Sanlam Investments active managers find alpha in 2022 despite surging inflation, interest rates
Local active fund managers used a combination of capital protection, diversification and realignment of portfolios to achieve their mandated returns through 2022, and investors can expect more of the same through 2023, as funds respond to the high inflation, high interest rate environment and the threat of global recession.
The consensus among Sanlam Investments’ active fund managers from across the risk-return spectrum, is that 2022 has been an exceptionally challenging year for investors across the globe. “Asset returns have been under pressure and exceptionally volatile, with the South African bond market going through one of the toughest years on record,” says Melville du Plessis, portfolio manager of the SIM Enhanced Yield, SIM Flexible Income and SIM Active Income Funds at Sanlam Investments. Despite this backdrop, the funds have delivered good outcomes this year by being invested in the respective ‘sweet spots’ of the domestic fronts for the year-to-date 2022.
In addition, investors in local fixed interest assets also benefitted from some positive ‘tailwinds’ in South Africa but faced headwinds from international bonds as interest rate hikes, off an exceptionally low starting point for base rates, resulted in quite significant capital losses on international bond markets. “We have seen a rising interest rate environment around the globe [as central banks] aim to tame inflation which has finally lifted in a significant fashion; an additional point now in focus is whether or not the global economy has a soft or hard landing, as well as the risk of global recession versus merely slower global growth,” says Vanessa van Vuuren, a portfolio manager at Sanlam Investments. The SIM Small Cap and SIM General Equity funds she manages sit at the high-risk end of the risk-return curve.
High inflation coupled with a range of macroeconomic factors has made life tough for equity funds, with major local indices down 7-10% so far year-to-date. Van Vuuren says the volatile market has suited stock pickers, with those who moved into banks, consumer and energy stocks doing relatively better than their peers over the period.
Natasha Narsingh, head of Absolute Return at Sanlam Investments, says multi-asset funds offer benefits because investors are not entirely exposed to the vagaries of a single asset class. Through 2022, the SIM Inflation Plus Fund relied on doubling its exposure to inflation-linked bonds, albeit off a low base, and investing heavily in the middle of the domestic bond yield curve, where returns were less interest rate sensitive and held up better than longer-dated bonds. The fund also maintained a healthy weighting of around 20% to domestic cash, which helped not only dampen volatility but also on the return side, where cash did well against most other asset classes.
The salvation for many multi-asset funds came courtesy of offshore cash. “Having foreign cash certainly assisted over the 12-months. It performed outstandingly well thanks to a weakening of the rand of close to 20% relative to the US dollar,” Narsingh explains. The combination of our select foreign bonds and having some foreign cash in the offshore component of the fund’s assets bolstered its performance year-to-date 2022.
Ralph Thomas, portfolio manager at Sanlam Investments and co-portfolio manager of the SIM Balanced Fund, a fund which is typically positioned for longer-term growth. “During a period like this risk asset correlations tend to increase”, he says. “Funds that are geared towards slightly higher growth are going to struggle.” However, there were components of the portfolio that performed particularly well such as the fund’s exposure to domestic inflation-linked bonds; but the standout performance came from exposure to real assets, which make up a quarter of the fund’s offshore equity exposure.
Both Narsingh and Thomas can allocate up to 45% of their funds to offshore assets thanks to recent changes to regulation 28 of the Pension Fund Act. Multi-asset managers relish as broad an investment universe as possible, but they will not increase exposures just because the law allows it.
“We actually reduced our exposure offshore because domestic assets were much more attractive. You could get an 11% yield, offering a real return of between 4.5 to 5%, on a SA 10-year nominal bond, and local equities were trading at a 30% discount to intrinsic value,” Narsingh says. Thomas agrees, saying that the moment you reduce constraints, you start opening up potential opportunities to achieve better returns. “We will migrate to that 45% offshore cap over time, but we are presently nearer to 30% to take advantage of better domestic opportunities,” he says.
“Stock picking will see us through the current volatile environment, and we are quite spoiled for choice insofar as domestic equities at this point in time; given the broadening range of opportunities that are emerging across the SA listed equity landscape,” comments Van Vuuren.
Du Plessis, meanwhile, says his funds’ positioning will be influenced by bond market valuations in combination with the local as well as international macro backdrop. “High inflation and the accompanied increase in policy rates have had a significant impact on asset class returns across the board, and the expectation should be that this will continue to be the case going into 2023,” he says. However, despite all indications being that the road ahead and next 12 months will continue to be a bit bumpy, investors should also bear in mind that longer-term return prospects look quite attractive at this point. As an example, our fixed interest portfolios have delivered decent performance for the past year, but the 3-, 5- and 7-year returns have been exceptionally good. Over the 5- and 7-year period, portfolios such as the SIM Enhanced Yield Fund have not only performed exceptionally well versus peers, but have also outperformed pretty much all other major local asset classes.
“We face a bumpy 12 months ahead; but looking three, five or seven years out – given that certain valuations look so attractive – there are some good performance numbers to compound over the medium-to-longer term,” he concludes.
