What’s on investors’ minds?

In our ongoing discussions with financial advisors, these key questions continue to be raised, namely:

1. As the money market is likely to underperform inflation from here, what are the alternatives to cash?
2. Offshore. . . how much is enough?
3. South African equities. . . is it too late?

We briefly discuss each in turn, providing broad insight from Ninety One. We have addressed each question independently, and not with a subsequent answer building on the prior question

1.Cash continues to trend lower

As we predicted in January 20211, investors in money market funds are now earning negative real returns. Given the expected path of the repo rate (lower for longer, with the first 25 basis point rate hike only penciled in for late 2021 / early 2022), money market investors can expect to earn negative real returns for the foreseeable future. We can therefore expect money market returns to continue to trend lower and bottom at 3.5%, being the current level of the repo rate. As is evident in the chart below, this will be the lowest annualised money market return since the introduction of inflation targeting in 2000!

Now, more than ever, financial advisors and investors need to look beyond the perceived safety of money market funds to deliver attractive real returns – perceived safety because cash will increasingly prove to be a poor investment in preserving the purchasing power of your money over the medium to long term.

Conservative investors with an investment time horizon of 12-18 months+ should consider flexible fixed income funds like the Ninety One Diversified Income Fund, where the current gross effective yield of 6.5% is almost 2% above the gross effective yield of the Money Market Fund. Unfortunately, this cash plus return may still not be sufficient for many investors, who will therefore need to introduce some exposure to growth assets in their portfolio. Investors with a slightly longer time horizon can consider the Ninety One Cautious Managed Fund: a multi-asset, inflation-targeted solution that importantly also seeks to shield investors from negative market corrections (as the fund so ably did during the Covid-correction in March last year).

2. How much should we invest offshore?

The short answer is that it depends. It depends on each investor’s personal circumstances, risk profile and longer-term financial planning objectives. The following, however, provides some guidelines/ considerations:

• Studies recommend a minimum strategic offshore allocation of at least 30% for long-term investors targeting inflation plus returns to ensure their comfortable retirement i.e., all investors can benefit from a meaningful offshore allocation.   For those targeting inflation plus 6% and more, the required offshore allocation rises to above 40%.
• Pensioners have very specific portfolio requirements, as they require a monthly income in retirement. Research conducted by Ninety One, as illustrated in figure  2 below, indicates that a living annuity typically requires a consistent 20–40% exposure to offshore equities, irrespective of the level of starting income.

• Wealthier investors not requiring an income to match any South African liabilities are able to invest significantly more offshore (up to 100%), depending on their objectives and tolerance for risk.

Importantly, while the rand is trading at below R15 to the dollar and seemingly providing investors with an attractive entry point to offshore markets, it is only one consideration and investors need to be selective in their approach given the valuation and financial planning risks. We believe that when investing in offshore assets, investors need to take a longer-term view and look past the shorter-term movements of the currency. Furthermore, South Africans investing offshore should look to global equities or high-equity global multi-asset solutions with long-term track records that have proven their mettle through investment cycles, such as the Ninety One Global Franchise and Global Strategic Managed Funds.

3. Too late for South African equities?

Global equities have outperformed South African equities over the past ten years, so   it would seem that 100% allocation to offshore may therefore be warranted. However, this relative outperformance is cyclical, as illustrated in the following chart.

The portfolio managers of the Ninety One Equity Fund have become increasingly positive about the investment opportunities arising in the SA equity market. Macroeconomic data, admittedly off a very low base and still precarious, has turned positive, and SA has benefited greatly from strong commodity prices. Further good news is evident in excellent tax receipts from the mining sector, which has helped narrow the budget deficit. The record terms of trade have resulted in a current account surplus, and, unlike risks of rising inflation globally, SA inflation appears well under control, providing further support to our economic recovery.

While risks clearly remain, the team is focused on their disciplined investment process of picking stocks with positive earnings revisions at reasonable valuations. As such, they are positive local cyclical stocks, and to select retailers, banks, and industrial shares.

And, while underweight SA equities in the Ninety One Cautious Managed and Opportunity Funds, our Quality capability has identified several stock-specific real-return opportunities. These select, high-quality stocks have attractive valuation underpins and therefore lower downside risk.

Importantly, across the Ninety One firm, we believe that it is too simplistic and increasingly risky to look at overall index metrics. We see attractive SA equity opportunities for active managers away from the broad indices.

In conclusion, investors faced with one or more of the issues raised above may well be best served by seeking professional financial advice, tailored to their individual circumstances.  DM/BM

This article was written by Paul Hutchinson, Sales Manager, Ninety One