Lebo Thubisi - Head of manager research at Alexander Forbes
Given everything that markets have experienced in 2020, what lesson stands out most?
‘Diversification is still your most affordable lunch’: The managers all agree that other than the unattainable shield of perfect hindsight, the value-add of being invested in a diversified solution becomes particularly obvious in markets such as these. It’s an insistent lesson from most bear markets in our history.
‘Always have dry powder to take advantage of market corrections’: Managers have found selected opportunities in the local markets, given that quality businesses are trading at reasonable prices. However, while valuations appear to be attractive, managers are cautious due to weak South African fundamentals. So, there’s only been selective buying within SA Inc. shares that show better earnings or cash resilience.
Rand cost averaging still trumps market timing’: Of the many investment adages that exist, the one that stands out the most is for investors to choose time in the market as opposed to trying to time the market. The biggest losers will be investors who changed their long-term investment philosophy for seemingly ‘less risky’ assets as they have forgone the recovery gains that some markets have already begun exhibiting. It is important for investors to focus on their long-term investment horizon, as focusing on short-term events may be detrimental to their portfolio.
‘You can never over-communicate during market turmoil’: Investors are the lifeblood of any asset management operation and during times of increased market turmoil and volatility, clear and consistent client communications are more important than ever.
What is the most important asset allocation decision you made this year?
Our decisions to increase allocation to our existing private markets and hedge fund solutions, which currently sit in excess of R10bn collectively, were value-accretive to our clients’ portfolios. Investors who had well-structured hedge fund and private market programmes going into this volatile period were rewarded.
Hedge funds were well-positioned to take advantage of greater discernment among opportunities, given their ability to make such fundamental assessments and position themselves both long and short.
While private markets have been more value-accretive in recent years relative to listed markets, they were not totally insulated from the effects of Covid-19. Many of the businesses interact directly in the real economy, which has been hardest hit.
Did you allocate to new managers in 2020?
The work on an asset allocator is continuous and so we did make changes to portfolios in 2020. Any changes to our portfolios are largely driven by our risk-led philosophy and process, where the three main tenets are asset allocation, strategy selection and manager selection.
Drawdowns are an inevitable feature of long-term investing. In order to generate long-term returns and enjoy the benefits of compounding, we need to be financially and behaviourally disposed to bearing such risk.
However, it’s also important to note that a decision to not make changes in one’s portfolios is also an active one. When calamity strikes, reason is often clouded by justifiable emotions such as fear and anxiety, which results in investors making sub-optimal investment decisions.
Global markets plummeted due to suppressed demand and productivity caused by the spread of Covid-19, which presented investors with a conundrum: to reduce allocation to risky assets and invest in more stable assets, such as cash, or remain invested. Each crisis that has struck the human population has proven that markets are self-correcting and reward investors who take on risk and remain patient throughout market volatility.
What is the most valuable discussion you had with an asset manager during this period?
We conduct annual interactions with the CEOs and CIOs in the industry, and some of the important conversations we had this year covered:
asset allocation decisions, with it becoming more difficult to meet long-term, inflation-beating return objectives;
the need to see more meaningful evidence of diversity and inclusion within investment management firms, both from a race and gender perspective;
responsible investment and sustainability (the appreciation for which has grown, given the lack of strong governance in South African institutions);
social woes through Covid-19 (job losses, increasing inequality, etc);
climate change;
continued regulatory changes;
non-investment risks such as cybersecurity (although asset managers may not directly interact with the public, they can still be a tempting target to attackers as they hold a wealth of customer data and intellectual property). In a world that increasingly embraces digital technology, it’s also important to consider the security of information.
What has been the most important attribute for fund managers to display in 2020?
Consistency, resilience and transparency have been traits that have been important for fund managers to display. Of the many consequences that Covid-19 presented, fear was one of the biggest. Being inundated with news (both true and otherwise) has made this crisis a particularly unique one to deal with.
As a fiduciary of people’s money, it is crucial that we communicate consistently with our clients to be transparent in the wake of big developments and remain resilient during times of turmoil. All our solutions are tailored with a long-term view, and a rigorous risk-monitoring framework has been applied to mitigate any losses in the event of market downturns.
If you look back on 2020, what would it mean for an asset manager to have added value?
Capital protection, beating the benchmark and ultimately realising a fund’s objectives would add value. Limiting downside risk and maximum drawdowns through effective diversification by asset managers has protected investors’ interests during this period.
Another way asset managers could have added value would have been by allaying the fears of their clients to prevent them from making decisions to the detriment of their investment. An asset manager that has communicated transparently and consistently allows investors to make informed decisions.
Knowing that an asset manager is well aware of circumstances and has communicated methods of mitigating losses eases the burden of wanting to take action because the asset manager has already taken informed action.
Source Star selector: Lebo Thubisi