How fund managers are placing their bets
Rezco is bracing for another big pullback in the equity markets
Leading balanced fund managers believe the recovery in local and global share markets since their fall in March may have been a bit overdone, but most are still banking on shares to deliver the best returns from here on.
While Allan Gray director and portfolio manager Duncan Artus described managers’ positions as “extreme” in a webinar for three leading managers hosted by Allan Gray, managers do differ on which shares are best for your savings.
And one notable exception is smaller manager Rezco, which has reduced the equity exposure of its Rezco Value Trend below 9% while it awaits better opportunities.
If you are one of many SA investors whose retirement fund savings are invested across the asset classes in one or more balanced funds, you have probably endured below-inflation returns for the past six years.
Artus and Coronation Balanced Plus fund manager Neville Chester told the Allan Gray webinar they are optimistic that these funds will do better from current market levels because they can, within limits, tilt towards or away from asset classes, depending on their outlook.
But their outlooks have differences that could see managers deliver different returns in future depending on their asset class calls. Multi-asset funds are limited to 75% in equities, and 30% offshore and 10% in African markets.
At the end of May, Allan Gray’s Balanced Fund had close to 63% of the fund in shares, of which almost 19% was in offshore markets.
Ninety One’s Opportunity Fund has 56% in shares, of which 35% is in shares listed on foreign and African stock exchanges.
Coronation’s Balanced Plus Fund has 68% in shares, of which 29% is in offshore equities.
The Old Mutual Balanced Fund has close to 66% in equities, of which almost 26% is offshore, its fact sheet shows.
Rezco’s position is starkly different, with close to 68% in local and global bonds. Chief investment officer Rob Spanjaard told a recent Virtual Network webinar hosted by The Collaborative Exchange that Rezco prefers to sit out the market in case there is another big pullback.
While Artus believes markets have run ahead of themselves, he said Allan Gray has taken advantage of opportunities to buy shares before they start moving. It has also bought SA government bonds, though it is not bullish on bonds long term, he says.
Markets are not reflecting the broken economy.Rezco CIO Rob Spanjaard
If there is one thing that will surprise, it will be if domestic equities do better than everyone expects, he said.
Neville Chester, portfolio manager at Coronation, said Coronation also thinks markets have run ahead of themselves as the world is fraught with problems.
Chester said that despite an economic stimulus on a scale the world has never seen before, someone has to pay for stimulus and the world is leaning to the political left. Ultimately, this could mean higher corporate taxes, which would be bad for global equities. “We see many reasons why this relief and liquidity-led recovery can peter out,” he said.
Both Chester and Hywel George, chief investment officer of Old Mutual who addressed the Virtual Network webinar, acknowledged the role of day traders in pushing up share prices in the short term.
Nevertheless, Coronation upped its weighting to select shares in developed markets when the market sold off indiscriminately as it believes developed markets can support and stimulate their economies better than emerging markets, and global bonds are not offering value.
Chester said the lockdown in SA has been immensely damaging and the country will feel the effects for a long time to come. Despite this, Coronation bought more global-listed quality businesses in SA while the prices were down. The manager also holds local bonds cautiously, as cash is not offering inflation-beating returns, he said.
Ninety One Opportunity Fund manager Clyde Rossouw said it is important not to think this crisis is the same as that of 2008 when the fortunes of many local businesses, including the banks, were largely unchanged.
This time it is an SA crisis and even before it the country was staring down the barrel of a recession. So the weak currency and the low stock prices will not necessarily translate into a mean reversion on the local market, he said.
This time the country will need to access huge amounts of foreign funding to weather the crisis and bond yields are still too high, making it expensive for companies to raise capital, he said. Ninety One is therefore more reticent about buying local equities, preferring instead quality companies in offshore markets.
A good multi-asset fund could be supplemented by a side-pocket portfolio exposed to technology, gold, cryptocurrencies and shares that will benefit from accelerating technology trends.Old Mutual CIO Hywel George
Rossouw believes the global economic recovery will be led by China, with many excellent businesses in the US playing an important role.
Despite a few excellent companies, such as Amazon, Apple and Microsoft contributing 35%-40% of the returns in the MSCI World Index, Rossouw said Ninety One does not own a lot of them because there isn’t a strong investment case.
He also said these businesses could face regulatory interventions in the form of anti-competition cases as they are sitting on huge amounts of cash when governments need to fill budget deficits.
Ninety One prefers second- and third-tier businesses that are positioned for growth and understand the need to work harder to ensure they ride the technology disruption, he said.
Artus said Allan Gray expects the best returns from its offshore shares. However, its offshore sister Orbis prefers companies such as BMW and Honda that have room for higher growth than larger companies such as Microsoft that already have huge market penetration.
Taking a contrary view on shares, Spanjaard told the Virtual Network webinar that the investors are remembering the recovery that followed the global financial crisis in 2009 and are behaving as if it is the start of a bull market.
Rezco does not believe this is the case as earnings and company fundamentals need to improve. Markets are not reflecting the broken economy, he said.
Rezco’s high cash and bond exposure cost it during the recent rally but Spanjaard said one-year returns are still high.
George said that while it is likely the world will lose two to three years of growth and SA will do hard yards, there will be a different kind of economy which will offer different opportunities to make money.
He said the Old Mutual Balanced Fund bought equities when the market was low and caught the ride up, but now it faces the hard call about how much further to ride it.
George said the economic hit was so severe there will initially be deflation, which will later be followed by inflation. The managers may be selling equities in due course when interest rates rise.
In future there may be less central bank support and less globalisation, along with accelerating technological change, more localisation, higher prices and more inflation for us all instead of the debt-fuelled economy we have been on for 20-30 years, he says.
In this environment most investors should stick with a well-diversified portfolio, George said.
A good multi-asset fund could be supplemented by a side-pocket portfolio exposed to technology, gold, cryptocurrencies — particularly bitcoin and ethereum — and shares that will benefit from accelerating technology trends such as e-commerce, cybersecurity and 3D printing, he added.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.