Time in the market is best for everyone
In an economic environment that is constraining as opposed to enabling, and at a time where the public is getting more interested in the world of investing – a world that they don’t completely understand – despondency can be the order of the day in cases where investors don’t see a lot of bang for their buck.
What needs to be pointed out though is that we are experiencing a protracted recovery cycle from the 2008 global financial crisis. The economic situation is tight worldwide and alpha is very hard to come by.
FAnews spoke to Emperor Asset Management Fund Manager TC van der Walt to find out where investors can find alpha in an economically suppressed market.
Hens’ teeth
While there is a lot of information and conjecture around investment advice, the message from the majority of industry leaders is the same, alpha will be as precious as hens’ teeth.
So where can investors find alpha in these trying times? Van Der Walt points out that during these times, you would want to move to higher dividend yielding shares with a stable outlook in future dividends. Value shares also have a natural built-in margin of safety to reduce risk.
He adds that there are also alternatives to alpha, “by including an alternative investment strategy to your portfolio, such as a long or short equity, one can generate alpha from short positions in a distressed market as well as help to mitigate the risk and volatility of an overall portfolio.”
Difficult conversations
At the end of the day, as much as clients want to hear that their investments are growing at a steady rate, they equally want to know when their investments are not doing as well as they should be. At a number of industry conferences last year, many advisers said that clients have told them that if they knew that their investments were not performing well, they could have at least put a plan in place to address the situation.
But the latter conversation is not an easy conversation to have with clients; no matter how prepared they say that they are for the inevitably flat news.
"An investor should never lose focus on long-term goals and objectives by concentrating on what might be short-term return limitations and volatility. If the necessary care and due diligence has been taken to construct the client’s asset allocation and underlying investments, then moving between funds too often might cause more damage to a client’s returns as the underperforming fund tends to turn around and provide great returns and vice versa," says Van Der Walt.
He adds that when considering moving from one investment to another; make sure that you have sufficient strategy diversification. Chronic underperformance must, however, be evaluated and acted upon to establish if the investment is still right for the client.
Debunking concerns
One of the other accusations thrown around during these times is that the grass is greener on the other side and that South Africa is the only market in the world that is facing economic turmoil to the extent that it currently is.
“Well, sometimes the grass is greener on the other side, but the answer to the second issue is: definitely not. South Africa is not the only country with problems and it can provide higher returns than most other countries. On the up side, some of our companies have massive foreign investments and are less affected by the current low growth rate in South Africa. Since South Africa is currently in a low growth phase and highly dependent on imports, inflation risk can be hedged by allocating some funds to foreign investments. However, currency volatility can affect the portfolio,” he says.
Van Der Walt points out that a South African citizen would have done well investing in US equity between 2011 and 2015 as the Rand weakened tremendously. This investment would have been a great hedge against inflation. During the last year or so, a foreign investment would have been less than ideal as the Rand strengthened and is still going strong.
2017 outlook
So what will the outlook for 2017 be?
"Despite all the noise, the Rand has largely continued to strengthen against the Dollar and surprised most market commentators and analysts with its resilience and strength. While rumours abound about cabinet shifts and the like, the Rand seems to have shaken these off as fake news and while we expect that it will remain volatile, we must take some confidence from its strength," says Van Der Walt.
He adds that this points to confidence in our local market suggesting that expectations of a stronger economy, less political intervention and with it a strengthening Rand and lower inflation might set the stage for a good year in equity markets.
Editor’s Thoughts:
The roller coaster ride is seemingly continuing and gaining momentum as the twists and turns are prolonged. The vital message that needs to be remembered that time in the market is better for anyone, no matter how hard it is to find alpha. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
