Diversification for the sake of it isn’t enough anymore – markets have become more complex and volatility is on the rise, investment industry insiders have warned.
“You can’t just deploy your assets offshore and think the job is well done,” says Natalie Phillips, deputy managing director at Investec Asset Management South Africa.
Neither is merely diversifying into another currency, she adds. Investors need to consider their situation holistically when deciding how to complement their South African investments with an offshore component.
South African investors have had a tough time over the last few years as the FTSE/JSE All Share Index effectively experienced a sideways correction. Offshore diversification has become mainstream news, but identifying pockets of value in the current environment is no easy task. Contrarian investors are increasingly identifying local opportunities.
Where to from here?
Vimal Chagan, divisional director of investments at Liberty, says the JSE has had its good moments and its bad moments, but over the past five years returns have pretty much been in single digit territory.
For investors trying to meet their financial goals, this has been quite difficult. Nobody has a crystal ball and getting real growth has been challenging. In the US tax rates are coming down and corporates are expected to benefit, but most of the good news is already priced in.
“To run after yesterday’s news is a losing strategy as well.”
Chagan says in this environment clients may want to consider different investment strategies like structured products or portfolios, which would allow them to get their money back when markets don’t perform or to get at least 10% per annum if markets experience any positive movement.
The flipside of this strategy is that if markets do really well, the dividend yield is high, and dividends are reinvested, the more cautious investor will normally lose out.
Phillips says a lot of South African companies have become rand hedges over the last decade.
“I think that is why it is so critical to look at your investments holistically and say how can I complement that diversification, looking at my SA investment exposure, and secondly, where is the value now.”
She says although growth has been pretty low, there is good value in some companies in Europe. “We like the cyclicals at the moment.”
The US stock market has benefitted from a prolonged golden period with very low interest rates, lower corporate tax rates and declining risk premia, but there are concerns.
Phillips says in their multi-asset funds they typically have a slightly more defensive approach, holding US cash but not large US equity exposure. They are more cautious about the US stock market at this point and prefer pockets of value in Europe and also – albeit a more controversial choice – Asia. Although there are some hiccups in China with regards to growth, Investec Asset Management has a structurally positive outlook on China and is taking a long-term view.
“It is the second biggest economy in the world,” says Phillips. “It is a no-brainer that structurally you’ve got to make an allocation into China, and if you look at the indices – the MSCI ACWI and many others – they are hugely underweight China as it is.”
Mark Lovett, head of investments at Stanlib, says investors need to be aware that volatility will go up over the next few years. Quantitative easing and extraordinary monetary policy globally have kept volatility low and even though it has picked up recently, it hasn’t returned to historic levels.
Against this background, diversification remains one of the most important considerations for investors.
Lovett says multi-asset products have done very well for South African investors due to an extended equity bull market, but going forward, investors will need to wrap their thoughts around diversification and the asset classes and instruments they choose.
Globally there has been a move to more sophisticated multi-asset products that are less reliant on equities to deliver returns. The theme is also emerging in South Africa. This may include alternative investments in the unlisted space like private equity and credit.
Lovett says there has been no benefit from diversification between equity and bonds so far this year. This suggests that rather than just including the narrow traditional metrics of equities, bonds, property, and cash, investors may need to cast their nets wider.