Conlias Mancuveni
The big themes in markets this year were rising inflation and interest rates. How did you respond in your allocations?
We derisked the multi-asset funds from assertively overweight total growth-focused asset classes to moderately underweight in favour of income-focused asset classes.
We implemented rand/US dollar exchange hedges to lock in the exchange rate gains, following the significant strength of the US dollar against most currencies.
We maintained the attractive SA long-dated fixed income exposure across all our multi-asset strategies, following the significant rise in bond yields.
How have some of the major geopolitical events we’ve seen this year influenced your decision making?
We had been gradually reducing our SA and developed market equity tactical exposures to neutral and underweight, respectively. This was partly on the back of a tightening monetary policy trend by SA and large central banks.
The war in Ukraine led to reduced predictability for corporate earnings, derating of SA and developed markets equity and triggered indiscriminate selloff fears. Currently, SA equity is looking attractive, and our intent is to gradually increase exposures to SA equity from neutral to overweight, on the condition that the current tense macro and financial conditions soften.
In what ways have markets surprised you this year?
The Russia-Ukraine war was a surprise factor for most managers, and it further aggravated the already-bruised and tightening global financial conditions, triggering sticky and high energy and food prices and a hawkish stance from central bankers.
How did the lessons of 2020 and 2021 help you in 2022?
There were several lessons reinforced from both episodic and sudden-event crises, and corresponding market recoveries experienced in the years 2020 and 2021, including the SA sovereign rating downgrade to junk status by Moody’s, Covid-19 pandemic and lockdowns, Eskom loadshedding, SA retail property damages and looting to name a few.
Our multi-asset funds delivered their best outperformance relative to peers in the Covid-19 recovery leg. This reinforced our view that the indiscriminate selloff of growth assets usually rewards disciplined and robust processes with the best opportunities of adding alpha.
The crises also reinforced that risk cannot be avoided if generating meaningful long-term real returns is a key objective. Instead, a balanced opportunity- and risk-taking approach, especially between growth- and income-focused assets is key to adding incremental and consistent alpha.
It’s important to have an investment team and committee that is well experienced, having participated in several market cycles and crises, the ability to move with speed when redeploying capital into growth assets, especially when growth markets are in a strong rebound mode.
Which asset allocation questions have been most hotly debated this year in your team?
As inflation and interest rates are rising, have we adequately compensated for those risks in our SA fixed income within our multi-asset funds and should we maintain or reduce our SA fixed income duration exposure?
What decisions have you made this year that have had the most impact on your portfolios?
We have reduced our tactical exposure to total growth-focused assets (both equity and listed property) from a moderate overweight to moderate underweight. This has moderately reduced the beta and downside participation of our multi-asset funds relative to sector peer benchmarks and the equity market.
Do you believe that the investment landscape for South African investors is more or less attractive than at the end of 2021?
Based on valuations, SA equity and listed property are looking more attractive compared to the end of 2021. Year-to-date performances for SA equity and listed property are close to -10%, depending on the choice of the representative benchmark. These two asset classes have derated further and yet the forward earnings have not materially changed.
Moreover, SA long-dated fixed-rate bonds are also currently looking more attractive than on 31 December 2021. The SA 10-year bond was yielding 9.7% and 11.3% on 31 December 2021 and 30 September 2022, respectively. We estimate an attractive 5.8% real return, assuming an average inflation rate of 5.5% over the next 10 years.
What are the most interesting conversations you have had with asset managers this year?
How managers are implementing ESG into their investment processes and governance. We’ve observed that the application of ESG thinking and interpretation is different from one manager to the next and from one asset class or sector to another; for example, some managers quantify and embed ESG into their valuations, some use it for screening and exclusions and yet some apply it as an overlay for ranking purposes.
We've also had conversations around hedging the rand/US dollar to lock in the currency gains while maintaining the underlying asset class exposure. This is an interesting and relatively complex business as it involves optimising the tenor (term), number of hedge tranches, protection levels, pricing, and percentages of currency-denominated assets that we should hedge.