Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
How we position portfolios
in a volatile world
Alwyn van der Merwe
Director of Investments
Nov 12, 2020
Listen to Alwyn’s views here:
Here is a transcription of the video:
It has become quite common for me to start by saying, ‘We live in very interesting times’, and it is certainly a euphemism if you look at what has happened to financial markets since the beginning of the year, and the volatility that we've experienced between the various asset classes and even within the asset classes. And maybe it would just be good to revisit the performance of the various asset classes to understand how the macro environment had an impact on investor sentiment and how investors assessed the various asset classes.
So let's start with equities. We said in the previous quarter, and certainly at the beginning of the year, that it would not be uncommon to find that markets respond in a very ‘barbell’-like fashion. What does this mean? It simply means that within a particular asset class, some assets do particularly well and other assets are very uncorrelated in the way that they respond to the strong performance, by underperforming.
Maybe we can just give a few examples to illustrate this point. If you look at the performance of the Nasdaq, which is in essence American IT shares, the Nasdaq is up by 35% year to date. On the contrary, what we've seen is that financial shares listed on the S&P, or part of the S&P 500 Index, those financial shares are down 25% in dollar terms. So there's a gap of 60% between the best performing sector and one of the poorer performing sectors.
And it's not only true for international shares. We've had exactly the same experience within South Africa, where the so-called SA Inc shares – those that predominantly make their profits within the South African economy – have underperformed severely in this COVID-19 environment. On the other hand, what we've seen is that the so-called low-risk stocks like gold, platinum and also Naspers, which predominantly has been driven by the strong performance of Tencent, have performed exceptionally well. In fact, if you look at it to the end of June, gold shares were up by 100% over the six-month period compared to very big negative performance of these so-called SA Inc shares.
In this risk-off environment over the last nine months, we've also seen that the rand has performed poorly. We’ve also seen that other emerging market stocks and currencies performed poorly, and most of the risk-off assets, like global government bonds, did quite well over this period. So in short, the very big divergence or disparity in the performance of the various assets and asset classes made for a very interesting investment environment. And depending on how you positioned the portfolio, the investment performance outcome would look very different depending on where you had your money invested.
Maybe I should just briefly talk about our positioning. As you all know by now, price is quite important to us, and it’s not that we ignore the investment thesis or the investment story associated with an asset class or with a particular asset. But for us, margin of safety normally lies in the price. So we preferred the so-called cheaper stocks, which did not work well in the first nine months. Having said that, before I create the impression that the performance was really poor, we more or less stayed in touch in terms of local equities, with the All Share Index, where gold, platinum and of course Naspers had a major impact on the total performance. We still stayed in touch with that performance, but we did not outperform.
However, when we position portfolios, I think it’s also important for clients to understand that history is not necessarily a good indicator of future performance. It is important that you understand that when we position portfolios, it is for the prospective outcome or the prospective returns that we would like to generate. And this might mean that in the short term, the performance might lag. And that is exactly what we’ve seen.
The question is though, within this environment where macro uncertainty is still rife, where we’ve seen a significant recovery in economic activity but you can see it is starting to lose momentum internationally, where in South Africa we’ve also seen a big jump in economic activity, but there’s still an enormous amount of policy uncertainty – within this environment, at what point do we think somebody will trigger a change in investment sentiment that will bring these unloved stocks and unloved asset classes back into play, and make them work for our clients’ portfolios?
Now, at the time when we did this recording, I think we’ve just seen the first signs of a potential trigger or catalyst as investors like to refer to it, that might bring a change in the environment. What might that be? It’s very difficult to forecast, but we’ve had initial indications that pharmaceutical companies are quite far down the road to bringing a vaccine to the market that will have an impact on COVID-19, the cases and the remedy to the issue.
Remember that the decline in financial markets was largely the result of medical issues, not financial issues. So if we want a solution to market problems, or a solution to poor investor sentiment, we need a medical solution to change the sentiment of investors. And we have seen a bit of that on 10 November, when we got the news that Pfizer is very close to launching a vaccine, and that the tests have been very favourable.
