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‘If there’s a crisis unfolding, why be there for it?’

Many ‘black swan’ events are in fact ‘grey rhinos’ – Rob Spanjaard, chief investment officer, Rezco Asset Management.


RYK VAN NIEKERK: Welcome to this market commentator podcast. It’s my weekly podcast where I speak to leading investment professionals. My name is Ryk van Niekerk and my guest today is Rob Spanjaard. He’s the chief investment officer at Rezco Asset Management and he has been in this position for 16 years. Rob, thank you so much for joining me. We’ve seen an absolutely dreadful March and most equity markets in the world saw a significant decline. So many people even call it a big crash. And I think most investors would be glad we are in April now. What do you think happened in March and how does it compare to the previous crashes you’ve seen?

ROB SPANJAARD: Ryk, thanks for the opportunity to chat with you and the listeners. Yeah, in short, you know, the closest thing I can see that compares to it is probably the 2008 global financial crisis h. It’s a tough environment, you know, even that, I don’t think we’ve seen anything like this.

RYK VAN NIEKERK: And how do you think most fund managers fared during this tough month?

ROB SPANJAARD: It was fairly brutal, particularly if you have a kind of buy-and-hold strategy. That’s not what are we’re doing; you know, we as active asset allocators. So if we see trouble coming, we take evasive action. You know, we’ve got a model – and you know, Nassim Nicholas Taleb [former Wall Street trader and writer] has done everyone probably a favour and a disservice. Now on the one level, he’s done us a favour as we have an excuse. If something bad goes wrong, you know, he coined that black swan analogy. Bad stuff happened. Nothing you can do about it and you, you just put your head down and grin. But we, in our risk modelling and the way we approach risk, we believe a lot of things that are just covered as black swans are in fact actually the thing called grey rhinos. And we’ve been putting out a bit of thinking on that. There’s a book written by someone called Michele Wucker, which says grey rhinos are predictable. You can see them coming, but you have to be quick. So if you can react quickly, you’re okay through this. If you just stuck to static asset allocation, you’ve probably struggled.

RYK VAN NIEKERK: So what did you do to mitigate the risks?

ROB SPANJAARD: We moved fairly aggressively starting in February and then through, mostly out by, February. And we aggressively do cash, and internationally we had some USD treasuries, which gave you some upside, and locally just very short-dated treasuries. So aggressively held some gold, and aggressively just took risk off and [sat back to] see what happened.

RYK VAN NIEKERK: That is pretty contradictory to many strategies of other asset managers who, they say in public, listen, sit on your hands; you can’t predict what will happen; it’s an irrational market, there is too much emotion involved, don’t try and time the market. Is this an active strategy for you, to actually try and time the market?

ROB SPANJAARD:

You know market timing is probably the wrong phrase because it denotes trying to get in and out the whole time, and if you’re not a professional investor watching it all the time, you are probably going to do it badly.

You’re going to eventually panic at the wrong time, but if you’re trained, if you’re seasoned, it’s part of your style. I think it’s got to be part of your style as well. You can see stuff happening. If there’s a crisis unfolding, why be there for it?

You know, for example, the market was hitting a record high in January in international markets. So there were a little bit upsides, there’s a couple of percent upside potential, but you had this crisis unfolding in China. The Chinese had locked up, put down a hard lockdown, 72 million people. And in some form of a quite restrictive movement, 725 million people. So the risks of that got out and got into a similar kind of scenario in London and New York. The market was going to be down 30% and that’s the risk you are facing in a market that was at a record high. So there was very little upside but a huge amount of downside and that was just a risk not worth taking, staying invested.

RYK VAN NIEKERK: I think many investors will receive their fund statements probably around now and many will see that in March the investments saw a significant hit. Some may even see a 20%-plus downside. Your strategy, did it work? I assume your funds were also down. I haven’t seen the March fund fact sheet of your funds, but how did your strategy work out for you? Did you limit losses?

ROB SPANJAARD: Look, our equity fund has to be invested. So that fell, but it fell less than our peer group. But our asset allocation funds, where we had the option of not being in equities, actually, [at] the time of reporting, these are still up for the year. So we fell [in the former], whereas [the latter] are a couple of percent up.

RYK VAN NIEKERK: So in March you actually made money?

ROB SPANJAARD: Yes. Flattish, but yeah – made a little bit of money.

RYK VAN NIEKERK: I don’t think many fund managers will be able to state that and I hope your investors appreciate that.

ROB SPANJAARD: Yeah, we’ve got pretty good investors [who] over the years understand that sort of strategy. And you know, we’ve seen a similar kind of thing happen in the 2008 crash. That’s a long time ago. But you’ve got to sometimes protect the downside. There’s not a lot of upside on offer you don’t [inaudible]. In South Africa we still have the advantage, we get 7.5-8% on our cash, which is not to be sneezed at at times when it’s high risk and you’ve got to be, we think you’ve got to be, active. It is our style. We think it’s important.

