If you’ve made the right investment decision, do nothing

… but that investment decision is a very hard one to make.

RYK VAN NIEKERK: Sangeeth Sewnath, he is the deputy managing director at the asset management group Ninety One and he joins me now. Sangeeth, South Africa is not a happy place at the moment. We are currently in lockdown, the JSE is down 25% since the beginning of the year. We are looking at a protracted recession in South Africa. Moody’s just downgraded us and foreigners are selling out of South Africa. It’s not a pretty picture indeed. And it seemed to have happened so quickly. Many people were relatively positive after the announcement of the budget a little over a month ago. How did things change so quickly?

SANGEETH SEWNATH: Morning Ryk, thank you for having me. The budget speech is such a long way away already and there was a lot of hope coming out of the budget speech. I think they tackled the issues that needed to be tackled and we were certainly looking like we played some sort of part [in] dealing with the wage issues. But you know, I think a lot of things have obviously transpired since then and have led to a lot of uncertainty in the market, a lot of volatility in the market and it’s been a combination of things that you couldn’t have dreamt could come together and so it has been one of the sharpest falls globally and in South Africa, that we’ve seen in our history but investors are certainly scrambling a bit at the moment. So we did a quick piece of work around what people are doing from a flow perspective in the unit trust industry. It is an estimate, but it gives us a sense of what people are thinking of at the moment.

So what we did is we looked at flows over a one-month period and then a lot of measures started on the 20th of February to the 19th of March and the unit trust industry saw estimated outflows of about R15 million, which is very sizeable. A lot of it coming out of multi-asset funds and some multi-asset height equity where genuinely a list has about 60% in equities. The multi-asset, low equity sector, they genuine list about 30% to the 35% equities as well as multi-asset income sectors seeing outflows over that one month period and then where you saw people go into funds was largely around money market funds and some bond funds in the market. So a lot of people really scrambling and trying to look for safety in these conditions with a lot of uncertainty in the markets as well as taking money outside of the unit trust space. So generally when people take the money outside of the unit trust space, the question is where are they going and generally they sit in bank deposits.

So a lot of scrambling going on in the market and people really trying to find, without a doubt, where they can find as much security as possible. On our platform side, which is a useful assessment of how people are reacting, what has been quite interesting is the rate of investment into the platforms – so the Ninety One investment platform – hasn’t actually changed. So people are still investing their money, they are choosing the money market and bank deposits as opposed to equity-like investments or higher equity-like investments. They’re doing a lot of switches so the volume of switches that we’ve seen in a platform for the month of March was probably twice as large as we’ve seen in the previous or more normal months, but a redemption side, we haven’t seen unusual reaction for this.

RYK VAN NIEKERK: Most investments on the Investec platform, would be retirement type of investments, retirement annuities and the like and the fund choices or the investment choices would come from financial advisors. And that creates an interesting dynamic because do you leave the investment and the asset allocation decisions to the financial advisor or to the fund manager in which you invest?

SANGEETH SEWNATH: That’s an absolutely critical question. I think during these times given investors’ reaction, I mean what you actually need in this situation is a combination of a calm investor, which is really hard to find in these conditions but you need a calm investor, you need a good financial advisor and you need an experienced investment manager. Those three things are really what you need in these type of conditions. And I think a lot of people who chose multi-asset funds for the right reasons where they leave the asset class decision, the actual stock decisions up to the investment experts. You know a number of those investors, if they’ve chosen the right investment strategy with their financial advisor, they should actually be doing very little if anything at this point because they chose something for the long term and they should stick to that plan. And there are many examples that talks to where investors panic and make irrational decisions over this time how they lose out significantly and one of the pieces of work that we’ve done to help living annuities because that’s where we get the most amount of questions.

We looked at the 2008 crisis, we looked at somebody investing about R5 million taking a 5% income growing by inflation and if they chose a multi-asset, one of the Ninety One ‘The opportunity fund’, what would they have done and what could the investment value be now versus, if at the time of the crisis they switched to cash and they stayed in cash. This is the third scenario of if they moved to cash for a one year period and then switched back into the fund a year later and the number is staggering. The R5 million living annuity investment with an income level, if you just stayed in the multi-asset fund without changing anything would have grown to about R8 million as of come the end of last year. And this is close to prime, if you moved to cash, you would have had half that amount that R8 million would have been R4 million. And if you moved to cash a year and then move it out to the multi-asset fund, you’d have lost 25%, you’d have 6 million. So really showing you the value if you’re in a multi-asset fund that you chose that was correct, that you should stay invested and because if you move out of the queue you are going to make the wrong investment decisions and you are going to destroy the value of your investment.

