Portfolio managers from Sanlam Investments’ active management funds recently shared insights into balancing risk, return and sustainability across various active fund manager strategies, from fixed income and multi-asset funds to value-focused equity funds. Arthur Kamp, Chief Investment Economist at Sanlam Investments, introduced some of the key themes, starting with the ongoing normalisation of the global economy post-pandemic.
“There is a growing body of evidence that vaccinations will allow economies to open up, governments to reduce lockdown restrictions and economic activity to return to pre-pandemic levels,” said Kamp. “We are rapidly adapting to new ways of working and learning to live with the pandemic in our offices, and that is one of the reasons we expect the global economy to continue advancing into next year.”
Asset managers are relishing the 2022/23 economic growth forecasts as support for financial markets. Ralph Thomas, Co-portfolio Manager of the SIM Balanced Fund, noted that getting asset allocation right had proven challenging during the pandemic. “The portfolio manager's role is to preserve and maximise our clients’ wealth over the long term, and one of the greatest defences that we have against emerging risks is this long-term approach,” he said. Short-term fluctuations can be weathered with a combination of smart asset allocation and hedging strategies coupled with emotional resilience.
Global inflation was singled out as one of the most impactful side effects of the pandemic scenario, both globally and locally. “Supply-side bottlenecks and long delivery lead times are putting upward pressure on prices,” said Kamp, who did not expect the demand and supply mismatch exhibiting in many countries and industries to ease overnight. However, the good news is that central banks in the European Union, United Kingdom and United States (US) view today’s inflation pressures as temporary or transitory in nature.
There is a risk of an inflation blowout in the US if policymakers get things wrong, but Kamp noted that the US Fed had acted prudently to date. “Inflation of around 2.5% is expected in the long term, which should be consistent with sustainable fiscal policy in the US; but asset managers will have to keep a close watch on what the Fed does over the next year,” he said. Inflation is also top of mind in South Africa, with CPI likely to top 5% entering 2022. Much of this domestic inflation pressure is attributed to the 2020/21 commodity price boom, including fuel prices. The good news from an inflation perspective is that commodity prices are showing signs of cooling, though there will be negative impacts on state revenues.
Asset managers care about inflation because it influences many aspects of the return-and-risk paradigm, not least of which interest rates. The South African Reserve Bank’s expectation is to continue normalising monetary policy gradually by following up on its recent 25basis points hike in the repo rate with a further 75 basis points spread across 2022. Melville du Plessis, Portfolio Manager of the SIM Enhanced Yield and SIM Active Income fund, was not overly concerned about the 2022 interest rate trajectory. “The market is already pricing in more interest rate hikes than we expect to come to fruition, which allows us to benefit from both the increasing interest rate environment and being able to pick up a bit of extra yield longer out on the curve,” he said.
The Chinese government’s regulation of financial markets, coupled with its sabre-rattling over Taiwan and ongoing trade disputes with the US, could impact global equities in 2022. “China has a vision of ‘prosperity for all’ and this will lead to ongoing interventions in various industries; we expect more regulation and scrutiny as their economy struggles,” said Vanessa van Vuuren, Portfolio Manager for the SIM Small Cap and the SIM General Equity funds. SIM funds with concentrated exposure to China, through Naspers’ holding in Tencent, are allowing for the heightened risks in their valuation models.
Allocators of capital have been singled out as essential enablers of the global climate response. The focus into 2022 remains on extracting the maximum possible impact from each rand or dollar invested. Kamp said that the COP26 Climate Change Conference held in Glasgow in November 2021 confirmed two things: First, the world is moving towards a greener future; and second, the move, however, is not happening nearly fast enough.
Sustainable investing and a focus on environmental, social and governance (ESG) factors is now the “ticket to play” in the SA fund management space, in both listed and private markets. “Over the next five to 10 years, our business will have a massive impact in South Africa, on the continent and in emerging markets more generally,” said Nersan Naidoo, CEO at Sanlam Investments. The asset manager has a proven track record in sustainable capital allocation, as evidenced by the successful Climate Investor Two (CI2) capital raise for investments in renewable energy and water solutions in emerging markets.
But raising capital for impact investment opportunities can prove challenging. “South Africa has made a remarkable V-shaped post-pandemic economic recovery, but for that projection to continue, we need investment spending to pick up,” warned Kamp. He added that credit extension was weak, in real terms, and made worse by the country battling a ‘depression level’ unemployment rate. “Asset managers can and do play a critical role in resolving unemployment, particularly in the SME debt space,” commented Naidoo. “These SMEs, in turn, play a key part in creating jobs and economic growth.” But there are a range of issues that need to be addressed to meet the credit extension theme head-on, not least of which addressing how the government’s large borrowing requirement is ‘crowding out’ private sector credit extension.
South Africa is facing real challenges in stabilising its debt, and even with prudent fiscal management, the Treasury expects the country’s debt-to-GDP to increase to 78% by 2025/26. “The problem is that the effective real interest rate we are paying on our debt is significantly higher than the real growth rate of the economy, and while that is the case, you have to run a big primary budget surplus,” said Kamp. He said that government would have to rein in expenditure, a feature that could prove challenging given the socioeconomic pressures linked to inequality, poverty and unemployment. The country’s best hope is to grow the economy faster and for allocators of capital to deploy capital with maximum impact for all citizens.
Portfolio managers, meanwhile, will stay focused on delivering sustainable returns through the right mix of assets. “For absolute returns, we like the consistency of interest-bearing assets, but we need equities to give us a growth lift,” concluded Fernando Durrell, Portfolio Manager of the SIM Inflation Plus fund. “We use tactical asset allocation to achieve our targets over the longer term, proceeding on the basis that the minimisation of the drawdowns is just as powerful as maximising the upside.”
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