RYK VAN NIEKERK: I’m looking at your equity fund fact sheet published at the end of February, and the biggest holding you have is in new gold. So you own gold, physical gold. Why do you like gold?

ROB SPANJAARD: Gold in this world of quantitative easing where, you know, the government’s just printing money very aggressively, gold is holding its own. It’s the returns on cash in the developed world that are going to do nothing and gold is doing well in managing to actually keep getting a return. And it’s defensive, so it’s not going to double. But gold is also – it’s a funny asset; it goes up when it’s going up and it goes down when it’s going down. It’s an ultimate kind of trend-follower’s dream. You’ve just got to work out which way it’s going.

RYK VAN NIEKERK: Do you think it adds to the risk?

ROB SPANJAARD: No, it reduced the risk. Because it wasn’t going to act in correlation with shares, it was going to be quite low. There may be even a negative correlation.

RYK VAN NIEKERK: Your [Rezco] Managed Plus Fund is one of the other funds I’m looking at currently, and you also hold a lot of gold in there. But it’s also quite evident that you own a lot of cash in there; 51% of your portfolio is allocated to the money market and another 23% to the bond market. I assume this was after you first started initiating some changes in the asset allocation. What was it in the past?

ROB SPANJAARD: Yeah. If you take the middle of January, it was about 71% invested in equities – equities and commodities. So it was pretty close to the Regulation 28 [limit] fully invested, which is 75%. Yeah, so it was pretty fully invested. It’s not like it’s a fund that’s always [or] is very bearish. Last year, 2019 [we] had a very good year. It was a time to make money in. Certain sectors, we went into the start of the year, as I said, pretty close to fully invested. But when we saw trouble coming, it was clear that you had to get very defensive and do that quickly.

RYK VAN NIEKERK: And you did, because currently you are invested in equities of around 20%?

ROB SPANJAARD: You know, currently lower; it’s even lower than that. It’s about 10-12%.

RYK VAN NIEKERK: The money market investments, in what did you invest?

ROB SPANJAARD: We kind of moved. It’s – and I think you’re getting a snapshot there where we’re transitioning out of the equities; the money markets are really low – it’s mostly in bonds now. So we’ve got a lot – 30% of the fund is in R186s [South African government’s benchmark long bond], a little bit of duration, which at the time of that was to wait for the actual downgrade, and move that in. We might’ve been a little bit early, but we still think, you know, that’s about a 10% guaranteed return for the next five, six years.

RYK VAN NIEKERK: Do you think the downgrade will benefit you?

ROB SPANJAARD: Yeah, I think it was pretty much all in the price. So if you look at our government bonds relative to say Brazil, we’re about 300% – close to 303% – worse. In other words, the yield is higher then that’s probably excessive. You know, a real yield – relative to the US, it’s something we track – of about 10% is probably just too wide.

RYK VAN NIEKERK: Another interesting perspective you have, and you wrote this in a recent opinion piece you’ve published, is that you say you don’t think the current situation is an opportunity to buy the dip and you don’t think we will see a V-shape or a U-shape recovery as we’ve seen in the past. Can you put this into context for us, especially after you’ve moved offensive to the extent you have?

ROB SPANJAARD: We think investors have become conditioned to do what’s happened in the most recent past. So if you’d take in at the end of 2018 there was a big dip on equities, particularly international equities. It was a great time to buy. Then there was a, you know, if we’ve got a little bit further back, there was a dipping in 2015 if you can remember that when the market fell there was also a great time to buy. But you know, this is not that those dips were just on the concern that there was going to be a recession. This is actually a recession internationally. So you’ve got to, you know, saying that the market is probably too cheap to sell, but it’s also not cheap enough to buy yet and you’ve got to look at your scenarios just automatically because the market’s fallen 25% below the highs, it’s automatically a great time to buy. I think that’s just one of the scenarios that you need to be assessing and we like to look at scenarios, but there are two or three other scenarios which could be very different and you need to work out which of the scenarios, you know, it could be something similar to the GFC in which case the market could have another 30% to go. It could be and it’s probably not that bad, but it’s a scenario you need to get your mind around. Is it as bad as the great depression, in which case you got another 60% I don’t think it said bad? Let me just put out that caveat, but you need to work it out. What it looks like. It’s probably the GFC, so you would indicate we’ve put got some more downside,

RYK VAN NIEKERK: But you have cash in the bank. Of course you would like to get back into equities. When you think equities will outperform. What green shoots would you be looking for to trigger such a reentry into the equity market?

