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In an overtraded market which asset managers should you trust?

Our [offshore investing] position is blue chip equity. Look for good dividend yields: Stephen Katzenellenbogen, director and private wealth manager at NFB Financial Services Group.


RYK VAN NIEKERK: Welcome to this Financial Advisor podcast. My guest today is Stephen Katzenellenbogen – a director and a private wealth manager at the NFB Financial Services Group. Stephen, welcome to the show.

We are seeing a lot of political events currently and a lot of political uncertainty; how do you manage your clients’ money in this environment?

STEPHEN KATZENELLENBOGEN: I think the difficulty is reconciling what impact the political environment is actually going to have on the investment market at the moment. To a large degree we’ve seen only really our currency being impacted by political on-goings, especially if you look at from December 2015 until now how the currency has yo-yoed significantly from Nenegate to perhaps a worsening situation but possibly better outcomes with a lot more activism.

RYK VAN NIEKERK: Do you get a lot of clients picking up the phone and saying, ‘Stephen, what is going on? How does it impact my money?’

STEPHEN KATZENELLENBOGEN: Very much so and that probably leads to investor behaviour where investors are often largely driven by sentiment, as opposed to fundamentals, and a lot of what goes on politically drives sentiment, where you may get clients wanting to externalise funds for the wrong reason or to increase or decrease their risk profile for the wrong reasons. So we definitely get queries and I think a big part of what we do is managing those emotions with the reality of the client’s situation and their portfolio.

RYK VAN NIEKERK: Do they normally want to change their strategies or try to become more defensive and what is your advice to these clients?

STEPHEN KATZENELLENBOGEN: I think there are two main areas. One is look to be more defensive and the other is to externalise or get non-rand exposure in a portfolio. I think we try and pull it back to what the clients’ objectives are and what the constraints of their portfolios are. What we’ll find is that hopefully their portfolios are positioned correctly to start off with and we don’t adjust positions based on current environment.

So in terms of non-rand exposure we’ve been increasing exposure in client portfolios for some time now, but not politically- or emotionally- driven, rather driven out of better fundamentals in offshore markets. While, when we look at PEs in local and global markets are stretched or definitely global developed markets but with a much broader set globally, so we’ll find more opportunities there.

RYK VAN NIEKERK: So what you are saying is that you are changing your asset allocation methodology?

STEPHEN KATZENELLENBOGEN: I wouldn’t say changing currently – it’s been a theme for the last two or three years where we’ve looked at increasing global exposure with currency being a secondary factor. So rather look at fundamentals and valuations offshore if those makes sense, does it make sense from a currency perspective? And I think that’s a conversation on its own, where we often find clients and individuals, and probably myself, trying to time the currency, which is a very difficult thing. So I think you have to try and find a reasonable point and take advantage of that without getting caught up in the sense.

RYK VAN NIEKERK: The key is, however, once you’ve taken the decision to go offshore, what do you invest in? It is mainly limited to equities at the moment, because your bond markets are so depressed and some even have negative yields. What geographies do you prefer and how do you invest offshore for your clients?

STEPHEN KATZENELLENBOGEN: I think your point about sovereign debt and sovereign debt yields in developed markets being depressed is a very relevant one. We’ve got around US$12 trillion of debt in that position, where some investors – and it’s evident in the flows – are saying: ‘I’m happy to accept a negative return over the next ten years to have a known outcome, as opposed to the unknown’. Our preferred asset class would be equity because you get very little in terms of cash, you get very little in terms of bonds and if they do start raising interest rates in the US you are going to find that those positions start unwinding quite quickly, because when you have interest rates going up you’re going to have a negative effect on the capital. So our position, and it has been for a while, is blue chip equity: look for good dividend yields. I think cash flow is very important and part of these negative bond yields has been a search for yield.

So if you can buy a decent blue chip global equity, you don’t have to take on too much risk; get a decent dividend yield and the capital should take care of itself over time. But part of our job is to get other views in and having attended a few asset management presentations from the large asset managers in the last couple of weeks, it’s quite interesting to listen to their views, where they are starting to see value in emerging markets and in South Africa to a degree, which I find quite interesting.

