South African investors are navigating uncertain times. The country is going through tough economic challenges. Growth is pegged at 1.3% for 2017, rising to 2% next year, but even Finance Minister Pravin Gordhan admits Treasury’s figures tend to be optimistic. Economists take a gloomier stance and have criticised the Minister’s budget for lacking a growth strategy. This is bad news for investors looking to grow their money. But Old Mutual Multi-Managers has a proven investment philosophy and process aimed particularly at retirement fund members to stay on track in turbulent economic times. It comprises asset managers with extensive experience who can help South Africans reach their retirement investment goals. David O’Sullivan explored the economic landscape with the CEO of Old Mutual Multi-Managers, Trevor Pascoe, to find out how his team is able to navigate these tough times and keep retirement fund members buoyant.
Trevor, first up, let’s talk about the role of Old Mutual Multi-Managers.
Old Mutual Multi-Managers is an asset management company and the difference between that and what we refer to as a single asset manager is that we create portfolios by selecting a range of asset managers, Coronation, Prudential, and the like create portfolios. We don’t select actual underlying stocks, so we wouldn’t select an Anglo and the like, we would select asset managers to do the manager selection for us .We refer to asset managers to create portfolios to provide the solutions we want to provide to clients.
Are you focusing particularly on helping South Africans reach their retirement investment goals?
That’s the key part of what we do. Our key strap line or saying is “Your future, our focus”, and what we try and do there is that most clients need a fairly high return and a return above inflation. So we have a range of portfolios that try and achieve those inflation targets. Most clients tend to need an inflation target of between five and seven percent in real terms and we construct portfolios to achieve that outcome.
Let’s look at the past and present markets. How turbulent has it been for investors, how uncertain has it been?
I think going forward, things won’t be any different from the past. It has been very uncertain the last three years and we’ve actually seen that in markets. If we look at returns on South African equities over the last three years, they’ve been fairly dismal returns of just above inflation, which has made it difficult to save money in the light of the last three years. However, if we look over the longer-term, if people had stayed invested, they will still have received pretty good real returns. We have no idea what the current geopolitical situation is going to cause to markets, so one has to take a longer-term view of your investments.
What is causing this volatility of the South African markets? Is it driven by global factors or is it the internal economic, political situation in South Africa?
We are pretty much led by global markets when the financial crisis hits, even though South Africa wasn’t really affected, but at a macroeconomic level markets were affected worldwide and we just followed that trend. We actually suffered economically, post the financial crisis and probably much as a result of the financial crisis. It didn’t immediately hit us; financial markets though, were hit at the same time. Political issues of the day tend to cause a whole lot of volatility, but if we look at the trend, the main cause of our Rand moving as it does, is how commodity prices move. It’s quite interesting to see the correlation between commodity prices and how the Rand moves over a longer term.
There is a fair amount of jitteriness about the future of our Finance Minister, Pravin Gordhan, whether he is in fact, going to be sacked. R rumours persist and we know the markets do react to rumours. Do you see that being a significant factor at the moment?
I think less so than we saw last year, but as we saw last year, we were surprised by a number of things. We were surprised by Brexit, surprised by the Trump election, so I think we could still find a surprise here. The fact that it has happened three or four times in terms of rumours over the course of last year, markets will adjust almost immediately and I think will come back to the norm after a while, so I think we will see volatility in the markets if there are those kinds of announcements. I think if there is a real concern around what message is brought out by those changes, we could see markets react, probably more violently than we have seen in the past.
Because we are navigating uncertain times, what have investors had to deal with lately and how has that impacted investment portfolios?
I think we were surprised by Brexit, we were surprised by Trump. If you look at the UK, Brexit actually led to an uptick in UK equities, so UK equity markets surprisingly responded very favourably and at the moment we’re seeing rallies in the US market as a result of Trump. I guess that those weren’t expected and the key event for an investor is to try and look through the noise. To actually know that whoever’s managing the money has a philosophy that they’re sticking to.to actually achieve their investment outcomes over the long-term because in many respects, if you look at a retirement fund member, they’re investing for, some of them up to 40 years. The short-term volatility should not be too much of a cause for concern if the asset managers are doing their job and sticking to their philosophy.
Let’s talk about that job, that philosophy. You have a proven investment process to help retirement fund members stay on track and reach their retirement goals, even if the times are tough. Talk us through that process. Why has it been so successful?
Our key and primary focus is to achieve the client outcome and we’ve termed that in real terms by saying that a client needs to achieve a return in excess of inflation of whatever the case may be, six or four percent. We build portfolios around achieving that goal based on long-term historic returns in the different asset classes. However, we will move around based on how we see valuations in the different asset classes.
Therefore, if we see value in say South African bonds and long bonds, we will allocate more of the assets to long bonds and less to say, South African equities. As we do see, at the moment South African equities are slightly overvalued and so we’ll move around what we call ‘our strategic at a location’ based on what we see valuation wise at the moment, but we keep sticking to the goal of achieving that real return target.
That long-term view that has to be taken, in these turbulent times, what is the risk built into taking long-term views?
If I can talk more about the mitigation that does come from a risk point of view, what we do see is many investors tend to move their investments at the wrong time. They see markets climbing and so they tend to invest more in equities at that time, as they are potentially reaching a peak. Then they will tend to sell them at the wrong time as well, so these markets will fall, they’ll actually say, “I really need to get out of this asset class” and make the wrong call, so what you find is that many investors actually only achieve half the return had they remained in the fund, if they’re actually making decisions themselves in terms of getting in when markets are high and getting out when markets are low.
The risk mitigation of a long-term view is that you actually stick to your strategy and you will do better in the long run if you do so. The risk there is that you’re going to have friends over the braai saying, “You’re crazy sticking to that view, you should be out. This is really what’s happening” and I suppose that is the kind of risk where you actually get peers saying, “You’re probably doing the wrong thing”.
When we talk about retirement investment goals, to what extent do South Africans appreciate investing for their retirement?
I think if you look at most savings monitors, the savings rate amongst the majority of South Africans is very low, and that’s even more so through difficult times. The general public will tend to access their savings in times of financial crises and in some cases, leave their jobs so that they can access their retirement savings, which has more detrimental effects over the longer term because once they retire, they haven’t reinvested that money, they’ve used it up and the retirement money in no way is going look after what they require at retirement, so being forced into a retirement fund is a good thing. However, I do think you see, with job moves, people not preserving their retirement savings.
Trevor, how should investors be preparing?
Investors should know what they’re getting out of their investment portfolios and then stick to that investment strategy through their working lifetime until they actually retire. They should actually get good advice to ensure that they are in the right portfolio. If they understand that portfolio and know what it’s going to deliver, stick to that strategy, remain in that strategy and if you do leave work and move to another country, make sure that you’re preserving your retirement capital.
