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How fund managers are approaching investment risk in an uncertain world

Published Sep 21, 2021


INVESTORS can hedge against the uncertainty and risks inherent in today’s changing world by being nimble and agile, doing things differently, focusing on diversification and not being complacent.

These were the insights from some of South Africa’s top investment managers when asked about the biggest risks and opportunities facing investors today at the recent Allan Gray Investment Summit. The virtual event brought together local and international investment managers and other finance experts to share their perspectives on how to make sense of the current environment and invest for the future.

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“The world is probably going to be very different in 10 to 15 years. Investors want to be on the right side of long-term trends and extremes whether in valuations or economic variables,” said Duncan Artus, chief investment officer at Allan Gray.

Artus set the scene by describing some of the key risks shaping the investment environment, including unprecedented money creation and fiscal spending, which could lead to increased inflation, along with higher nominal commodity prices.

“The increase in commodity prices is occurring as the trend in environmental, social and governance (ESG) accelerates, raising the cost of capital for mining and other related industries,” he said.

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Delphine Govender, co-founder and chief investment officer of Perpetua Investment Managers, said that investors need to guard against complacency. “If it worked before that doesn’t mean it will work going forward. You need to be creative in how you adjust your responses.”

Artus and Govender both agreed that differentiation will come from having active asset managers at the helm of a portfolio.

“I am a strong believer that active investment management will deliver better returns going forward,” said Artus.

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Govender said that active managers have the ability to use their insights and judgements to bring differentiation.

“We use the information that all investors have available and say, how do we apply a second level of thinking and come up with different solutions? We engage, collaborate and influence by working with management of companies to change their thinking and become nimble, so that they are not wedded to how well, or not, the economy turns out,” she said.

Focusing on the local context, Malungelo Zilimbola, chief executive of Mazi Asset Management, said that the only answer to the risks facing South Africa is growth.

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“The tough stuff we need to deal with are structural reforms. The unemployment and low youth employment rate are big problems. We should be looking at how to grow the economy to create opportunities. All the other issues next to growth are secondary. Let’s focus on making the pie bigger and everyone will profit from being absorbed into the economy,” said Zilimbola.

He added that the economy is currently cashing in on the commodity boom, driven by demand for iron ore in China.

“Some of the commodity prices have increased to 200%. If you look at the margins of the commodity companies as well as their cash flows, these companies are paying 100% of their profits as dividends; this is fantastic. As long as China wants to grow their economy, we will continue to benefit.”

However, he also flagged that global inflation is a real risk.

“Once the interest rates in the US go up, commodity prices are likely to fall; this will be the end of the party for us. But we think it will take a while to get there.”

Artus added further caution: “The South African equity market is very exposed to China directly (through Prosus, Richemont, BHP and Anglo American) and indirectly via commodity prices. Recent events in China have made this risk more visible. Investors need to think about and manage the Chinese risk in local portfolios,” he adds, noting that independent thinking will be increasingly important.

While Marius Oberholzer, head of multi-strategy at Stanlib, agreed with Zilimbola that South Africa had benefited from the commodity upside, he said that it would not just be China driving this demand.

“We have seen that there is a strong recovery plan by Biden, and in combination with the European recovery programme there is talk about another $5 trillion (about R74trln) coming in the next few years. Our president is also talking a better game, focusing on energy liberalisation and private public partnerships … And so there could be some green shoots in terms of the reforms policy.”

So, where are the managers seeing opportunities?

Govender said Perpetua is currently more overweight industrials and general retail than resources, given that there is a concentration risk in South Africa to commodities.

“We are also now underweight banks compared to 2020. We are placing our bets only on the banks that we think have the ability to pick how they anticipate to win in today’s world. We are also underweight platinum.”

Rory Kutisker-Jacobson, portfolio manager at Allan Gray, said he sees value in some miners such as Glencore, as well select domestic companies like SA banks, as all of the traditional banks’ share prices are lower today than they were at the end of 2019.

Patrick Mathidi, a founding member and the head of Equities & Multi-Asset Strategies at Aluwani Capital Partners, echoed Kutisker-Jacobson’s opportunity in some of the SA banks, but is shying away from iron ore and coal miners.

Mathidi was the only investment manager on the day who made specific mention of the hospitality sector, which has been decimated by the Covid-19 pandemic.

“My top pick is City Lodge. The share price appreciation is down, but our view is that the business traveller will come back relatively soon, simply because you have to knock on doors to start new relationships, so we think there is good opportunity there.

“Our market in South Africa offers fantastic value in terms of the three things we look for: A stock has to be cheap and undervalued, it has to be a quality stock with a good ESG framework, and we see opportunity when it can return capital to shareholders in the form of dividends,” said Mathidi.