Managing Investment Trends

We spend most of our time on thinking about the current market trends and how it will influence our clients portfolios. How to adapt their asset allocation to take into account the changes in investment trends.

Below is a summary of the current trends that we find interesting and that may influence client portfolios.

  1. Developed market vs Emerging Markets

Generally the most talked about investment battle is developed markets versus emerging markets. Your exposer to either would have hugely influenced your returns.

The last 10 years its all been developed markets providing returns.

Taking the longer view (since 2002 as my analyses tool does not want to go beyond 2002 this morning!) emerging markets outperform.

The emerging market and JSE growth has mostly come from 2000 to 2010:

Look at the JSE’s contribution over this period!

  1. Is the JSE the best Emerging Market exposure?

As can be seen in the last chart the 2000’s was prime for the JSE. Driven by the highs of the commodity cycle and good economic management (SA had a budget surplus in this time).

Since then South Africa’s contribution has been negated by reversing these actions.  See my article here on the resent past performance.

Gareth Stokes (Stokes Media) penned a good summary of the JSE’s offshore exposure:

South African #IFAs & their clients have long debated the need to diversify  investment portfolios offshore. But while they gabbed, market forces quietly did the job for them. The MeetTheManagers seminar taught me that:

An #investment in the JSE All-Share or SWIX Capped is far removed from an investment in SA Inc. A presentation by Brian Thomas, a Portfolio Manager at Laurium Capital Pty Ltd, used Foschini to illustrate the new reality. Foschini generates 14% of turnover from London & 15% from Australia. And an analysis of all local shares reveals “you get dual-listed, #randhedge and individual shares with significant revenue exposure to non-SA markets,” said Thomas.

He said a mere 21.1% of the All Share was exposed to physical SA. This increases to 34% on the Capped SWIX, which removes excess weightings of Naspers Limited & Prosus. “Only a third of this index is actually exposed to the heartbeat of SA,” said Thomas.

The argument was that the limits imposed by #Regulation28 may not be as restrictive as thought; especially if the return on your 70% local equity exposure is largely generated offshore. 

In other words, the 70% SA equity exposure of large fund managers typically equates to just 39% domestic exposure.

 And that, as they say, is food for thought.

 The comments from Steve Price (Bidvest Wealth) reflect our views:

Absolutely. There is however a big emerging market, currency and political risk discount placed on locally listed shares, so despite the fact they have offshore earnings, they often don’t perform as well as their truly global counterparts as they simply don’t command the same Earnings rating (PE).

 I would add that the JSE offers offshore exposure but that it is mostly emerging market exposure.  The offshore exposure offered by the JSE limits choice (and therefor diversification) and that there are more sound companies to select in the wider emerging market. Why limit yourself to the JSE options when you can have access to:

  • best available companies in the wider emerging market (think of the billion lost by South African companies trying to expand offshore);
  • sectors not represented or with limited representation in South Africa (motor manufacturing and IT exposure comes to mind);
  • diversifying your emerging market exposure over various political, currency and social risks.

It is always good to consider the arguments of companies that have different view. See PSG’s article here that explains why they see value in the JSE.

  1. Value Strategy vs Growth Strategy

The battle between value (read here for the definition of a value stock) and growth (read here to understand what a growth stock is) is another that keeps our minds occupied. Its been all growth since 2007 and value’s death has been announced on several occasions. Rightfully so if you look at the last 10 years performance:

But if you take the longer view:

 

  1. Out performance of the IT sector

The same goes for IT versus the rest of the market. The IT sector returns over the last 10 years has been pleasing:

The longest term my analysis tool allows:

How do we manage clients exposure to these trends? Using managers that can combine the trends to achieve a balanced return without overexposure to one trend and using your asset allocation (aligned to your risk profile) to make sure you are not over exposed to one trend.