It’s no longer just about risk or returns
If there is one thing that the pandemic has reminded us, it is that uncertainty is a fact of life, and the commonly prevailing consensus does not always incorporate or adequately balance all risks and facts.
The real question, according to Tamryn Lamb, Head of Retail Distribution at Allan Gray, is, how do we incorporate the learnings from our most recent past and avoid making the same mistakes? The same lens, she said, can be applied to investing. The current investment environment requires investors to adapt their way of thinking.
Kondi Nkosi, Country Head for Schroders in South Africa added that the investment landscape is changing rapidly as a combination of economic, political, demographic, environmental and technological forces are creating both opportunities and threats. These, in turn, are changing the ways we will invest in the years ahead.
Key themes of 2022
Emerging from the second year of the pandemic, Gontse Tsatsi, Head of Retail Client Management at Old Mutual Investment Group said 2022 still sees investors wanting to invest in global markets, albeit at lower levels than the last two years. “The recent change to Regulation 28 which sees offshore allocations to retirement investments increase to 45% has been very well received in the market. Local investors may be tempted to have an “everything offshore” mindset following this relaxation of foreign exchange controls by National Treasury; however, they should exercise caution when making this decision as achieving the optimum balance of offshore versus onshore exposures across cash, bonds, equity, and property asset classes can be a complex consideration. Deciding to move more assets offshore is not only making a call on global assets versus South African assets, but also a call on the rand as well as individual views on the state of the SA economy and political outlook.”
“The growing global threat of climate change, resource depletion, rising pollution, and unethical practices in the private and public sector, has led to an escalation in demand for more ESG aligned practices and products from companies and governments alike. In addition, COVID-19 has exposed the shortcomings of economies and societal systems. The growing awareness is part of what led to huge inflows into ESG funds globally, with 2020 and 2021 being record-breaking years which we expect to continue into 2022,” said Gontse.
“Further to this, the asset management industry locally and abroad is evidencing an increasing commitment to shaping a decarbonised world in this lifetime. This is in line with growing acknowledgement that there is an urgent need to accelerate the transition towards global net zero emissions, for asset managers to play our part in helping deliver the goals of the Paris Agreement. We are therefore excited to be one of only two South African asset managers that have pledged a commitment to decarbonising assets under management through the Net Zero Asset Managers Initiative,” added Gontse.
Innovation, according to Gontse, continues to be a key theme of 2022. “We expect to see investors look for alternative ways in which to invest by capturing these various global innovative themes that have the potential to grow exponentially, both tech and green themes. These themes include blockchain, robotics, bioengineering, green bonds, clean energy (hydrogen), space exploration, quantum computing, etc. It is best to ensure you have a diversified portfolio at the core of your investment strategy but also explore these new options without putting everything at risk.”
Investment insights
“Thematic investing has seen significant growth in recent years as it offers investors the chance to both manage the challenges that these disruptive forces pose but also grasp the exciting opportunities that come with this transformation. With investors today seeking additional sources of returns, we believe thematics can play a critical role in building a portfolio fit for the long-term. Natural Capital is a specific area that we believe will garner a great deal of interest – this covers the elements of nature that directly and indirectly produce value to people such as clean air and water, food, biodiversity etc. All of these elements underpin much of the global economic activity and, therefore, its degradation puts much of that economic at risk. Investing in this manner allows for this preservation,” said Nkosi.
“Another big theme we are seeing play out is the growth in accessibility of private assets. Private assets, as an asset class, have been growing over the last two decades, in terms of breadth and depth. Investors, for example, can access sub-asset classes such as private equity, private debt, real estate, infrastructure etc., from ESG-aligned to sustainability focused and impact investing. The pandemic has accelerated the evolution of private assets into the next era that is focused on, amongst other elements, the “democratisation” of this asset class. What this trend allows for is broader investor access to this asset class and for features such as partial liquidity to be incorporated into investment vehicles – attributes that historically were not available to investors in this area. This is a theme that we will see play out more and more going forward,” he added.
Risk in a post-pandemic environment
Aside from the widely reported impact of the recent tragic events in Ukraine on inflation, Nkosi believes inflationary pressures are also likely to increase amid measures to discourage high-carbon energy sources, although much depends on how policymakers intervene to tackle global warming.
“The impact on inflation will come via changes in energy prices. The recent developments in the gas and oil markets are already showing us how important energy prices are for headline inflation. Accelerating energy prices have been a key factor behind the recent surge in global inflation. Therefore, it should not come as a surprise that with the adoption of carbon taxes, inflationary pressures will increase globally,” he said.
In addition, Nkosi said the move to net zero will also dramatically boost demand for key industrial metals used to generate and store renewable energy. “Given the supply challenges, this is likely to add further pressure on inflation, via higher prices for aluminium, copper, cobalt and lithium.”
The future of investment management
Lamb added that investors believe what has worked in last 10 years will continue to serve them well, but this is not necessarily the case. History demonstrates that themes can last for several years, until they do not.
“We do not know – for example - how long the conflict in the Ukraine will persist, or what a recovery path from COVID-19 will look like. And we don’t know which trends will prove structural versus cyclical. This is why it is important to position portfolios for a variety of potential future outcomes,” she said.
Thematic investing, Nkosi added, offers the opportunity to invest in the trends transforming the world around us now – and in the future.
“Thematic funds focus on powerful, long-term global trends which are transforming the world and creating a wealth of investment opportunities. At Schroders, we believe that the purpose of a thematic portfolio is to invest profitably in the most powerful of these themes. In our view, these are where human ingenuity ignites innovation to address imbalances in the world,” he said.
“Thematic investing is different because it involves breaking traditional sectoral, and indeed regional, boundaries when putting together a portfolio of those companies best placed to benefit from a theme. In so doing, thematic investing allows investors to invest with precision in themes which are important to them, like those above, and which they believe can deliver superior returns,” he continued.
Themes like these, according to Nkosi, are long term in nature, playing out not over months or even years but over decades. “To that extent, the wider market often struggles correctly to model and value longer term themes, thereby creating some attractive mispricing opportunities for thematic investors. Investors, however, do need to be weary of over-hyped themes that are unlikely to deliver on the returns expected from these themes.”
Lamb added, “The best way to mitigate uncertainty is for investors to be clear on their long-term goals, to have a plan and stick to it. Investors should only implement changes when their goals change, not in response to what the market is doing. While many investors may also be feeling tempted to avoid investment risk, as a result of the market volatility over the past two years, they should try not to shun the equity markets completely. Investors need equities to deliver real returns. The only asset class that has consistently delivered returns in excess of inflation – currently the key risk on investors’ minds – is equities.”
Writer’s Thoughts:
This is where financial advisers play a critical role, in helping clients avoid long-term biases creeping into decision making. In his concluding remarks Nkosi said, “Investors are becoming more and more demanding of their investment managers. It is no longer purely about returns or risk-adjusted returns and a fair price. The third dimension of impact, in what we term Asset Management 3.0, has been thrust forward by investors. Those products that factor all three elements into their approach will be the winners going forward.” Do you agree with his remarks? Please comment below, interact with us on twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