RYK VAN NIEKERK: What is your asset allocation in South Africa? Are you moving money from, for example, equities into bonds, maybe into property? The JSE has been flat for the last two years.

STEPHEN KATZENELLENBOGEN: We largely outsource asset allocation to fund managers or portfolio managers of some sort, so we look for mandates that have flexibility in that. Broadly what we are seeing is underweight local equity, overweight foreign equity, overweight local bonds – and that’s probably in a preference to local property – and also erring on the conservative side, where you find high allocations to cash, floating rate notes, those types of assets that just give you quite a solid underpin.

RYK VAN NIEKERK: Which asset managers do you prefer? Obviously this is a very overtraded market, on the asset management side I think there are more than 1 200 funds available to financial advisors. Where do you typically go and who do you trust?

STEPHEN KATZENELLENBOGEN: Our process is varied or reasonably broad in that our business contains its own asset management business, which accounts for a small amount of our flows and we also have a list of preferred managers. As advisors we recognise that we haven’t got the time to go out there and analyse these funds. As you say, there are so many of them, we wouldn’t be able to do our jobs if we went and analysed them all the time. Our philosophy is typically, like it is with global equities, stick to your more blue chip type of managers, where we do have a limited amount though because over-diversification is also going to just give you average performance, which we don’t want. So we have a limited number of managers per risk profile and asset class.

RYK VAN NIEKERK: How do you view boutique managers?

STEPHEN KATZENELLENBOGEN: I think they are interesting and I think they deserve attention, which they do get. They are able to access positions, which some of the larger managers aren’t, just because of size and regulations. So a large manager couldn’t take a meaningful stake in a small business. But I think one of their definite advantages is their flexibility or agility, where they can move in and out of positions more quickly than a large manager.

One of the issues that I have noticed is that it seems that when the boutique managers do start marketing themselves more largely on the back of good performance and take on large flows, we’ve actually often seen an inverse relationship with their performance, where flows are going up and performance is going down. So I think it’s important to look at them: you probably have to do a bit more homework in terms of making sure that the right custodial relationships and all those types of things are in place, and then look at their process and philosophy and that it fits with what you are doing.

RYK VAN NIEKERK: Let’s talk about your clients. I think it’s a massive responsibility to manage someone’s retirement savings and investments – how often do you interact with clients?

STEPHEN KATZENELLENBOGEN: We interact regularly and those interactions vary. We have a number of newsletters that go to our clients, some of those are market- or asset management-driven, where we look at asset classes and economic fundamentals, inflation and those types of things. We also have general newsletters, which look at broader financial planning principles and will touch on things, like we started off talking about things like politics, products and those types of changes.

RYK VAN NIEKERK: How informed are your clients about what is happening, or do some clients just leave it to you and hope for the best?

STEPHEN KATZENELLENBOGEN: I think with all businesses and all businesses of our nature that varies. So you have clients who are very informed and very well read and very close to managing their money, and others who will abscond, to a degree, from responsibility. But our process and philosophy is to keep clients informed and engaged, so that when decisions are made they are mutual decisions, not one of just passing over the baton and saying you run with it. But with that said, if clients could do it on their own then they wouldn’t need us, so there is a degree of trust and responsibility on our side.

RYK VAN NIEKERK: I’m pretty sure that not all advisors get it right all the time, especially not while we are seeing this volatility. How difficult is it to deal with clients in this environment?

STEPHEN KATZENELLENBOGEN: It is difficult and the difficulty is expectation management and probably there’s an emotional aspect also. At the moment we’ve got a three-year return on the (JSE) Alsi at 4.5%, which is, as we know, a couple of percent below inflation and to try and manage that against an environment of rising costs, like electricity, education and medical, is quite difficult. So again it’s just making sure that portfolios are appropriately positioned and that clients often stay the course, because we have seen market cycles before – both good and bad. And often your best result is going to come from sticking to your philosophy and sticking to your guns and making sure that nothing fundamental changes in your life that requires change in the portfolio; make sure that nothing fundamental changes with the managers you are using – so don’t necessarily look at their performance but look at their process and their philosophy or have they had any major personnel changes, those types of things, and let those be the drivers of change, rather than the flat markets at the moment.

