RYK VAN NIEKERK: We continue with our discussion on the mechanics and structure of offshore investments. Not all investors have the same objectives when it comes to foreign investment. Some investors want to hedge against the rand, others are looking for aggressive growth. And then there’s an interesting segment which looks to be more conservative and focused on capital preservation. This could be an investor who wants to secure long-term financial security for his or her family.
John Stopford, the head of Global Multi-Asset Income at Ninety One, is on the line. He is speaking to us from London. John, thank you so much for joining me. It is a bit of a problem. It is one thing to decide to invest offshore, but it’s not always easy to choose where and in what asset class or product to invest.
JOHN STOPFORD: I think that’s absolutely right. Our view is that we live in a very uncertain world and the uncertainty to some extent is reflected in both how economies are behaving, but also how policymakers are behaving. And so, we think it’s a recipe for significant market volatility – periods of market strength, and then periods of significant market weakness – which is difficult for a lot of investors to manage. And then the safer alternatives of investing in cash, for example. One of the sorts of policy prescriptions that central banks have adopted is essentially zero nominal interest rates forever, or at least for the foreseeable future. And so cash in nominal terms is okay, but in real terms, it’s a wasting asset. We think it’s a big challenge in terms of how investors might deal with some of those issues.
RYK VAN NIEKERK: So you have equities on the one side, which seem to be very risky and potentially very volatile, and on the other side of the spectrum you have cash, which will yield very, very little. So obviously you would like to have something in between. What are the options in between?
JOHN STOPFORD: For us, it’s all about how you choose and then blend different securities. We think you should take the widest possible perspective. So the approach we take is multi-asset – it’s global. It’s saying let’s look among all of the investment opportunities out there and try to find ones that give us a balance of a relatively predictable return, but which also can be blended together to give relatively low volatility or risk.
And so, you can end up with something that is more consistent, with a steadier outcome, even if it’s not massively exciting – in which case potentially for investors who can take a little bit of risk. It’s an alternative to cash returns or low-yielding bond returns, for example, but isn’t as racy as going all the way into the equity market.
RYK VAN NIEKERK: Every single textbook regarding investments says if you have a long-term view, invest in equities, it has outperformed all other asset classes for decades, and it should for decades to come. So how should an investor weigh up the option to be more conservative and invest in a multi-asset product like this, or actually try and sit out the volatility and just look at the potential of equities, which has been proven over many, many years?
JOHN STOPFORD: I think that’s a very good question. I think you need to think about it in, probably, two ways. One is in terms of prospective returns over the long run, and the other is in terms of time horizon. In terms of prospective returns over the long run, one of the challenges for equity markets, I think, is they are already pricing is potentially quite a lot of recovery and sort of good news post-Covid. And so, if you just look at the earnings yield, for example, on equity – that’s the sort of prospective cash flows divided by the price – those kinds of yields are also pretty low. And historically they would suggest that your return on a 10- or 20-year horizon, which is probably the longest most people are going to be thinking about, may not be that great.
Just as after the dot-com bubble in the 2000s, you had relatively elevated equity valuations, and it took a long time just to get back to your starting point. And, if you look at more extreme examples, after the bubble in Japan in the late eighties, Japanese equities have never got back to where they were trading back then, and we are, what, 30 years further down the line.
So yes, in the very long term. But there may be periods where, if equities are overpriced and there’s a downside risk, you may have to have a very long time horizon, I think, for that to work. We’re not saying that that’s necessarily the case. I just think it’s not for everybody – just to go and stick money in equities regardless of how they’re valued and what their time horizon is.
And on the time horizon point, clearly there are some people who are much closer to needing to spend their savings. They’ve accumulated capital over their lives. They’re in retirement and they need a bit more certainty because they don’t have the years left, if there is a big market event or a big market drawdown, to rebuild their capital again. So, they’re looking for a steadier outcome – and that’s the kind of strategy that the team I’m with is looking to deliver.
