RYK VAN NIEKERK: Welcome to this Market Commentator podcast. It’s my weekly podcast, where I speak to leading investment professionals. My guest this week is Anthea Gardner. She’s the founder and managing partner at Cartesian Capital. Anthea, thank you so much for joining me. Let’s quickly talk about Cartesian – an interesting business. You have only a fixed-income unit trust at the moment, but your main focus is on model portfolios. Can you just discuss exactly what a model portfolio is, and who invests in it?
ANTHEA GARDNER: Hi Ryk, and thanks for the invitation. What we realised was that there are a couple of routes you can take for your clients when you’re investing. Obviously we’ve got the Money Market Unit Trust, which works quite well, and we can accumulate retail money into that.
But the thing with unit trusts generally in the country is that you need a minimum-sized investment of about R50 million before it becomes feasible from a cost perspective. And what we noticed was that there were platforms offering what we call ‘model portfolios’, or we could run model portfolios within structured notes. And so we’ve tended in the past couple of years to go that route. And so the platform that we run on the model portfolio [is] in the background and, as we sign on clients, we put them on this platform and the platform automatically allocates our model portfolio into the client’s portfolio.
Of course, it’s very much like a unit trust. We simply buy and sell into this model portfolio, and the platform really manages it for us. It’s a little bit cheaper than running a unit trust; you don’t need the back-office unitisation of it all. It’s probably a little bit more labour-intensive, I should say, for the actual platform, but the platforms we use have offered us really good rates. So I can’t complain about it.
RYK VAN NIEKERK: Is it cheaper for Cartesian or cheaper for investors?
ANTHEA GARDNER: Definitely for our investors. Cartesian never really pays – in fact, no asset manager pays the actual cost of running. It comes out of [the] fund and fund performance. So, at the end of the day, whatever’s cheaper for running the fund, whether it’s Cartesian or the client, the client should benefit because [their] returns will be better.
The only difference is that it doesn’t have the beneficial tax status of the unit trust. So, as I buy and sell shares within these model portfolios, if you’re doing it in a unit trust, you don’t have to submit your ITC3 – I think it is – every year for a unit trust if you’re not buying and selling units. Your tax event only gets triggered when you’re buying and selling units; whereas, in the model portfolio, you do actually have to submit your ITC3 because you’re buying and selling shares in your segregated personal portfolio based on the model portfolio.
RYK VAN NIEKERK: Let’s talk about the model portfolios. How are they structured?
ANTHEA GARDNER: We’ve got a number of portfolios under the structured note. We’ve got a pure equity portfolio. Then, on a separate platform, we’ve got model portfolios that are Regulation 28-compliant, and multi-asset. There we use the platform’s licence to wrap it for the client, to make it a multi-asset Reg 28-compliant portfolio.
RYK VAN NIEKERK: Interesting. What do you think of the local market at the moment?
ANTHEA GARDNER: I’m afraid I’m a little bit negative on the local market. Of course, the equity market has run so hard, it’s almost bizarre. But let’s talk about the equity market first. So the equity market – I almost want to compare it to sovereign debt. It’s near impossible for a company to be rated above the sovereign debt of the country it operates in. So it’s difficult for, in my view, companies to recover or to perform well in a flailing economy, which is exactly where I think South Africa is at the moment. I think the cogs in our economic machine in South Africa are grinding very slowly.
Then, on the flip side, we’ve got the fixed-income market, where we’ve got this incredibly steep yield curve, something we haven’t seen – certainly not in my lifetime – in the fixed-income market in South Africa, just indicating very different return profiles, basically.
RYK VAN NIEKERK: Yes, but if you take out Naspers and the mining companies from the recent performance over the past few months, other companies have performed poorly.
ANTHEA GARDNER: That’s exactly it, Ryk. You’re spot on. This rally on the JSE is not broad-based. The other thing is you obviously find, I think, very cheap companies or good entry points. But my concern, of course, is that going forward there needs to be a catalyst for these shares to come back.
I’m afraid in my view we just don’t have the pent-up demand that other economies have coming out of lockdown.
So, even though I think banks are very cheap retailers that have had such a terrible knock because they’ve been closed, even as they come out of lockdown and start opening and start re-engaging, the problem is that we’re in a situation in South Africa where we went into lockdown with not a very strong economy to start. And, if you think of tens of thousands of companies that are going into business rescue or that have gone into business rescue in the past couple of months, on top of this incredibly all-time high unemployment rate, I don’t know where the demand is going to come from.
RYK VAN NIEKERK: Yes, we need a growing economy. We need companies to grow their profits. It’s a bit of a snowball, but currently the snowball doesn’t want to start. It seems to be very, very reluctant to get moving. There’s a lot of things that need to happen.
One thing I’m really worried about is South Africa’s fiscal position. RW Johnson said on a webinar last week that we could be at the IMF’s door within a few months. I don’t think it will be within a few months, but we will get there at the current trajectory. What will happen the moment South Africa defaults on bonds? What do you think will happen? And how should the investor look at the eventualities?
