Bull market poised to turn bearish - SA Asset Manager

Insight on dealing with a bear market from award-winning active asset manager, REZCO Asset Management.

The bull market has been going for over six years and investment managers now need to moderate their risk in anticipation of a potential bear market on the horizon. This is according to Rezco Asset Management chief investment officer, Rob Spanjaard.

“We are worried about the bull market. Clients have become used to enjoying returns of as much as 20% and the reality is that while the market keeps getting higher, it is now expensively priced.”

Spanjaard continues, “This is in effect not so much a bull market but could be seen as a ‘pig market’ because the trouble is that the market could still double from here – or it could halve. The real question facing investors right now is what assets to own and when to leave.

“There is the temptation to just keep ‘feeding at the trough’ – you need to know how to manage this market. It is important to remember that bear markets don’t always recover immediately – last time it ended badly. And the 1969 bear market took ten years to recover, but it was actually 30 years in inflation-adjusted returns.”

Spanjaard outlines four main points for managing a bear market, as follows:

• Own managers with a track record and experience of successfully managing money though bear markets.
• Invest in balanced funds.
• Create a portfolio of funds that are good at managing the up side as well as the down side.
• Build portfolios consisting of funds which have a low correlation to each other to obtain diversification benefits.

He continues: “In terms of owning managers with a track record of managing through a bear market, it is important to note that many balanced funds in existence today simply weren’t around during the last crisis. Out of the current 336 ASISA South African Multi-asset balanced funds available to investors, only 149 existed at the last bear market.

“It’s important for investors to be in balanced funds and in doing so, letting the portfolio managers make the important asset allocation calls on behalf of investors. Emotion tempts people to buy high and sell low. It is a frightening statistic that from 2000 to 2010, the best performing fund in the USA obtained a return of 18% per annum, yet the average investor invested in the fund earned a negative return of minus 11% per annum.”

In terms of creating a portfolio consisting of funds that are good at managing the up and the down side, Spanjaard clarifies the importance of capture ratios. “Morningstar data, for example, provides capture ratios which measure the ability to manage both upside and downside periods. Using the upside-downside capture ratio is a very good way to measure performance – you need to look at how much a fund participates on the down side.

“To put it into simple terms, if you invest R100 and you lose 50% of your investment, one would have to gain 100% to get the value of your investment back to R100. It is therefore imperative that one invests in a fund that protects investors on the downside. By losing less, an investor is essentially able to obtain better long term returns on their investment.

Finally, one of the best ways in which an investor can insulate their portfolio against market volatility is by selecting funds that have a low correlation to each other. By selecting funds with a low correlation, one is able to maximise the opportunity presented by diversification.

“Don’t be tempted to invest into funds that all behave the same. Similar investment styles can cause funds to behave in the same manner. By building a portfolio consisting of funds with low correlations to each other an investor is able to construct a portfolio that is robust and that will be able to absorb market volatility,” concludes Spanjaard.