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‘Passive investing is not a theme or bubble’

Absa Multi-Management’s Mothepu Mothae discusses 2020 lessons, asset allocation decisions, fund manager attributes and adding value.
Image: Citywire, supplied

As part of its series of interviews with top South African fund selectors looking back at the past year, Citywire spoke to Mothepu Mothae: Head of manager research at Absa Multi-Management.


Given everything that markets have experienced in 2020, what lesson stands out most?
Passive investing is not a theme or bubble.

Proponents of active investing have for a while predicted the imminent rectification to passive investing. They cited increasingly bearish views on markets that were over-bought beyond fundamentals, and that clients would experience full downside participation in that scenario.

However, in my view passive is seemingly here to stay and as such the pressure on active management has increased even further. In the wake of the March market correction the ALSI returned -21,38%, with the average ASISA equity fund in Q1 underperforming the ALSI by -1.44% (before fees). This under-performance may not seem significant; however, only 33% of those funds outperformed the ALSI (before fees) with the worst performing equity fund returning -34.30%.

Subsequent to that, markets re-rated aggressively in Q2 2020, delivering 23.2%. However, the average equity fund underperformed the ALSI by -3.7%, with only 18% of equity funds (before fees) outperforming the ALSI.

This is a clear indication that passive investing is not a bubble or theme and should form part of a well-diversified risk managed a portfolio, especially with the continued under-performance of active funds relative to their respective equity benchmarks.

What is the most important asset allocation decision you made this year?
Going into the pandemic, we had marginally reduced equities in favour of bonds, but really went overweight in the wake of the market correction. We took an active decision to up-weight bonds at the end of March to take advantage of the attractiveness of bond yields at the expense of property.

I must also say that we did put a derivative overlay on a portion of our equity portfolio at the end of April, fearing further downside. This hasn’t benefited us much until the recent market pull back that took place in September.

Did you allocate to new managers in 2020, and why or why not?
We implemented a few manager changes across our solutions, however these were not premised on the market correction that took place in March. The manager appointments initiated by our investment team have been driven by portfolio construction and not any specific qualitative and/or quantitative manager issues.

Our investment process focuses heavily on diversifying across risk premia and sources of returns that exhibit evidence of market reward, even if that particular premia/return source may not necessarily be in favour at the moment; as we can risk budget and optimise our exposures accordingly.

What is the most valuable discussion you had with an asset manager during this period?
Investment teams employ various valuation techniques to ascertain an asset’s investment merits or lack thereof, and to be honest no technique is superior. The effectiveness of each process anchors heavily on the experience and quality of each investment team.

I recently interacted with a manager who focuses on ‘economic profit’ and as such, a company’s free cash flow or its ability to generate cash. This lengthy engagement further reiterated the type of companies that become resilient through economic crises. Especially in this day of accounting manipulation, free cash flow is difficult to distort using ‘creative’ accounting.

What has been the most important attribute for fund managers to display in 2020?
Adaptability – business sustainability and consistent client engagements.

The Covid-19 pandemic has inflicted serious damage to the global economy, with a lot of industries and businesses incurring irreparable damage. Asset managers have shown resilience, opting to focus on budget cuts and not massive staff retrenchments to remain in operation.

This is indicative of the efficiency with which fund managers operate, with hardly any redundancies. The swift adaptation to virtual engagements has been seamless and extremely beneficial as clients and investors seek to stay close to markets through consistent engagements with asset managers.

If you look back on 2020, what would it mean for an asset manager to have added value?
Risk management and absolute returns.

Unlike the global financial crisis of 2008, which was a financial system meltdown that led to a global market crash, 2020 has been a multi-faceted risk event. It is a health, market and economic risk event that will affect the world for a prolonged period.

This has been a single event that has tested asset managers’ financial and operational resilience, and investment risk management abilities all at the same time. I believe the primary objective of superior risk-adjusted returns remains key.

However, an increased focus on volatility management and absolute returns for clients will define a manager’s ability to add value in 2020. Equally as important is for asset managers to focus on employee health, operational integrity and profitability, because it’s imperative for the overall industry to remain resilient and sustainable.

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.


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An asset manager adding value is very simple: Beat the market. If you don’t beat the market, you take zero fees.

That’s like saying if you are a below average doctor, lawyer, actuary, accountant, plumber, professional tennis player, etc. you should not get paid. Apply your thinking to your profession and see how far you get? Maybe you go out of business. You make it seem that fund managers don’t have fixed costs. Comparing a fund manager’s net return to a zero cost index is totally incorrect. Every investment fund is entitled to charges fees and it is just the level that varies and that is under the spotlight.

I’m still trying to find a passive fund that outperforms the leading active funds.

End of comments.





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