Factors to consider when re-evaluating investment choices

‘There are three main areas we believe you should pay attention to when you are looking into investment portfolios’: Jaco van Tonder, director of advisor services at Ninety One.

NOMPU SIZIBA: The world of investments is a fluid one with volatility the order of the day in these times. The usual advice tends to be that investors should be well diversified in terms of the asset classes that they’ve put their money in, as well as issues like geographical diversification. But when is the right time, if ever, to start reviewing your investment strategy or choices? Last year, when the markets plunged, some chose the strategy to exit assets and may well be regretting that decision, given the massive improvement in valuations in recent times.

Well, to discuss some of the factors to consider when re-evaluating one’s investment choices, I’m joined on the line by Jaco van Tonder, the director of advisor services at Ninety One. Thanks very much, Jaco for joining us. So, what are some of the typical signals an investor needs to look out for to re-evaluate his or her investment strategy or choices?

JACO VAN TONDER: Hi, Nompu. It is an interesting conversation – the discussion around when you should make a change to your investment portfolio and when you should not.

We always take a lot of time and effort to explain to investors the things that you would normally think about that should trigger a re-look at your investment portfolio – like, for example, disappointing performance in the last six months or over the last year.

In absolute terms, we explain to people in great detail that those emotional responses are really not the way to look at your investment decisions and your investment portfolios, but we don’t spend much time talking to people about what they should be looking at. So I think the important point is, if it’s not emotions around short-term performance and angst because your portfolio hasn’t performed as well as your friend’s or one of your family members, then what is it that you should be looking at?

From our perspective there are three main areas that we believe you should pay attention to when you are looking into investment portfolios.

The first area is really around the firm that you’ve appointed to manage part or all of the money that you have invested.

People often forget that when you buy investment management, you’re buying people and skills; you’re buying people who sell you the ability to beat a passive index, so you need to hold them to that standard.

Are they beating that passive index over time, and how do they do that? They do that with high-quality people, skills and processes.

Whenever something happens to an investment management firm that is managing part of your portfolio – something in the space of senior executive departures, changes in the way that people manage money, or the way that they talk about managing money, or sometimes even changes in the ownership structure – those can all be signals that an investment management firm could be at a T-junction and could be making wholesale changes that would really affect the essence of your investment performance, such as the skill and the capability of the people who manage the money. So that’s always the first one to have a look at: any major announcements around significant changes in fund manager.

The second one that I think is also fairly easy for people to keep track of is the size of the portfolio in the fund-management firm. Size is an interesting discussion because it’s a case of being either too large or too small; both have their disadvantages. Obviously, if you are invested with a small fund manager, your investments could make up a substantial proportion of the portfolio, which has risks like liquidity. Being able to get in and out of your investments can become challenging. On the other side, if your investment-management firm or the fund that you’re in at a particular firm is really large, then it becomes progressively more difficult for that fund manager to achieve the primary objective, which is to outperform some relevant index.

NOMPU SIZIBA: Let me interject there, Jaco. If you’ve got the requisite skills, does size really matter?

JACO VAN TONDER: It is linked to the type of mandate that you’ve got. But there’s enough evidence to prove that in many mandates that South African investors would be invested in, specifically domestically, you do definitely run into size limitations. And these size limitations are often caused by the distribution of the size of the shares on the stock market. So, the bigger a fund becomes, the more and more difficult it becomes for that fund to take meaningful positions in smaller share issuances. And those have been shown over time to definitely have some impact.

Any large fund manager will tell you that it varies by mandate. So, if you are invested in an investment fund that tries to check the Alsi 40 index, which is the biggest 40 shares on the JSE, then sure, it’s much easier to run a large fund. Similarly, if you’re invested in a fund that is tracking the international MSCI World Index, then again, it’s easy to run a large fund against a benchmark like that.

But if you’re running a South African balanced fund or a South African equity fund, or even something in a very specific sector, like property or mid-caps, it can become a problem if the fund is too large.

So, size of management and size of fund is something to keep an eye on, and if there are substantial changes in the size of a fund that a manager is managing. So, it’s not just the absolute size, but any changes in the size, because those could be indications that there are big cash flows in and out of the portfolio that make life more difficult for the investment manager as well. If you think about it, it’s an easy number to obtain and it’s a good number to keep an eye on.

