RYK VAN NIEKERK: Welcome to this market commentator podcast. My name is Ryk van Niekerk, and this is my weekly podcast where I speak to leading investment professionals. My guest today is Patrice Rassou, the chief investment officer of Ashburton Investments. He has been in the industry for more than two decades. But, Patrice, you joined Ashburton in April last year – that was when there was chaos in the market, the lockdown had just started. Tell us about that first day.
PATRICE RASSOU: Yes, it’s interesting. I made sure I joined on April 2, to avoid the 1st of April jokes, Ryk. And really, I started in the most sort of traumatic time in terms of the lockdown and the Covid crisis, and, as you know, SA’s GDP dropping by close to 17% in the second quarter, and markets having a complete meltdown globally and locally.
So that was really a baptism of fire, having to sort of get to grips with, I would say, a crisis which was – if you look back in terms of job losses and the way the markets reacted – probably more severe than even the global financial crisis, which is almost hard to believe. And it was triggered by something which was very difficult to really understand and get our heads around – not that we currently know whether we are completely out of the woods, but hopefully, the vaccine works.
So it’s been really a baptism of fire for the team in having to prove its mettle. And sometimes I feel that that’s where you realise and see around you what people are made of in the difficult times rather than the easy times, when, as they say, in a bull market even turkeys can fly.
RYK VAN NIEKERK: Absolutely. And as a new broom, you’re standing there and people are looking up to you to say, listen, how do we handle this crisis? Did you try and change a few things from April 2?
PATRICE RASSOU: At the point in time when you look at markets in such a crisis, the key is always to try to keep a level head and to try to focus on sustainable investments. Obviously, looking back, we’ve had a sharp V-recovery that we would look at. But our philosophy is to build quality portfolios and deliver consistent returns. And for me the number one rule in markets is not to lose our clients’ capital – that’s the first thing – and to build resilient portfolios.
So what I had was a live experiment, a live scenario of how anti-fragile our portfolios were, and that exposed some of the cracks.
And, in a way, as a new chief investment officer, that also allowed for a relook at investment processes, a relook at, within the investment team, who would be doing what, a reshuffle of responsibilities, and really a firm base that we rebuilt last year. I feel very confident going into the new year.
And I guess with the economy also into repair and markets on a firmer footing, one has to be a lot more careful, I would say, because we’ve had that massive relief rally, but now the real test in terms of sustainability comes into play.
RYK VAN NIEKERK: If you look back with the benefit of 20/20 hindsight, what we’ve seen over the past year, or at least from March last year, has been actually unbelievable. We’ve seen market sentiment drop to lows, recover very quickly to highs. And, as we are speaking, many international markets, including our own market, are very close to all-time highs again. And there’s really a lot of volatility, a lot of unpredictability, and it seems as if assets are being valued not by traditional profit-driven measures, but by sentiment and expectations. It can’t be easy to run a fund or a portfolio of funds in such an environment.
PATRICE RASSOU: Yes, you’re absolutely right. There’s been a disconnect with fundamentals and definitely a disconnect in terms of what markets are discounting versus what global economies are facing. I think the first big theme is that it’s almost that globally indebtedness doesn’t matter. We’ve had developed market debt levels increase from close to the 100% mark to now 140%, as everyone has stimulated. Emerging markets [are] no different – from 40% to 60%. And in our case, even worse, we’ve gone from 30%, 35% debt-to-GDP to now hitting 80%. So markets have shrugged that off and, if you read all the literature, fiscal drag is real and should be a concern. But I think everyone’s been focused on monetary policy and what the impact of the stimulus and let’s call it ‘free money’ will be in the developed world.
What’s interesting is the interest-rate burden – despite this ballooning debt burden – has declined. So it’s costing nothing to take debt. And you’ve seen much of this phenomenon manifesting in markets.
The most interesting thing is how retail investors in retail online brokerages seem to be dictating markets and even trumping the so-called smart money or institutional money.
If you look at the whole, whether it’s the bitcoin phenomenon, or the GameStop phenomenon more recently, it’s been driven by what we call the Robin Hood effect – the free online brokerages with a lot of newcomers who open accounts and trade. And I can tell you from the stats we look at, this has been true internationally. But also locally we’ve seen a massive pickup in terms of interest from various retail investors in getting into the market during the lockdown.
Maybe it’s a question of people having more time on their hands, or enforced savings because consumption was curtailed, but that’s been a phenomenon driving the markets. And on Wall Street, there’s a war right now between the professionals in the hedge funds and the guys on the investment blogs.
RYK VAN NIEKERK: I can understand that in the US markets, a new venture like Robinhood [the trading plaform] could make a difference, because it just brought millions of new investors to the market. But in South Africa that is not the case. Our retail segment of the investment market is very, very small. Are you saying that you actually saw an above-average increase in the number of retail traders? Do you think these investors had an influence on the market?
PATRICE RASSOU: Well, we’ve definitely seen this through the FNB trading platform, which has benefitted from that. So it might not be at the volume levels that we’ve seen in the US, for instance, which have definitely been market-moving. There’s an element there, Ryk, of collusion, obviously where you can corner certain markets, but there’s definitely been an interest even here from retail investors.
RYK VAN NIEKERK: How would that move the market, though?
PATRICE RASSOU: Internationally or locally?
RYK VAN NIEKERK: Locally.
PATRICE RASSOU: Locally, if you look at the small- and mid-cap space, a lot of the stocks are very illiquid and have been neglected by the institutional market.
