2 years ago

Blue Chip Journal, Issue 77

  • Text
  • Advisor
  • Management
  • Equity
  • Finance
  • Planning
  • Advisors
  • Financial
  • Planners
  • Investments
  • Offshore
  • Wealth
  • Global
  • Funds
  • Portfolio
  • Retirement
  • Asset
  • Managers
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.


OFFSHORE INVESTMENTS Leading by action With a career built on sterling positions within the financial services sector, Kondi Nkosi has found the seat that will forever change his profession: the seat of Schroders, Country Head, South Africa. Blue Chip caught up with him to find out what is happening in the offshore investment sphere. Kondi, you took over as Schroders’ Country Head, South Africa in April 2020 – an extremely difficult time to take over the reins of an offshore investment company. Please tell us about your last few months. It was a very challenging time from many perspectives, let alone from an investment markets’ one. The primary focus for us was the health and wellbeing of the team on the ground. Fortunately, in our firm, it is relatively easy to work from home without any impact on the ability to do our work, given the investment in technology we have made over the years. We spent a lot of time interacting with our partners and clients, reassuring them that we were navigating the turbulent times in markets. There were several investment management businesses that either succumbed to the economic fallout of the pandemic or had to reassess how they do business. Schroders was in the fortunate space of having a strong financial position and a diversified business model that allowed us to navigate the tough times without having to seek external assistance or having to reduce staff on a temporary or permanent basis. What is your leadership style? I am a strong believer in leading by actions and bringing people along with you. “If you want to go quickly, go alone. If you want to go far, go together.” Why should investors consider offshore? Offshore provides diversification to an investor’s portfolio. It is a prudent approach for investors to diversify their exposures so that they manage their risk. Other global markets have significant comparative advantages that may not be available in South Africa (industries like aerospace, high-tech biomedical research and others). Opening oneself to those opportunity sets can potentially help enhance the returns on an investment portfolio. It allows investors to get exposure to other economies that may be experiencing higher degrees of “If you want to go quickly, go alone. If you want to go far, go together.” economic growth. For example, investing in a fund that invests in domestically listed China A-share companies, that derive the bulk of their revenues from the domestic economy, allows for diversified exposure to the China theme. While there are South African companies that derive some revenues from that economy, it would not compare to the domestically listed Chinese companies. Last year, the FSCA approved four funds to add to Schroders’ comprehensive range of offshore options. Please give an overview of these funds. We have been adding to the menu of funds that are approved by the FSCA and now have a broad range of 12 funds that have received approval. Last year, we added four more [see below]. Three more funds were approved by the FSCA in 2020: Schroder International Selection Fund (ISF) Global Gold (invests in companies worldwide that are involved in the gold industry), Schroder ISF Global Equity (another global equity fund that looks for underpriced shares relative to our expectations for future growth) and Schroder ISF Global Managed Growth (a flexible asset allocation, multi-asset offshore fund that aims to outperform a 60% global equity/40% global bond benchmark). SCHRODER INTERNATIONAL SELECTION FUNDS Schroder ISF Global Sustainable Growth A high conviction, global equity offering, managed by our Global Equity team, that focuses on companies whose growth prospects we believe the market has underestimated. These companies aim to provide positive earnings going forward. A cornerstone of the process is also the degree of sustainability (determined by our inhouse model) these companies display. 22 Schroder ISF All China Equity This fund invests in companies that derive a large portion of their earnings from China, irrespective of where they are listed. Our team believes that these companies are, or will be, able to consistently generate returns on invested capital above the cost of capital, and thereby generate returns for investors. Schroder ISF Asian Equity Yield An Asian equity fund managed by our Asian equity team. We have had a presence in Asia since the 1970s and the team has a strong track record. The fund invests in comp- anies in the Asia Pacific (excluding Japan) region that pay dividends now but also retain enough cash to reinvest back into the company to generate future growth. Schroder ISF US Dollar Liquidity A fund that invests in US$ money market instruments. It provides investors access to wholesale money market investment securities and aims to provide income by invest- ing in short-term bonds denominated in USD.

COLUMN HOW TO NAVIGATE volatile markets Sound advice by Florbela Yates, Head of Momentum Investment Consulting What a year 2020 has been so far! The effect of the Covid-19 pandemic on South African economic growth has been severe and markets around the globe continue to be volatile, not only as a result of the pandemic but also due to investor sentiment and political issues. So how do investors navigate these times? The starting point should be to sit down with your client and establish whether their circumstances have changed and, if so, whether their existing portfolio still meets their requirements. Then, it’s also worth ensuring that the investment manager appointed to run the portfolio is actively doing so. The world has been through severe pandemics, US presidential elections, recessions and market volatility before. Markets go through cycles and we don’t know how long or severe the current crisis will be. But we do know that you should highlight the importance of continuing to save and staying invested so that clients can still meet their financial obligations and achieve their long-term financial goals. If portfolios delivered disappointing returns, it’s worthwhile understanding what has driven these returns. Don’t sell out just because you see another portfolio doing better. History has taught us that selecting funds based on short-term past performance is dangerous and invariably leads to poorer outcomes. Ensure that you are comparing like with like. What asset classes are the portfolios invested in? Do they have similar offshore exposures? How do they compare to the peer group average over the longer term? And engage with the portfolio manager to understand what they are doing to position the portfolio for the future. The unit trust statistics continue to show a trend towards de-risking as investors continue to lose faith in the more aggressive funds being able to deliver on their performance expectations. The problem with exiting after poor returns is that you lock in those losses. Investors that are prepared to wait for a future recovery may not only make back these losses but potentially have some gains. Markets go through cycles and we don’t know how long or severe the current crisis will be. You should also consider the other costs of disinvesting and switching. Your client may still incur capital gains tax, and there is the opportunity cost of being out of the market when the recovery starts. People wait for confirmation of recovery before committing. So, investors who exit portfolios after a market downturn and only enter again after the recovery is confirmed, lose out on both sides of the investing cycle. While those that remain invested will experience the shorter-term volatility, our statistics show that they are invariably compensated for staying in the market. True diversification requires investments in several asset classes and there is a very strong argument for South African investors to have a portion of their assets invested in offshore markets. The amount again depends on your client’s personal circumstances and risk appetite. At Momentum Investment Consulting, we believe it is as important to learn from our past, as it is to consider the positioning of our portfolios for the future. We spend time investigating the current market and trying to determine which changes are structural versus those that are cyclical. In a low-return uncertain environment, being in a diversified portfolio isn’t enough. It’s important to look deeper to gain an understanding of the drivers of return given the current interest rates and growth expectations. It’s also important to understand that real returns don’t come in a straight line and to be realistic about the real return expectations. Over the short term, real returns are unlikely to be as high as we have seen before, but by having exposure to quality assets which tend to be more resilient, we believe there are enough opportunities out there to deliver on our clients’ longer-term objectives. Florbela Yates, Head of Momentum Investment Consulting 23

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