It’s time for investors to temper their return expectations – Corion Capital’s David Bacher

Corion Capital publishes an informative summary of asset class and fund performance returns every month (attached below for ease of reference). David Bacher, Corion Capital’s chief investment officer, reviews the winners and losers for the month of December. David urges caution following a near decade long bull market, which has seen valuations skyrocket to their highest relative levels in history. David outlines the importance of diversification in any given portfolio given the number of macroeconomic risks that surround global markets at this point in time. – Sharidyn Rogers

David Bacher on the average return that a high equity unit trust did in 2021:

From our perspective at Corion, the best indication of the man on the street, in terms of investments, is generally his investment through his retirement fund. A retirement fund is not just about equities, it is a mixture of different asset classes; mostly equities but it has bonds, offshore investments, cash – which it has to because of legislation –  it needs to be a diversified portfolio. We like to look at the high equity space where those unit trusts offer long-term retirement funds. The average return that a high equity unit trust did – that’s over 100 unit trusts – was just over 20%. Considering inflation, that is about five. The next best return from that high equity category was in 2006. It was an exceptional year for investors and for people’s general wealth to improve.

On the best performing high equity funds in 2021:

David Bacher

It’s quite an interesting year, especially in the South African context. You usually have a bang bust kind of scenario where resources are either shooting the lights out because of the rand weakening at the expense of financials or vice versa. This year, it was very different. The All Share Index was close to 29% return and the basic materials did outperform with low 30% returns. But financials were up 28% and industrials were up 24%. It was a case of most major equity sectors rising. Unlike previous years, where we look at the best unit trust, it was generally those who are very heavily weighted in financials, and very weighted in basic materials. That did not happen last year. If I look at the winners, what stood out last year was the small cap industry was up over 50%, after many years of really lagging; those funds that did not have exposure to Naspers and Prosus, which is a big weighting in the All Share Index. Naspers and Prosus have had a tough year and being a big counter in the market, if you were biased towards small caps and did not have exposure to Naspers and Prosus, you would not have had a very good year. If you look at the best performing funds, it was those funds that were positioned that way. We are talking about Piet Viljoen’s Counterpoint. When I looked at the best performing funds in the various categories, they were the top performing in two categories: low equity unit trust and global. It is very seldom you get best performers in two very different categories.

On the investment process at Corion Capital:

We have done things a bit differently with our equity fund. Most companies that follow our multi-management approach, mix different strategies and funds. What we have done at Corion is blend different managers’ best ideas and left a large part of the portfolio, construction and risk management to ourselves. In this way, we are trying to get the best ideas from very clever managers. Fortunately, our managers such as Andrew Vincent from Clucas Gray, had an exceptional year. He invested a lot of the small caps or less favoured stocks of 2020 at the right time, and that was the reason why Corion, as a house, was fortunate to have a very good year.

On whether the JSE can expect a growth to value rotation given that all the economic indicators, inflation, interest rate and direction are pointing to it:

I think it is going to be an interesting year. What was quite defining last year was if you looked at the 30-year US treasuries. US treasuries and bonds generally are better indicators of what is happening out there than the equity market. If you look at all previous equity markets, bear markets, the bond market tends to be a better indicator. Last week was the worst weekly total return of the 30-year treasury in almost 50 years. That’s quite striking, we lost about 9%. So, that could be a sign that the lights are going from amber to red, and it’s an indication that rates are probably going to go up a bit quicker, higher than people expected. This wall of money, which was filled by the fed quantitative easing and low interest rates is coming to an end. What happens generally in that kind of environment, the momentum stocks, the growth stocks – where you rely on low discount rates – they’re generally pricing great expectations going forward. That does struggle. From a Corion perspective, we are certainly not overweight equities, and we certainly do have a bias towards value kind of shares, not in South Africa but globally, which tend to perform better in that kind of environment.

On the safe havens that investors can look forward to in 2022:

You never want to go all in or all out. Market timing is difficult. Generally, asset classes rise over time. So, if you go too conservative for too long, you generally underperform. Don’t get too scared and totally disinvested. But it is a time to have a bit of your portfolio in more conservative assets. Things like cash is not such a bad investment because if you have cash and the proverbial rainy day arrives to invest at lower prices, it is always a good thing. I would just lighten up on equities, have a little bit more cash in your portfolios and don’t get too greedy because it has been a good period for investors.

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