Investor, know your enemy

Natasha Narsingh, Head of Absolute Return at Sanlam Investments

Investment envy is real and poses a challenge for advisers. While your client is earning a long-term return of 10% on his investment, knowing that a friend or family member is earning 11% seldom sits well with anyone.

Wanting to compare results is only human, but it could take an investor’s eye off the real enemy: inflation.

At the recent All Access Summit hosted by Sanlam Investments, Natasha Narsingh, head of Absolute Return at Sanlam Investments, presented the disturbing impact of inflation on an investor’s capital. “Most investors are concerned about market crashes and the impact of interest rate changes. But what is under-appreciated is the damage inflation can do over the long term. We’re up against the decay inflicted by inflation,” said Natasha.

Inflation is your number one enemy

What is the real impact of inflation on your life? For the past 60 years (1958 -2018) inflation stood at 7.7% per year on average. What does this mean? If you had R100 in 1958 you would need about R8 800 to buy the equivalent of goods and services in 2018. Or put differently, assuming 7.7% inflation, 30 years from now your money will be worth about 10% of what it’s worth now! This is particularly devastating for investors who are no longer earning an active income and who need to live from their capital.

“Sometimes there’s a disconnect between the returns you need to achieve and what the underlying asset classes are doing for you,” said Natasha. “In down markets when your peers are getting -12%, you would not be happy with the better -8%. A negative return, irrespective of whether it is outperforming or not, is still lower than what you started out with. Beating your peers will not protect your capital. It’s inflation you need to beat.”

This is where an absolute return fund comes into its own because it’s built to combat ever-present inflation. “Absolute return funds exist to give a relatively smooth investment experience. Essentially, you can use the fund as a stable component or investment building block of your portfolio and blend it with more aggressive funds, if you wish,” said Natasha.

Dual goals

We’re in an uncertain environment from an economic and political perspective. Not only here in SA but worldwide. This as an opportune time for an absolute return fund, such as the Sanlam Investment Management (SIM) Inflation Plus to really show its mettle and to deliver on the aims that it’s mandated to deliver on: shorter-term capital protection and the longer-term (3-5 year cycle) goal of an inflation plus return. Over the 10 years to 30 September 2018, the fund returned 9.40% versus its benchmark of 9.25%. Its worst 12-month performance is 5.80%.

“In the case of the SIM Inflation Plus Fund we have two goals,” said Natasha. “The shorter-term goal is to preserve capital over any rolling 12-month period and the longer-term goal is to explicitly deliver CPI + 4%.” This fund is not index sensitive; nor is it managed with the goal of outperforming its peers.

“But, if you allow us to brag a bit, it does stack up exceptionally well against its peers on a risk-adjusted return basis.”

Consistently strong risk-adjusted returns

The managers of the SIM Inflation Plus Fund have a very disciplined focus on downside risk. As a result, the fund has one of the best risk-adjusted results in South Africa. It consistently delivers one of the highest Sharpe ratios in the industry.

Notably, the SIM Inflation Plus Fund takes just enough risk to deliver on the returns it needs to deliver. This is important, as not all absolute return managers are able to deliver positive 12-month returns in case of a market crash. “In years like 2008 and 2009 we’ve seen more aggressive, almost balanced-type fund managers purporting to be absolute return managers and who previously delivered outperformance well above the inflation target, failing hopelessly to protect capital when markets took a tumble,” said Natasha.

Mitigate the risk of entering the market at expensive levels

For investors worried about the timing of entering the market at elevated levels, the SIM Inflation Plus Fund provides peace of mind. The fund delivers consistently no matter when you decide to enter the market, which is great for volatile times - like now. The fund managers watch the markets on your behalf and make use of various capital protection tools to mitigate the risk of entering the markets at expensive levels.

The SIM Inflation Plus Fund hits the investment horizon sweet spot for investors who want to invest for longer than three years, but don’t want to ride out the vagaries of the markets. And, most importantly, the managers never take their eye off investors’ number one enemy, inflation.