Paul Marais

The big themes in markets this year were rising inflation and interest rates. How did you respond in your allocations?

Our portfolios have typically been underweight risk assets and equities – foreign exchange and longer-dated bonds as examples – for a meaningful period now. Rising interest rates have simply allowed the cash holdings in the portfolios to earn a more appropriate level of return. At times of market stress, when the persistence of inflation is being digested by the market and dislocations result, we have tended to reconsider our risk exposure with a specific view to increasing it. As a specific example, one of our global balanced portfolios has an allocation to US Treasury Inflation-Protected securities, for which rising inflation rates have seen us reconsider our exposure with a specific view to reducing it.

How have some of the major geopolitical events we’ve seen this year influenced your decision making?

Typically, geopolitical events – which extend beyond Ukraine and into China’s party conference, and the ANC’s conference, among others – have seen us defer our decision-making. Not that markets ever provide perfect clarity, but time is one of a portfolio manager’s greatest resources. And allowing ourselves the time for markets to become less opaque has been the right thing to do (we believe). An example is the South African interest rate environment: its moving parts appeared to be well known earlier this year but the yield on South African bonds is almost as high as it’s been at any point in the past two years.

In what ways have markets surprised you this year?

The persistence of high and positive correlation amongst asset classes – particularly between developed market bonds and developed market equities. High degrees of positive correlation among asset classes in times of stress isn’t anything new, but what’s surprising is correlation has been high almost throughout the year, with both of the mentioned asset classes experiencing a poor 2022. This has offered investors very little means with which to protect themselves.

How did the lessons of 2020 and 2021 help you in 2022?

Our primary lesson from 2020 and 2021 is the future is uncertain and it was wasteful to try to predict – and control – it. The future remains uncertain. Speculating whether it is more or less uncertain distracts from the main uncertainty point. We remain committed to acknowledging the future’s uncertainty. Our preference continues to be to avoid forecasting and to spend our time understanding how current market valuations relate to each other and to the past in order to identify opportunities in the present.

Which asset allocation questions have been most hotly debated this year in your team?

Two questions were thoroughly debated throughout the year and remain the subjects of debate at the time of writing.

(1) Whether our multi-asset, high-equity portfolios should have higher allocations offshore – clearly precipitated by the increased offshore allowance in terms of Regulation 28. Given that local fixed income assets provide returns commensurate with the inflation-plus ambitions and fixed income needs of our multi-asset, low-equity portfolios, this was far less of a debate. The key pivot point for the debate for our more risk-assertive portfolios is the valuation of the rand, where dollar strength appears to clearly warrant careful consideration before allocations are made.

(2) Where our portfolios made allocations to longer-duration assets post the Covid-induced sell-off, the question has become whether we take even more duration risk given that interest rates are higher now than they were when we first made the decision, and given that these types of assets have meaningfully underperformed in the past year.

What decisions have you made this year that have had the most impact on your portfolios?

The decision to bring non-vanilla products into our business that have payoff profiles significantly different from the ordinary long-only space. This meaningfully changed the framework within which we make our investment decisions. Whilst it cannot, for regulatory reasons, change the decisions we make in our cautious and balanced portfolios, it does make us think more critically of what payoff profile those asset classes offer and at what price.

Do you believe that the investment landscape for South African investors is more or less attractive than at the end of 2021?

More attractive. For decades now, all asset classes have been priced off interest rates, which have been artificially suppressed. While the transition to a higher rate environment is exceedingly difficult and is not guaranteed to turn out as central bankers hope – and while there is a non-zero probability that we end up in an environment where rates are higher but economic growth never recovers and inflation remains troublesome – the fact that risk-free assets are earning a return commensurate with providing investors with real returns (even if they are slight) means that every other asset class has a higher hurdle rate to overcome and therefore will themselves earn appropriate risk-adjusted returns in time to come.

What are the most interesting conversations you have had with asset managers this year?

By far the most interesting conversation we had in the past year was with a manager that had Russian exposure. The position’s value had been written down to zero but could be exited if the manager followed the convention that South Africa was a ‘friendly’ nation despite the portfolio’s jurisdiction being in a non-friendly nation. The complexity being in the moral ambiguity of either allowing investors to exit the position but appear Russian-friendly or take the potentially higher moral ground but remain invested in the asset. Debating the ethical merits one way or the other was fascinating.