RYK VAN NIEKERK: What is the risk profile of such a multi-asset income product?
JOHN STOPFORD: The key driver of the portfolios is we’re looking to find individual securities that pay a reasonable yield, but not necessarily a very high yield – because often the highest-yielding stuff is the riskiest – but where that income is underpinned by real cash flows coming from the underlying assets business. So you’ve got a reliable income stream that’s doing the heavy lifting, and most assets’ income is the long-term key driver of returns, much more so than capital growth. Even in the case of equities, income dominates returns over the long term.
So finding reliable income payers within bonds, within equities, within listed properties, is the starting point. But then it’s about putting them together in a way where you have a reasonable level of diversification. You don’t have everything likely to go up and down together, and you are focused on, ultimately, a sort of risk objective as well as the return objective.
So we’re trying to deliver a moderate return, but importantly with somewhere between zero and half the volatility of the equity market. So typically, perhaps about a third of equity market risk, which we call typically bond-like. We think that it’s giving you a risk profile that’s similar to fixed income but, hopefully – because it’s ploughing or looking at a much wider universe – can do that more consistently than yield bonds can now, partly because bond yields are so low on the whole. So it’s looking wherever we can to find that combination of reliable income, but also then to put that together into a relatively defensive portfolio and deliver ideally moderate return with low risk.
RYK VAN NIEKERK: Money market yields are close to zero, so what type of yields should an investor expect?
JOHN STOPFORD: Yields have come down. One thing that hasn’t particularly declined is the additional yield you’ll pay for taking a bit more risk. So, if you go into corporate bonds, if you go into high-yield bonds, even if you go into equities, the so-called risk premium or yield premium that they pay remains relatively wide. You’re still being compensated for adding some additional risk to the portfolio, even if the overall level of yields is lower than in the past.
At the moment we’re targeting around a 4% yield, and that we think is pretty sustainable – and that doesn’t involve chasing after very high-yielding securities. It’s about trying to find that balance between securities that pay a decent yield on average. Not every one will be that high. Some will be much lower, some will be a bit higher – but making sure that each of those investments has cash flow, excess cash being generated at the underlying business level that’s going to be sufficient to pay the yield, and also is going to be relatively resilient or sustainable if the economic environment changes.
RYK VAN NIEKERK: It makes a lot of sense for somebody who is concerned about capital preservation. There are also a lot of other reasons people invest offshore, but I don’t think this option may be on top of the list as an investment destination. I don’t think it’s top of mind. Are you seeing inflows into this fund and the broad category of multi-asset income?
JOHN STOPFORD: Yes, definitely. I think part of it is a view that investors are looking more for solutions these days than just looking to invest in asset classes. They want somebody to try and help them navigate a pretty complicated investment backdrop, so they’re looking for strategies that have clear return-and-risk objectives. But, as I said, I think we live in a world that’s inherently unstable. We’ve seen, since the GFC [global financial crisis of 2007/8], about every one or two years, a pretty big drawdown in equity markets – 10, 15, 20, 25, 30%. And those kinds of events seem to be happening with more regularity.
We would put that down to this tension between big secular forces, like worsening demographics, too much debt and so on [which] tend to keep growth suppressed. And then central banks just doubling down the whole time on ever-looser policy to try and keep the whole show on the road. That we think creates an inherent instability, and that gets reflected sometimes in markets getting very excited and running away on cheap money and then periodically crashing. That’s a very tricky environment, I think, for most investors.
So if you can offer something that is designed to try and find a sort of middle ground, or something with a little bit more consistency or steadiness, then there’s definitely a market for that. And so we’ve seen strong asset growth over the last few years from really all over the world, because it’s a problem that everybody’s facing now.
RYK VAN NIEKERK: I think the phrase of the day is “periodic crashing”. I haven’t heard that before, but it makes sense nonetheless.
But John, thank you so much for your time today. That was John Stopford, the head of global multi-asset income at Ninety One.
Brought to you by Ninety One.