RYK VAN NIEKERK: What is your fee structure? We are currently seeing a perpetual debate on what the long-term impact of fees is on investment returns. You have guys like, for example, 10X, who claim it’s a massive, up to 40% change in your return. What is your view on this debate?

STEPHEN KATZENELLENBOGEN: So I think there are a few underlying questions there and the one is passive fees versus active fees. Quite simply we can all ascertain that fees do have an impact on investment returns: if your fees are 1%, your investment return is going to be reduced by 1%.

But I always caution people on looking for cheaper fees while giving up return, because you need to have both of those working together. There’s no point in paying a minimal fee but not getting a return on the other side. So I think often a blend of these types of assets and managers in a portfolio makes sense.

The argument at the moment could be that investing in passive managers at the moment is sub-optimal, given that markets are trading at hefty valuations. So you are blindly buying an index at a very high valuation and your result may not be as good as where a manager has flexibility. But we do that. I think it was Benjamin Graham who said it, that markets can remain irrational longer than you can remain solvent. So it comes back to the point of diversification and having a blend of these types of assets and managers in your portfolio, because to try and get the timing right is almost impossible.

RYK VAN NIEKERK: What role does risk play? Say the Alsi or an index fund does 10% and you manage to invest your clients’ money and get a return of 8%, but the 8% was achieved with a lot less risk. Obviously that is a better result, depending on the circumstances of that particular client. Do you think clients take that into account when they look at performances, that there may have been a different risk profile?

STEPHEN KATZENELLENBOGEN: I think they do and, again, it’s something that gets highlighted in the current environment when markets have been flat, where you have clients perhaps willing to accept the upside, but not willing to accept the downside. Different managers in different markets … their risk processes and risk philosophies are going to come through quite differently, where you’ll have some balanced managers who have a focus on capital preservation and some balanced managers who have a focus on capital growth. It’s quite easy to pick up those performances and returns at the moment. I guess the difficulty is to highlight them in a portfolio where you have got a blend of products and managers and to understand why you have different managers in there and what they are doing differently and how they would work in different environments.

RYK VAN NIEKERK: Well, that’s the Warren Buffett approach: rule number one don’t lose money. Obviously that sounds simple but it’s not as easy to achieve.

STEPHEN KATZENELLENBOGEN: It’s not. It’s going to sound strange, but one of the biggest risks we see in our business is the risk of clients being too cautious. So while it’s important that you do look at volatility and potential capital loss … it’s also very important that you embrace risk to a certain degree and understand what your own needs and objectives are. If you have the right path ahead of you, you can take on a bit more risk and volatility, perhaps at the risk of short-term returns, but at the benefit of a much more comfortable retirement later on.

RYK VAN NIEKERK: What do you think of robo-advisors?

STEPHEN KATZENELLENBOGEN: I think we probably put them in a similar camp to passive managers. I think they do have a role to play; I think it’s a good way for people to perhaps access markets. But we’ve seen globally that the rise of these robo-advisors hasn’t taken away from the financial services industry, and clients with particular needs and particular portfolios and particular demands are still going the route of having a financial advisor and paying for them. I think the human interaction is perhaps discounted too much.

RYK VAN NIEKERK: So the more complex your portfolio or your needs are, you would rather speak to a person than a computer programme?

STEPHEN KATZENELLENBOGEN: Evidence is definitely showing that. In the studies that I’ve read people definitely tend to lean towards the human interaction, because you can better explain your needs and feel like they are better being heard than running through a robo-advice type of programme.

RYK VAN NIEKERK: Thank you, Stephen. That was Stephen Katzenellenbogen, a director and a private wealth manager at NFB Financial Services.

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Stephen Katzenellenbogen

NFB Private Wealth Management



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