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3 years ago

Blue Chip Journal Issue 76

  • Text
  • Investment
  • Planners
  • Funds
  • Investors
  • Probability
  • Pandemic
  • Global
  • Planners
  • Investing
  • Equity
  • Advisors
  • Asset
Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.

COVER FEATURE SWOT BOX

COVER FEATURE SWOT BOX Florbela Yates, Head of Momentum Investment Consulting, offers her SWOT analysis of the South African investment landscape. STRENGTH On the whole, financial advisors are professional and research shows that advised households tend to have higher savings rates than those that don’t use a financial advisor. WEAKNESS The average age of advisors in South Africa is 56 years and the majority are white. We need to encourage transformation and make it attractive for younger advisors to join the industry. OPPORTUNITY By simplifying their investment offering, advisors can unlock huge efficiencies in their practice and free up time to sell their book, buy a new book, grow their business, or align different investment books. THREAT Change is inevitable. Technology is changing both the advice and asset management business. If you don’t keep up, you open yourself up to competition from those who are changing with the times. Our risk process places a greater emphasis on downside risk in the more conservative portfolios, and a greater emphasis on getting to the goal in the more aggressive portfolios where we have the luxury of time. We have optimised our portfolios to have a greater focus on quality factors, and so we went into the crisis with exposure to more resilient companies and higherquality credit, which we believe gives us better protection in the current market environment. I’d love to say that our portfolios weren’t affected by the crisis. But the reality is that the extreme moves in yields, spreads, listed property, inflation-linked bonds and equities experienced towards the end of February and March, did result in portfolio values falling. The good news is that diversification gave us some protection and we saw some recovery in April and into May. We remain committed to outcome-based (or goal-based) investing as an overriding philosophy. The biggest step in our process is the strategic asset allocation, and that looks through the cycle and ignores current crises or events. However, we do consider making tactical calls at the margin where we feel that certain assets are mispriced or showing obvious over- or undervalued steps. The coronavirus has led us to re-evaluate the current positioning, and given the expected volatility over the next few months, we have made some tactical changes relative to our longer-term strategic positions. Consistency is the measure that we place the biggest emphasis on. We believe that our portfolios are still positioned to make their targets over the longer term. What significant changes, if any, have been made to the portfolios? We have slightly underweighted the positions to the more aggressive asset classes given the current and expected market volatility and uncertainty over the shorter term. We have also evaluated our exposure to credit and positioned the portfolio towards higher-quality equity and credit counters. What is MIC’s perspective on how long we can expect the volatility that we have seen in markets to continue? It’s difficult to say exactly how long this volatility will continue. Given that we haven’t yet seen a peak in the infection rates locally, the fact that the lockdown has been extended beyond the original period added to the knock-on effects to various industries, I would say it’s safe to expect this to continue for at least the next six months. Depending on the fall-out that we see and how significant the effect is on the economy and unemployment, as well as the effect of greater liquidity being injected by governments across the world, it could potentially continue for longer. The current slowdown in global economic growth coupled with South Africa’s sluggish economy and increasing government debt is extraordinary. What strategies should clients adopt? Yes, our economy faces many challenges. I expect growth to remain weak over the short term, but some asset classes will continue to deliver real returns despite this. Make sure you partner with someone who understands markets and can build resilient and diversified portfolios. How do you manage client behaviour in an era where fear steers every decision made by every individual? Over the last two years, Momentum as a group has spent a lot more time researching and trying to understand the effect of client behaviour on their investments. The best that we can do is to continuously share these results with the market to get clients to stick to their investment goals and not make decisions based on emotions. Our clients have started to see the value of this research and we are starting to see them questioning their decisions. 18 www.bluechipdigital.co.za

COVER FEATURE We build diversified and resilient portfolios that consistently deliver on their objectives or outcomes over the relevant time frames, regardless of short-term volatilities or crises. Please outline the dynamic behaviour of asset markets during high-stress events. What advice can you share with the industry on how to manage through this trying time? The coronavirus has had a dramatic effect on financial advisors in two key ways: 1) a fall in their revenue due to the fall in investment markets and the difficulty of generating new business in the lockdown; 2) clients who have been affected financially – either through job loss or a temporary fall in income or the value of their investments. From an investment perspective, I would suggest that those clients who can, stay invested and consider other alternative sources of income. For example, many insurers have allowed clients to consider reducing cover or even take some payment holidays for the next few months. If there are any assets that they don’t need, selling these could also release some capital. I would suggest reducing debt and saving more. For clients who have lost their jobs or experienced a reduction in income, and need to disinvest to meet their costs of living, I would suggest that disinvesting from the more liquid money market or income portfolios while leaving their longterm portfolios the time to recover. Partner with a financial advisor that can help you identify your investment and income goals over the short, medium and long term. Revisit them at least yearly and make sure that your investments keep pace with your changing life. It has been tough, and we expect the volatility to continue for some time to come. In South Africa, the government has projected that we will only see a peak in infections in August or September, so I don’t think the bad news is over yet. What advice would you give to advisors about how to manage their clients who are currently going through a difficult time? I recommend that advisors stay true to their clients’ financial needs and plan accordingly. Many of their clients’ financial needs may be changing due to changes in their circumstances and advisors need to update their investment plan accordingly. Implementing the changes in planning should be done in such a way as to limit the effect on the client’s returns, such as locking in losses. Advisors should remain objective and not allow their subjectivity or own personal views on markets, the economy or the virus to drive the formulating and planning process. Should strategic asset class preferences change during and after Covid-19? Strategic asset allocation forms the cornerstone of our investment process. It looks through current markets and focuses on the expected returns of each asset class through the cycle. Although it should be reviewed at least yearly, to ensure that our expectations still hold, we wouldn’t recommend making changes based on shorter-term movements, as a result of a crisis. Where asset prices are depressed, this may present an opportunity to rather make some tactical changes. It is very important to have a disciplined approach to tactical asset allocation as you don’t want to make such big changes that you erode the value of your strategic asset allocation. What are the fundamental factors that Momentum Investment Consulting considers when planning to build investment portfolios that are resilient to financial market shocks? We apply a disciplined process and build diversified portfolios that are better able to consistently deliver on their objectives. Risk forms part of our portfolio construction process. We tend to www.bluechipdigital.co.za 19

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