ROB SPANJAARD: You know, you want to be seeing values that are outstanding, but people don’t want to buy the shares because they’re worried they’re going to go down. You know at the moment the psychology of the market’s a little bit, Hey, shares of 25% cheaper than they were in January – must be a bargain. But I think you get to a stage where companies are solid, balance sheets have survived the crash and the values are enticing and you kind of try to work out what’s the risk, what am I missing? You’re going to get that kind of outstanding values and I don’t think we’re there and then that’s where we say, I don’t think it’s cheap enough to buy yet – you’ll get outstanding value. Just on it, to be seeing some of the forecast economists are like a 30% decline in GDP in the US for example in the second quarter is what I was reading earlier, now just in relation, 10% GDP declined for the year. Looking at some numbers of Syria, I think the worst they got to is a 3.6 decline, 10% declining GDP is massive and we just need to, we need to understand, get some understanding. What’s the economic damage from this economic worldwide shutdown before to really investible.

RYK VAN NIEKERK: Especially for local stocks, because I think a lot of our chip lies ahead. I don’t think our government has the ability to protect the economy from really a protracted recession, but that’s maybe a discussion for another day. Another point you made in the article, which I found very, very interesting, is that many people who receive their fund statements, will be very disappointed at poor performances, but many will hope that these funds bounce back and because they’ve fallen so much and you say maybe it’s a better idea to switch from those funds into funds that have performed better during this downward cycle or this actual crash. Can you put that into perspective?

ROB SPANJAARD: Just clarifying South Africa has got some fantastic asset managers. You’ve got a good record of finding great investments in the carnage, so certainly you wouldn’t be recommending investors sell those outstanding track records over many years and I’ve got really good investment teams to go and scratch through talking about this, finding this value I was talking about earlier. Great solid companies and they are there, there’s some people who haven’t done as well and certainly investors should think about [how] can they manage, you know, it’s all about the risk control, how, what’s the risk control within the organisation and if they’ve got good risk management.

RYK VAN NIEKERK: But do you think you should switch at this point in time if you’re not happy with the performance? So how do you evaluate your performance relative to the performance of other funds?

ROB SPANJAARD: We kind of try to manage – part of what we do is we measure risk as to the measurement of you know, what’s the odds of losing client money. I mean, so we don’t really measure our, we don’t feel if we’d down 10% and the opposition is down 15% we’ve done a good job. So we don’t really directly looking at peers, which important point, it is in assessing it. I wouldn’t, you know, we obviously we’d take our client’s money very seriously and we think we do a good job. The other managers, you do a superb job and each has got to look at the track record. And now certainly wouldn’t be the time to switch some of your managers who’ve got fantastic track records, but you always need to be thinking about what your managers actually do and how the funds combined together. That’s important because most investors, you don’t have all your money with one manager, see how guys perform, see how funds perform and see what to do.

RYK VAN NIEKERK: Rob, thank you so much for your time and let’s see what happens. I think it’s going to be a very interesting second quarter too. Hopefully, the arrows point up. Thank you very much. That was Rob Spanjaard. He is the chief investment officer at Rezco.

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‘So there was very little upside but a huge amount of downside and that was just a risk not worth taking, staying invested.’ Good call, well done. Wish my fund manager had been as decisive.

Though I get the gist of Michelle Wucker’s figure of speech, she doesn’t know much about rhinos: there are no grey/gray rhinos; the black rhino is unpredictable and ill-tempered; the white rhino is predictable. Tellingly, South Africa is home to the majority of the world’s white rhinos and many of its black rhinos; the ANC government has birthed many of Ms Wucker’s grey rhinos.

It will be interesting to look back at this crisis in a few months and figure what impact passive had? Did it help stabilize or worsen volatility?

Imagine an EFT that simply tracks an index like S&P example SPY.

If the whole market goes down, SPY does near to nothing. There will be a bit of selling say airlines and buying amazon because airlines dropped and ecommerce went up.

But if investors panick and go to cash, then SPY must sell across the board in order to honor withdrawals. Pretty much like SPY supports momentum when everybody is sending them cheques to buy more units.

I am not sure there is any difference. In a panick, people will sell their units whether they are in a value fund or an index? There will be extreme examples of sector focused ETF?

Market cap weighted indices like the S&P 500 have minimal turnover, for SPY 3% p.a. is normal. Relative share price moves do not lead to turnover in them so your Amazon example is not correct. Also if investor’s panic, who would be sending cheques? So that part does not make sense. If you are looking for an impact on volatility, market cap weighted indices is the wrong suspect. You should rather look at so called smart beta, as well as derivative based protection strategies. Value investing (and I am not a fan) tends to be against the tide and could reduce vol, so whatever is opposite of value in style could increase vol. Mostly it is just human emotion in my opinion. Anybody who sells what is going down or buy whatever is going up.

End of comments.

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