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Beyond the noise: the power of the bottom line over sentiment-driven markets

25 January 2024 IFSA

Will the SARB begin to adjust interest rates down this year? Will the Fed? Are we risk-on? Risk-off? What about global geopolitical uncertainty? Is it time to get back into stocks? Or stay in the money markets?

It is the nature of publicly traded assets that they follow cycles of sentiment, hype and fear. Sometimes these cycles are well-founded; sometimes they are not. Investors in these markets accept this volatility. But there are alternatives.

Frikkie van Loggerenbert, CEO of private equity firm IFSA says, “Alternative assets – such as private equity – have the potential to grow irrespective of global market movements and tend to move steadily with low volatility.”

Private equity is the ownership of a company that does not publicly offer its equity on a listed exchange. In exchange for capital, you receive a percentage of ownership interest in the business – usually through the purchase of shares in a private equity firm’s fund. For example, IFSA offers and manages two funds for potential investors. One fund prioritises businesses within South Africa and the other focuses on global markets.

Alternative asset allocation provides consistency in a market that is driven by sentiment and repo-rate discussions says van Loggerenbert. “Because alternatives are priced directly at asset level and are relatively illiquid, they are a lot less susceptible to runs should the market become spooked.”

Of course, no asset class is immune to global economic cycles, and fixed-rate returns and performance are key when considering underlying investments through an alternative asset class.

Inflation, characterised by a general increase in prices and a decrease in the purchasing power of money, can significantly impact long-term investments. You might recall South Africa’s inflation surge in the early 2000s, which peaked at around 13% in 2008. An investor primarily holding cash or cash-like securities during this period would’ve witnessed a significant drop in their purchasing power.

“Today, in an environment of higher interest rates, the local markets are bound to underperform as cash and alternatives tend to perform better; the main reason being funding cost and net returns of institutions that have a higher cost of capital when interest rates are elevated,” says van Loggerenbert.

Understanding such scenarios is critical in effective financial planning. At IFSA we focus on consistency and term-driven rates and solutions. But by separating investor sentiment from the underlying analysis we can take the uncertainty out of uncertain interest rate movements, and provide a more consistent performance and risk versus reward matrix. This is one of the fundamental benefits that private equity and alternative asset classes hold.

The many types of private equity investments offer investors diversification opportunities – especially when working with a trusted firm to research and manage assets. Private equity has a broad range of investment opportunities because of unique industry attributes and the different growth stages of target companies. You could have private equity in an established business with a long history of cash flow or in a more recently established entity looking for capital and rapid growth in an emerging market.

Compared to standard investments in publicly traded funds, private equity typically has a longer investment timeline; offers more direct control over the asset; is more protected from market volatility; and presents the potential for higher returns.

There is enough global uncertainty to go around. For experienced and sophisticated investors looking to diversify their holdings and anchor their returns to the performance of experienced professionals, it is well worth exploring alternative investments.

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