Striving to obtain the highest risk-adjusted return for investors is a challenging task that asset managers generally take in their stride. It is, after all, their calling. Successful asset managers have built up expertise and optimal operating procedures to satisfy investors’ expectations and create specialised products to achieve their goal.
However, fund managers face a myriad of challenges and concerns that can influence both the investment performance and the operating environment of the asset management firm itself.
“One of the biggest challenges and concerns facing SA currently is the perilous state of the country’s state-owned enterprises,” says Jo-Anne Bailey, sales and country manager for Africa at Franklin Templeton Investments.
It’s a known fact that state-owned companies are on the brink of bankruptcy. SA’s auditor-general’s office has issued qualified audit reports for more than half the country’s state-owned enterprises (SOEs) and is questioning whether a worrisome number of the biggest SOEs can be seen as going concerns.
“These SOEs create risks for the economy as a whole,” says Bailey. “Some state companies are totally reliant on funding and debt guarantees from government. Meanwhile, government itself is facing huge budgetary constraints. Debt default by one of the large state enterprises will have a pronounced effect on government finances, investor confidence and the investment environment.”
This leads to another huge concern – the risk of more pressure to use investment funds to bail out these inefficient and loss-making entities. Franklin Templeton describes this as a “tremendous risk” and a “huge concern”.
“We have noted calls from different quarters that the Public Investment Commissioner invest in state-owned companies to save them from collapse,” says Bailey, pointing out that the commissioner manages the huge Government and Municipal Pension Fund. “The risk is that such investments will be due to political pressure rather than decisions based on proper investment principles.”
A similar concern, she says, is that government might, in time, introduce new requirements in terms of prescribed assets to tap into investment funds managed by private asset managers.
South African investors should also be aware of the risks associated with an economy that relies heavily on commodities, notes Bailey. “Investment managers should ensure that they manage these risks on a day-to-day basis.”
One way to reduce these risks is to diversify investments by considering global and foreign currency funds, and to actively seek funds focused on different industries.
Franklin Templeton has also identified SA’s continued high level of unemployment and weak education system, from primary through to tertiary level, as serious risks. “Investors and the investment industry should take cognisance of these risks because they affect the economy, political stability and financial well-being drastically,” says Bailey.
A key risk area that the authorities have given considerable attention to is the protection of investors and their investments. “Current and proposed legislation with regards to investor protection offers investors good protection,” says Bailey.
She believes legislation that enables the Financial Sector Conduct Authority (previously the Financial Services Board) to regulate the industry is well-developed and in many aspects better than similar regulations elsewhere in the world.
More good news: Franklin Templeton believes that prospects for most emerging markets remain sound despite the recent increase in volatility. In a recent communication to clients, the emerging markets research team noted that these markets have historically bounced back from external shocks quickly, displaying a healthy level of resilience.
Importantly, emerging market economies look poised for further growth, says Bailey. The International Monetary Fund, according to a report published a few weeks ago, estimates growth of 4.9% for emerging markets in 2018.
“We believe the key drivers for emerging markets – information technology and growth in the consumer sectors – remain intact,” she says.
Rising wealth in emerging markets is an important driver, and the demand for goods and services is expected to continue to be a growing trend, which should benefit investors.
Brought to you by Franklin Templeton Investments.