NOMPU SIZIBA: How do you assess whether you’re still getting value for money, especially if you’re not very conscious about what’s happening with your investments – you have a look at your statements [only] once every six months or whatever it may be?

JACO VAN TONDER: You need to spend some time. Some people are naturally very interested in investments, and they take a keen interest in what’s happening to their money. For those people, offering up tips, looking at the news around your investment manager, the size of the portfolios, and the skill level of the portfolios – if you’re naturally interested in those things, it’s easy to check them yourself as long as you check the right points.

If it’s not your natural inclination to look at investments and understand investment markets, then really, it’s around appointing someone to do the job on your behalf. If you have a reasonable investment amount, it pays you anyway to have a financial advisor to help you see through the tax and other estate-planning consequences of what happens to your investments. So, because you probably should have an advisor for those reasons alone, it’s a good idea to bounce these same questions off that same financial advisor, who will be able to give you some pretty good insights and tips around whether your portfolio perhaps contains some managers that need a rethink.

NOMPU SIZIBA: Coming to the substantive issues, does this period right now qualify as a possible time to reconsider investment strategies, given the change in US treasury yields and a very real expectation by market players that high inflation is an inevitability? And, if so, where do you see the asset class shifts happening in these times?

JACO VAN TONDER: We talk in investment management terms about the great rotation between momentum and value. It sounds really complicated, but really what it means is that in the last 10 to 15 years the parts of the stock markets – all over the world, not just in South Africa – that have really performed well have been the tech, new generation, healthcare, biotech shares. We call them the momentum shares because these are shares in newer technologies and newer industries. There’s not yet a lot of profit, but there’s an enormous amount of growth, and people buy the growth story. Think about Tesla, think about Facebook. For a long time, people bought a growth story before there were earnings and the earnings are only coming through now.

So that’s been a feature of the investment landscape over the last 10 to even 15 years. People have bought the growth stories and they’ve neglected the commodity shares. They’ve neglected a lot of the industrial shares that used to be the hallmark of economies all over the world.

What many market pundits are talking about now is what they call the “great value rotation” out of those high-growth stocks and tech stocks into more real-economy shares that are more connected to the real economy, and which could provide you with a much better inflation hedge, for example.

That is the big question – the monetary stimulus policies that have been deployed post-Covid all over the world. Are those going to be causing inflation in some countries?

You see the oil price and the commodity prices recovering, and it’s great when the platinum price and gold price goes up, especially for commodity countries like South Africa. But you must also think about the oil price. With the oil price at $70 or maybe even $80 or $90/barrel, what does that imported inflation do to a country’s economy, and could that spark off a structurally higher period of inflation in first- and third-world economies? If that is the case, as many, many pundits are starting to signal, it could happen. That would definitely mean a change in the way that portfolios are invested, and definitely a change in portfolios more to things that hedge against inflation, and perhaps a little bit less [to things] that build upon a growth story in a new and vibrant economy. Those two are playing off against each other at the moment.

NOMPU SIZIBA: Lastly, diversification is a mantra that’s often hummed by people of your ilk, and that includes geographical diversification. What’s the balanced way to invest as a South African investor? Presumably that will very much depend on how asset managers view offshore versus domestic value.

JACO VAN TONDER: Yes. That’s a really topical discussion point at the moment in our industry, no doubt about that. Historically, if you put that question to many fund managers, many of them would have said that they would be happy on a mandate for a South African investor to have the ability to place 30%, maybe 35% of the investment offshore. The nature of the returns available in South Africa has been such that you didn’t really need to take more offshore to generate a really good, diversified return for the South African investor.

That’s changed, and it’s changed because the international markets have grown much more substantially whereas, for reasons that we are well aware of in South Africa, the economy has been anaemic for the better part of a decade. Because of that our listed shares and the options on our stock market have really gone sideways for the past 10 years.

So, if you ask investment managers the same question, more and more they are seemingly starting to indicate that they believe people should have around 60% of their free investment portfolios in offshore-related assets.

It’s a function of the fact that the SA market is not growing as much as the offshore markets, and it’s also a function of the investment returns in sectors and industries available offshore that are increasingly becoming difficult to access in South Africa.

NOMPU SIZIBA: That was Jaco van Tonder, director of advisor services at Ninety One.

Brought to you by Ninety One.

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