be accessed without Reserve Bank approval, or the higher limit of R10m that requires exchange control approval.
"If clients want to access these markets directly through Orbis they should make use of their allowance and deal with Orbis as there is nothing stopping them from investing more of their funds offshore if they are under the exchange control limits. So, as more individuals use their allowance, this would free up some of our forex capacity," Carter says.
William Fraser of Foord Asset Management says the company has definitely seen increased interest by investors in offshore exposure, either through asset swaps and feeder funds or by taking assets offshore directly, as Carter has advised.
"In a world where people are worried about political uncertainty and the economy, there is a move towards further investment into international assets," Fraser says.
The bigger challenge for asset managers is having faith in the strength of global markets, which is far from a sure bet.
On the one hand, Investec’s Freund is not a believer in the spike in resources, nor that a preference away from local stocks is a clear-cut solution.
"My view is that the resources bounce is not sustainable and I believe the point of maximum stimulus is already past. I personally don’t support the thesis of buying into the likes of Anglo, BHP Billiton and the iron ore players — I think they have run too hard, too fast.
"The risks on the currency are also more evenly balanced right now after the rand has weakened since mid-2011, and I wouldn’t be surprised if it was 10% stronger next year. If the rand were to be stronger, many of the previous rand-hedge big winners might take a bit of strain. And many of the South African fund managers have loaded up on those."
Given these uncertainties and frailties in local and global markets, Freund is distinctly on the defensive.
"I think now is the time to be protecting other people’s capital rather than making a lot of money. The risk-reward trade-off is not great at the moment."
This view is echoed across the asset management industry.
"We focus on protecting the real investment of investors," says Foord’s Fraser. "There are times when it is appropriate to have a larger allocation to growth assets in a portfolio. Currently, we are not in such an environment. Capital preservation is required at times like today, when high valuations and low growth in future earnings collide.
"The market often forgets that to survive and finish first, you firstly have to finish. This means you have to invest in a business that survives over a cycle."
Outperforming the market over the long term, irrespective of these cycles, is where the asset managers earn their dues and reputations.
Fraser says that Foord’s managers have managed to avoid short-term market downturns by focusing on the value of earnings and management of their portfolio investments.
"We like to have balance in our portfolio despite taking strong views on markets globally. We’ve been wrong enough times in the past to know that we will be wrong in the future and also that investors don’t always have the same time horizon as we do," he says.
It is this experience and expertise that leads him to argue against investors taking too conservative a view.
"There is a view in the market that investors should be more conservatively positioned in terms of their exposure to equities. I would argue this is probably not the right decision to make. At Foord, we act as risk managers for our investors as well, and hence are doing the asset allocation for them."
The views on strategy are as varied as the options available to investors.
Allan Gray’s focus on value, for instance, is contrasted by Investec’s view to the contrary.
"Our focus is on buying stocks that represent value, are cheap and are likely to produce a return for our clients," Carter says. "Returns don’t come in a linear fashion. They’re sporadic, and we are generally not in a good position to predict when those returns will come through and which assets will outperform at specific points in time."
Freund, conversely, says he is not a value zealot and looks forward to a future in which he is able to take a more aggressive stance in the market.
"I can see some sectors and shares that are quite cheap, so I have some sympathy with the view that some valuations are good enough to build a meaningful position, but to me there is more than value. I look forward to the day when we can take more risk. That may come quite soon, but right now the trade-off doesn’t look good enough."
With a slew of factors clouding the outlook on markets over the next six months, it is understandable that asset managers are cautious.