What was the result of that? We’ve had a massive reversal in the performance of the loved stocks, that came under pressure, and the unloved stocks, that performed exceptionally well. Just on the day, on 10 November, the Sasol share price, which was one of the big detractors from performance in our portfolios, gained 25% in one day. But we’ve also seen that international banks that were also laggards as I introduced the topic, on average gained about 14% to 15% on the day.
Now that doesn’t mean to say that that is a start of a new trend, but I think it is important to say that at least those investors who backed the story, started to understand how dangerous it might be to ignore valuations. So we still believe that the actions that we have taken during this year – where initially when we started the year, we had quite a conservative approach to asset allocation, we started to favour SA Inc shares in our equity portfolios, we didn't hold any property stocks in our equity portfolios, very low exposure to property stocks – that that positioning was the correct positioning to start off the year.
When the market sold off, of course we added to risk in the portfolio, during April. And we added a lot of the so-called unloved stocks, which haven’t worked up to now, but in the last two or three days, it has worked particularly well for our client portfolios.
Going forward, if we can just quickly summarise our views on the outlook, I think what we’ve seen in the third quarter is that most of the economic indicators that came out more or less match expectations of the market. But as we moved into the fourth quarter, it became quite clear that we are starting to see more and more negative surprises in terms of macroeconomic indicators. And that actually sits very nicely with the view that because COVID-19 cases have started to pick up again, restrictions imposed on economic freedom are starting to have an impact on economic activity again. So it wouldn’t surprise us to see a few negative surprises going into the fourth quarter, and in all likelihood, gross domestic product (GDP) growth in the world will probably be roughly somewhere between -2.5% and -3% for the year.
Into next year, we think that the stimulus that economic authorities provided to the macro picture, should work. And we should see a continuation of the recovery that we’ve seen that started back in the second quarter of this year.
From a South African perspective, it’s very tough to forecast. The one thing that we can say if we analyse most of the high-frequency economic numbers that came out, that just as we’ve seen a decent recovery in the world, we’re starting to witness a decent recovery in South Africa in economic activity. However, from a longer-term perspective, I think the same question marks remain. There is still big policy uncertainty when investors evaluate or assess the macroeconomic situation in South Africa. We still sit with a major fiscal issue where the solution is very uncertain, and it will take time to work that away. However, what we do know, and we said this a quarter ago as well, is that South African equities remain cheap for us in terms of their own history, relative to interest rates, relative to inflation expectations, and certainly also relative to the valuations that we’ve seen from overseas equities.
So how does this play out? We maintain our position within equities, where we favour SA Inc shares, but it’s not a binary positioning that we apply in our portfolios. We still have stalwarts like Naspers in the portfolio, we still have stalwarts like Anglo American in the portfolio, but we just blend these with shares that we believe are quite attractively priced.
From an asset allocation perspective, we’ve moved the equity exposure to what we call neutral, and in South Africa of course, slightly higher in equities. Neutral means that we’ve positioned the portfolios halfway between what we believe is overweight and underweight. So it is quite a conservative position. Should markets drop, we’ve got the ability to buy more shares, and should markets continue to run, then we can take profits in those shares that do particularly well.
We were also, let’s call it brave enough to use the opportunity when South African bonds sold off. In other words, when local bond yields went significantly higher, we used the opportunity to acquire government bonds for the portfolios of our clients. Given the recent change in investor sentiment, we’ve seen those yields come off significantly, and we have seen the benefit of that in our portfolios. Should that trend continue, at some point, again, we will take profits and then reemploy the money in areas where we think there’s better value to be had.
So I want to summarise, it was an extremely eventful nine-month period we experienced. It was also a nine-month period where the volatility was massive. But I think if we look back, at least we can say that by and large we’ve used the opportunities that were on offer in the market. Some of those opportunities did not play out in terms of big, positive performance in our client portfolios, but given the recent change in investor sentiment, if this can be sustained, I think our clients can look forward to very competitive investment performance from our portfolios.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.