Corion Capital’s David Bacher – How sustainable is the US bull market?

The current coronavirus has disrupted markets and created an environment where, in theory, active managers should thrive. However, rapid changes in the economic outlook and high volatility in the markets show that the performance of active managers gets much, much worse. Corion Capital CIO David Bacher unpacks the drivers of outperformance, indexed strategies and S&P sustainability. He notes that behind the uncertainty of the new Covid-19 variant, there’s been a lot of volatility in asset classes, best represented by the Volatility Index, which shot up during November. – Sharidyn Rogers

David Bacher on the performance of the All-Share Index:

If I look back at the current report, which has been running for almost 5–6 years, I’ve never seen a dispersion between the peer group, the category average and All-Share Index. It looks alarming, but it isn’t, because in South Africa we have two different main indices. The man on the street and the public generally looks at the All-Share Index as it has been around the longest, it’s the most quoted. But the actual investment industry doesn’t really track its performance against the All-Share Index. And the question is why? The reason is that the All-Share Index is a much more concentrated, higher allocation to resource shares than most markets and definitely relative to where investors would like to invest retirement fund money. The actual industry standard or the most asset managers in the industry use what is called the Capped SWIX, which has two main differences in terms of its methodology. The one is that any underlying shares are capped at 6% currently, and the other one takes into account only the shares that are registered in South Africa. The actual makeup of the All-Share Index, relative to the Capped SWIX, is night and day. What will be interesting is that the Capped SWIX return for November was just shy of 1%. So, the actual active industry, you could say, did okay and it’s just what you are measuring your performance against.  The All-Share Index, its top five shares, count 42% of that index. The biggest allocation of the All-Share Index is currently to Richemont, then Billiton, then Anglos. Those shares rallied hard during the last month as a result of a depreciating rand. 

On the main economic factors that drove markets during November:

The fact that inflation in October in the US hit 6.2%, a three-decade high, is probably one of the reasons why the transitory speech has been sort of put on the back burner. Inflation is very much a prominent concern. Maybe we are getting to the top end of the inflation concern. But the other main economic factor that everyone is talking about – which is top of mind for investors – is the new Covid-19 variant and its implications and what that means for the market and different sectors in the industry. Maybe this herd immunity with low severity could be a good thing. On the back of that uncertainty, you’ve seen a lot of volatility in asset classes, and that is best represented by the Volatility Index that has shot up during November.

On the sustainability of the S&P 500 index:

It is front of mind from a Corion perspective. We’ve been fortunate to have a very good product range in terms of our performance across all our underlying offerings, except probably with our global allocation in equities. It is for the reason you’ve mentioned, we are concerned that the S&P and the valuations are high at the moment. As a result, we have been underweight in the best-performing region/industry. We don’t think it’s sustainable given a number of reasons; firstly, valuations. Secondly, it is driven by a lot of large-cap companies; even if they do continue to do well, we think they are going to face regulatory burdens and more obstacles going forward. The man on the street sees the S&P, the Dow Jones or the Nasdaq reaching all-time highs but given the weightings of those indices and the emergence of passive shares and ETF shares and this wall of money that has been going into this, it has become almost like a virtuous circle. If you look under those shares, the broader sample of the market, I don’t think it is reflective of economic prosperity and great earnings.

On how 2021 has played out for investors:

It has been a very good year for investors, and it played out in terms of what you would expect the relative rankings would be of the various asset classes. Over time, you would expect property and equities to outperform bonds, which would outperform cash, and that’s actually how it played out this year. If you look at what equities have done, properties bounce back strongly, even higher than that. Those are good returns and very good returns for the man who’s saving for retirement. It has been a bit of a lean period for South African investors over the preceding five years, but when it snaps back, it snaps back quickly and those people who have stayed invested have been rewarded. So, most retirement funds in South Africa will be close to the 20% return when you have inflation, although picking up significantly at about 5–6%. That’s a significant real return for people’s long term.

Read also: 

• Christmas comes early as global markets soar higher in October – Corion Capital’s David Bacher in review
• Corion Capital’s David Bacher unpacks asset class and fund performance data for September
• Corion Capital’s David Bacher unpacks asset class and fund performance data for June