If you multi-asset fund you should actually be okay and you shouldn’t be doing much. If you have chosen to use asset classes if you chose to pick an equity manager, a fixed income manager, an offshore manager, there’s a whole myriad of asset classes that you can choose, then hopefully you’ve used that professional investment manager to help you make that decision. So whether that’s a discretionary fund manager that we have in South Africa and globally or some professional to help you make this decision, they need to guide you in these conditions as to what the changes need to be to keep up with what markets have done. And that is not the easiest decision because ultimately you’re competing against the guys and look at this on a daily basis, who make decisions on a daily basis given market conditions. And if you feel like you don’t have that expertise in your business, then you do need to think about moving to a multi-asset fund where the decision making is left to the expert.

RYK VAN NIEKERK: But do you do it now?

SANGEETH SEWNATH: Well, you know, I think if you are in different asset classes at the moment and you don’t have the expertise to choose the right asset classes, then the multi-asset fund that suits your long term needs is the right approach. You know there’s ways that you can do it. You could either choose to do it immediately or you could choose to phase it into the market and that averaging, helps you ensure that you don’t enter at one particular point. So you could decide well over the next six months I’m going to do every month , I’m going to do a six-month investment and ease that into the multi-asset fund or you could decide to do it over a shorter space of time. If you’ve chosen assets classes and you do not have the experience and the professionalism to be able to manage it, you should be looking at a multi-asset fund as an alternative way to leaving the decision making to the right people.

RYK VAN NIEKERK: The narrative I have received or heard from many fund managers over the past few weeks is that investors should sit on their hands, don’t make any decisions now because the market is really in many ways irrational, wait until it’s more predictable, but it’s always a difficult choice and decision to know when to change and shouldn’t make that decision based on emotion and that’s a difficult thing to do.

SANGEETH SEWNATH: Yeah, absolutely. I think it’s right, if you’ve chosen the right investment plan and you’ve got the expertise and you’re comfortable with the expertise and the plan is correct, then you should do nothing but that decision is a very hard decision to sit on your hands when things are moving around. It’s difficult, but what’s important to put into perspective, there are two important points in any investment. The point that you make the investment and the point that you decide to disinvest from the investment. It’s those points that determine what return you generate within an investment. Anything in between and the reason to sit on your hands if you made the right investment decision is actually noise. Its really paper wins and it’s paper losses. You actually experienced gain and loss is dependent on when you decide to invest and when you decide to sell, so as hard as it is emotionally not to make a decision when you see all of this noise and all of this turmoil in the market. If you’ve chosen the right investment decision at the outset with the help of your financial advisor, then you should not be doing anything in these conditions.

RYK VAN NIEKERK: What did Ninety One do under the circumstances? Did you change certain positions?

SANGEETH SEWNATH: Yeah, look, I mean I think these conditions do create some opportunities in the market. I mean valuation has dropped quite significantly of companies in South Africa and globally. You know what we’ve found in a number of the portfolios that we manage in particular the quality portfolios that we manage is that the balance sheet strength at this stage whether it’s a global company or South African company is absolutely critical and we need to find companies who have this balance sheet strength that can show resilience in these market conditions. So our views on our quality portfolios have largely, for the last year and a half, two years and largely been that global equities and local bonds are where we see the best risk-adjusted returns and we’ve actually weathered the storm relatively well, in absolute terms everyone is struggling in the market but relatively we’ve done okay and what we finding now is that with this market correction and downpour, we are finding other opportunities in the market.

So we are finally comfortable in South Africa. You have balance sheet strength, you know, which has been knocked down in terms of the price of the investment. So we have seen some opportunities in South Africa but you’ve got to weigh out the risk and the opportunity, we still believe that you’ve got to be very selective around the SA equities that you choose, but a lot of adjustment that’s likely to happen in the market. It’s hard to say for sure what that’s going to be, but balance sheet risk is absolutely critical. That’s what we looking for at the moment and we will continue to do it and that’s what people expect us to be and that’s how we generate the right outcomes for our clients. I will continue to look for opportunities as the market unfolds and find the best place to invest and the best opportunities.

RYK VAN NIEKERK: What would your advice be to investors now in the context of we will see really poor economic growth over the next few quarters in South Africa. The JSE prospects are also depressed. Foreign markets are very volatile, the rand has depreciated significantly over the past few weeks and all of this seems to be a bit of a perfect storm. What would your advice be to invest this within that context?

SANGEETH SEWNATH: I think it’s no different to what I’ve already said which is, if you have chosen the correct investment plan then you’ve got to stay invested because if you decide to disinvest at this stage and to be more cautious, then you will miss the tick up in the market when it does happen because no one’s able to really time that correctly. So if you’re invested in the market and you’ve got the right investment mix of your portfolio to recognize your particular goals, then you shouldn’t do anything. If you do not have the right investment portfolio, given your objectives and goals, then you should find a really good financial advisor and determine what that right choice is. Sitting on your hands and sitting on the fireline if you don’t have a good investment portfolio is probably the wrong decision at this stage as well.

RYK VAN NIEKERK: Sangeeth thank you so much for your time today. That was Sangeeth Sewnath, he’s the deputy managing director at Ninety One.

Brought to you by Ninety One.

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