Finweek_English_Edition_-_March_19,_2020__

fundfocus introduction

22 finweek 19 March 2020 http://www.fin24.com/finweek

OVERVIEW

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By Leon Kok

w

hen in Baltimore some 20 years ago I

recall then leading US mutual fund expert

Jeffrey Laderman warning that a great

danger for many is that they choose their

funds almost as if they are ‘wonder drugs’.

“You give your doctor a call and say, ‘How about writing

me some prescriptions for the two or three that you think

are the best’. Sounds absurd, doesn’t it? Too many choose

their investments the same way. They hear about a hot-

performing fund with a novel investment twist and jump in.”

What is needed instead, he said, is to first examine

your financial goals and decide what exactly you are trying

to achieve through your investments. Only then can you

make a sensible choice from the multitude of investment

opportunities.

There are around 1 500 locally managed unit trusts in SA

alone, and obviously not every one of them – even those with

the best ratings – is appropriate for every investor.

An important feature emanating from this edition is

that if you’re jittery about SA’s short- to medium-term

economic prospects and increasingly high equity valuations

in, say, the US, there is a case to be made for venturing into

conservatively orientated balanced portfolios,

if not fixed investments. A diversified and

tactical approach ought to provide you with

a smoother ride and hopefully a little extra

in returns along the way.

Says Sasfin chief investment

officer Philip Bradford: “I’m aware of

the difficult environment around us,

but we’ve been able to identify great

low-risk investments that are ignored and

shunned by the rest of the market.

“I believe it is still too risky to go back into

local equities. I am finding much safer opportunities

in SA bonds which have sold off over concerns around the

domestic economy and a potential further downgrade.”

Head of fixed income at Prudential Investment

Managers, Gareth Bern, expresses more specifically the case

for corporate credit as a core asset within the fixed-income

investment universe, arguing that it can add considerable

value to investors’ portfolios through the extra yield it offers.

He writes with experience – his investment team has

boasted a superb record in its management of corporate

credit during the past 20 years. A major beneficiary, for

instance, has been the Prudential Income Fund which has

returned an annualised 8.6% (net of fees) since its inception

in December 2016.

“We do not believe local floating-rate credit is currently

expensive. This is despite the fact that, in the past four years,

the extra yield (or spread) offered by floating-rate notes has

Preparing well for a long, hard winter

Investors concerned about South Africa’s short- to medium-term economic prospects should look to conservative

balanced portfolios or fixed-income investments.

fallen, no longer providing as much additional compensation

as it did previously.”

True, Eskom has raised the hackles of many investors

regarding SA bonds, but it can also be reasonably argued

that domestic yields are still fairly valued on a relative basis.

The underlying view is that if SA’s macroeconomic

fundamentals, political stability and the perceived strength of

its institutions remain comparable to other leading emerging

market economies, there is no need to be concerned that

we’d be faced with merciless discrimination.

Coronation Fund Manager’s head of personal

investments, Pieter Koekemoer, expresses a somewhat

different view to Bradford, and perhaps even Bern, on the

interface between equities and fixed investments.

“We believe that there are a number of attractively

valued opportunities in the local equity market where the

opportunity for the patient investor to do reasonably well is

not premised on a stronger economy,” he says.

“This is the opposite of market conditions on the income

(fixed interest) side, and especially in the corporate debt

market. There you have a situation where the supply of credit

instruments has diminished because economic activity is

low, yet investor demand for these assets has soared.

“If you can’t stay invested in equities during

tough periods, you diminish the probability

of creating serious wealth over time,”

Koekemoer adds. “And one of the best ways

for investors to focus on staying the course

is to consider investing in a well-diversified

multi-asset fund.”

Should all things remain the same with no

increase in the price-to-earnings (P/E) multiple,

several leading analysts I met estimate that

equities are priced to deliver an annualised return of

about 14% over the next three to five years. However, if

the P/E multiple rises back to its historic long-term average

and company earnings growth don’t disappoint, then it could

offer an even higher return over the longer term.

We also present a case in this edition for being invested

in global equity funds, as opposed to being too parochial

in approach. Clearly, it has become easy and convenient to

invest abroad. Nothing new about it.

The Templeton Growth Fund, for instance, started in 1954,

has posted an average annual return of around 12% over the

past 66 years. It started investing in Japan when the whole

notion that it would become one of the world’s biggest stock

markets seemed absurd. An investment of $10 000 in the

fund at inception would be worth $10m today.

Wishing you well in your forthcoming fund investment

planning. ■

Leon Kok is an independent writer on public policy and investment markets.

CONTENTS

23 Q&A

Kicking the can

down the road,

or worse?

24 Prudential

Is SA corporate

credit too

expensive?

26 Coronation

Step back to

reflect on what

matters

27 Sasfin

Critical choices

await individual

investors

28 Last Word

Offshore

exposure

still key