So when you have a situation where the war on money comes at it – and you would have seen that in the second half of the year – the best-performing sectors, surprisingly enough in South Africa, have been the small caps and mid caps, not the large caps. And then you have a few select stocks which have driven the market.
And what’s also quite interesting, in many cases these are again these trends, which have been happening internationally, reflected here. The more beaten-down stocks which have got the most problematic balance sheets are the ones which are running the hardest.
For instance, look at the reversal in the performance of the listed property sector, which I think still ended 30% down last year, but you’ve had this 25% rally in the last quarter. And this was led by a lot of the beaten-up stocks, which are into balance-sheet repair, and these have done in some cases a 100%-plus.
RYK VAN NIEKERK: Patrice, let’s talk about fixed income. It’s one of the speciality areas of Ashburton, and there are many people who are dependent on fixed income products. With the current interest rates at virtually all-time lows, that does pose problems for many people who live on interest. What have you seen from your fixed-income and money-market funds? What were the average yields and what should these investors or pensioners look at as a realistic expectation of returns?
PATRICE RASSOU: Ryk, it is an excellent question. And it is, I would say, by far the biggest topic of debate that we are currently dealing with, in terms of how one deals with yields at 50-year lows, and the fact that traditional sources of income are now, I would say, problematic in broad terms, in the sense of a lot of investors have been overweight in, for instance, the property sector, which has yielded very good real returns, and now they’ve suffered on paper quite a big capital loss, and the fact that dividend payments are uncertain as some of the companies skip dividends.
So I think let’s step back first and look at the type of returns that we’ve seen over the last five years, and where we are seeing returns now. If you look on a risk-adjusted basis, I think over the last five years being in income funds and earning 7% to 8% per annum was definitely the right place to be if you compare that to your more multi-asset, high-equity funds, where you got 3% to 4% per annum over the past five years. So it was actually a great place to be – to be in these income funds.
The problem now is where are we sitting – looking at expected returns, I do not think that income funds, if I listen to my head of fixed income Albert Botha, I don’t think you should expect much more than, I would say, a range of 5% to 6%. So just above inflation, and not very attractive.
If you can have a bit of a longer-term point of view, I think bonds are quite attractive in terms of the yields – but obviously we just touched earlier in our conversation on the fiscal situation. I think that comes with a lot of risk.
The space which we think is very interesting, going forward, if one looks at some capital protection with decent yields, is the low-equity multi-asset space. There I think that one can expect double-digit returns with almost very little capital at risk.
So we think, going forward, that would be the growth area for investors.
And, interestingly enough, when we look at the Asisa [Association for Savings and Investment SA] numbers, for the first time in four or five years, we are starting to see positive net flows in that area of the market, whereas equities and balance are still bleeding.
RYK VAN NIEKERK: In which asset classes do you then expect an above-average return?
PATRICE RASSOU: You have the certainty of a very good real return from bonds. So I think the cash category, as I mentioned, like your cash funds, will give you 3% to 4%; bonds you’ll get 8% to 9%. And then we’ve a type of low-equity, multi-asset, which is anchored by the fixed income and looks at the whole spectrum of assets. I think it’s the best risk-return trade-off.
RYK VAN NIEKERK: But are you seeing that trend in your portfolios? Are you seeing money flowing from your income funds to your multi-asset funds?
PATRICE RASSOU: Unfortunately, Ryk, no. This is the problem. I think the money is still very risk-averse, despite the very strong rebound in the markets, both equity and bonds in the second half of the year.
The flows are still in the cash funds, in the money market and income funds, not quite going up the risk curve yet.
Unfortunately, the issue is that investors tend to be a little bit late to the party, and this is why we are trying to message that, at this point in time, being in cash funds will not give you the requisite return to beat inflation long term; and investors need to start looking forward rather than looking at these eye-watering returns from the last five years. We need to almost take a rain check and look forward and acknowledge the fact that cash rates are at 50-year lows and that that’s not going to help in terms of beating inflation.
RYK VAN NIEKERK: It’s also interesting in the context of equity markets being close to all-time highs. There’s a massive risk-averseness despite equities performing excellently. Is that an anomaly?
PATRICE RASSOU: The equity market behaviour is quite interesting. The rally has initially been very narrow so that the key question remains the cyclical space – so resources stocks have performed excellently. But, now again, I think one needs to stand back a little bit and not look at the short term, but look at the longer-term performance.
So over the last year, yes, the big drivers of performance have been the very attractive 20% returns from global equities and resources stocks, whereas property and financials, anything SA Inc, have been left behind. But we are seeing a reversal already in the second half of the year, and many people might not realise it, but the best-performing area has been financials in the second half of the year, even beating resources. So we’ve seen a bit of risk reversal, whereas locally or globally value is coming back in favour.
So I would say at this point in time, while cyclicals are still in favour, I think, again, getting into areas which have been just continuing the momentum and the trend of last year is not wise.
I think commodity prices are at highs and, yes, the Chinese economy has done well, but it’s starting to overheat. You can see the Chinese central bank is starting to hike rates, which goes a little bit against the trend, and I’d be very careful looking at the second half of the year to be overly extended in, for instance, cyclical stocks.
RYK VAN NIEKERK: We’ll have to leave it there. Patrice, thank you so much for your time today. That was Patrice Rassou, the chief investment officer of Ashburton Investments.