Alwyn van der Merwe, director of investments at SPI
Sanlam Private Investments (SPI) has launched a new bespoke flexible portfolio, allowing clients to benefit from clever asset allocation, and thereby reducing risk and restricting capital losses. The portfolio is the first of its kind for SPI.
According to Alwyn van der Merwe, director of investments at SPI, one of South Africa’s fastest growing private client businesses, the bespoke flexible portfolio will fill a gap for clients who only invested in a single asset class. Clients in the past would approach the group to invest money in the equities market. “But when the equities market is expensive, then you have a problem, because if the market corrects, you become a victim of that correction.” As a result, clients would suffer when the entire market fell.
The single asset class mandate came under intense scrutiny with the collapse of stock markets globally in 2008. At the time, the market fell by 40 percent, thereby reducing a R100 investment to just R62. But Van der Merwe says that with reduced exposure to equities, that investment may only have fallen to R80. “With this portfolio, we’re catering to most of our clients who buy into the Warren Buffett story: the first rule being, don’t lose money; the second rule being, don’t forget the first rule.”
Van der Merwe, who will manage the flexible portfolio, says he’ll look at managing money across equities, bonds, cash and property. This will be different from all SPI’s current portfolios, which are all Regulation 28-compliant. Funds that adhere to Regulation 28 may not invest more than 75 percent in equities, and are all clearly defined in terms of risk. With the new flexible portfolio, there are no such restrictions. He says, “In managing money across asset classes, we’ll be able to generate smoother returns for our clients, and ultimately reach our nominal return investment objective. So we want to restrict capital losses for clients.”
Asset allocation has also proven crucial in maximising investor-returns in the past. Statistics show that if an investor reduced his or her exposure to South African equities when markets became expensive (when the price to earnings ratio headed over 16 times), a R1 000 investment in 1960 would today be worth nearly R3.5-million. If the investor had simply stayed in equities right through, that same investment would today be worth around R1.2-million. Had the same investor managed to dodge the seven biggest market collapses over that time, the investment would have soared to R174-million.
In the same vein, by avoiding the all share index during down times since 1990, a R1 000 investment would be worth just under R30 000 today (versus around R12 000 if the investor had not moved out of equities). “This shows the importance of asset allocation. An investor will enjoy bigger gains because he’ll miss some of the falls, and capture some of the big advances, which usually occur just after the market has been sold down.”
Van der Merwe says that by adding the stock picking skills of the manager (alpha) to the mix, returns could be even better. The flexible portfolio will make use of tools such as PE ratios in determining which assets to invest in. It will also form part of the formal investment process of SPI, and as a result the portfolio will be analysed frequently by the investment committee.
Currently Van der Merwe is wary of investing in equities, and prefers cash. “Prior to the recent correction, the market ran hard and was trading on a PE of 17.5, which means we initially kept a large portion of the portfolio in cash. We believe the market is trending upwards cyclically and will utilise bouts of equity weakness to increase equity exposure.” The group is forecasting a 15 percent increase in the stock market over the next year. He also likes resource stocks like BHP Billiton and Anglo American, as well as industrial giant British American Tobacco.
While the portfolio is aimed at investors who seek capital protection, Van der Merwe says it will involve some risk as it also seeks to build capital. “So it’s not for the person who can’t stomach any risk.” The flexible portfolio’s benchmark is consumer inflation plus four percentage points (CPI + 4), while the minimum investment is R1-million. “This will ensure we generate a good nominal return for our clients – which is exactly one of the portfolio’s main objectives.”
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