ANTHEA GARDNER: You’ve made an assumption that South Africa will default on its bonds, and the one thing that I’m fairly certain about, actually – and I touch wood here – is that South Africa won’t default on its debt. I know that the yield curve is steeper and the short ends come down and the long end is still very high, all things considered. That does indicate that basically investors are saying, well, actually we are a little bit nervous about South Africa and its ability to repay debt going forward.
Going to the IMF and defaulting are not the same thing. So I don’t think South Africa will default. I think there is a chance that we will end up at the IMF. And, in fact, I think the government would rather – and I say this with caution – print money than default on its debt. And unfortunately the downside of printing money, no matter what the reason, is a weakening currency.
I’m hoping that foreign investors will continue their search for yield.
So South Africa, relative to the rest of the world, at least offers some yield. In fact, there’s a very good high yield compared to the rest of the world.
I have been a bit disappointed that foreign holdings in bonds haven’t increased in kind of the last six months. I’m guessing it’s partly due to our credit-rating downgrade.
RYK VAN NIEKERK: Yes, but foreigners are running away from our bond market in droves.
ANTHEA GARDNER: Well, I don’t know why it’s in droves. But I think certainly they have run away. And that’s why I said I was really disappointed by it, and I’m hoping that they’ll come back in search of this yield, because that would be the ultimate catalyst for us.
As investors invest in our bonds, the yields come down, [and there is] cheaper access to capital for not just government, but also for companies. That would be kind of the golden scenario.
Because I think the South African government won’t default on its debt, it becomes a less risky trade than we seem to imagine. I really think South Africans are quite negative about the whole situation at the moment, and I’m no different, actually. I’m genuinely worried about, as you say, the fiscal position, which just looks dreadful at the moment. And I did read Johnson’s article.
So here’s what I was trying to say earlier – on the distinction between going to the IMF and government default. I think going to the IMF is not that terrible a situation. I think they’ll take the purse strings from us, and force government to do what they should have been doing in the last couple of years. That’s tightening the purse strings and taking control of this debt that’s running away from us, and [then] kind of figuring out how to generate revenue
RYK VAN NIEKERK: But again, how should an investor look at this. Should you take action now to try and mitigate the risks?
ANTHEA GARDNER: Oh, certainly. Cartesian is currently working on an offshore solution, because we do think that it’s going to take a while for the South African economy to recover, and therefore for the JSE to stay at these elevated levels.
So certainly I see in the local market a lot of volatility going forward. And yes, absolutely, you need to diversify.
That was always going to be an issue.
And when I say diversification into offshore markets, again, I’m not 100% convinced that you’re going to get massively huge returns from the global markets. And so, if you’re managing kind of the way I’m doing it at the moment, it’s that I’m going to stay fairly close to benchmark on the offshore portfolios, and not run absolute funds, because I think the risk is also a little bit high. The global economy is not great, but I think they’ve got, compared to South Africa, a lot more ability for stimulus. And so, yes, as an investor, you definitely need to be diversified offshore.
RYK VAN NIEKERK: But there’s a difference between being diversified offshore and trying to get as much money out of the country as possible, because a lot of their money will be tied up in pension savings, RAs [retirement annuities]. Within Regulation 28 these need to be invested in South Africa. But would you advise, if you have discretionary money, to look offshore to mitigate the local risks, not to merely think of it as a diversification?
ANTHEA GARDNER: Certainly, absolutely. Unfortunately, as South Africans, broadly speaking we have so little discretionary savings and investments. But yes, I would say absolutely that you need to be offshore – also as a hedge. And if you are forced to be invested locally, the bond funds are still paying and the income funds are still paying really decent returns. I don’t think this is the time to be looking for extraordinary returns. I think play it safe, kind of look to the bond market for kind of consistent returns.
RYK VAN NIEKERK: And, looking offshore, Jerome Powell [US Federal Reserve chair] last week said they will take a more relaxed view on inflation. That, in economist speak, means we’re going to keep interest rates lower for longer. That will, of course, stimulate foreign markets, especially the US market.
That makes decisions complicated, because the US market is very expensive. But, owing to his comments, it might rise even further. But there’s risk.
ANTHEA GARDNER: Indeed. Isn’t that the irony of what we’re talking about? You’re talking about investing offshore where markets – as in the US – are very expensive, and not being invested in South Africa where things look cheap. But the catalysts for whether or not the market rallies higher or stays, or turns negative, that’s what we are talking about, what we’re trying to figure out.
So obviously Powell’s comments about extending their inflation target to be an average, and not this absolute 2% number, implies that rates are going to be lower for longer and therefore, as you say, a boost to the equity market. And so you should, in the medium term, see equity markets rally because that is the catalyst. And again, it’s stimulatory for the markets rather than the economy, generally speaking.
I think the concern with what Powell was saying the other day was that this inflation, the rise in inflation, may not necessarily be the right kind of inflation that they want. So, instead of getting demand inflation, you’re seeing inflation coming from production competition or other streams. That unfortunately runs out of steam at some stage. So we’ll see what happens with their inflation. They’ve been trying for, what, 10 years, to get this inflation number higher.
RYK VAN NIEKERK: That was Anthea Gardner. She’s the founder and managing partner at Cartesian Capital.