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With political, social and technological disruption the new world order, over 500 fund buyers recently gathered in Johannesburg at the Nedgroup Investment Summit 2017 to share ideas on how to navigate an increasingly unpredictable investment terrain.
Here are five top tips from several of the world’s top fund managers that emerged during the discussions:
1. Review the basics: Risk and reward
Abax Investments portfolio manager Rashaad Tayob shared a story of a large international sovereign wealth fund that approached him last year with an interest to invest in the South African bond market.
Following market analysis, Tayob advised the client that bonds were, at the time, trading at yields of 10% and posed good returns.
He was surprised, however, when they ultimately decided not to invest, citing uncertainty surrounding the country’s political and economic outlook.
“I found that odd, because you never have certainty on anything. People talk about it as though there is certainty in investing, but there are ultimately only two questions to ask: what is the risk and what is the potential return?” he commented.
According to Tayob, the risks and rewards in the investment proposition in SA are still quite balanced.
While debt is increasing, fiscal deficits linger and structural issues remain, there has been an improvement in the political status quo in recent months, he said.
“As we get closer to December, we are seeing some structural reform and house-cleaning in state-owned companies,” he said. “There can never be certainty in investing in any asset class in SA, but we weigh up risk and returns – which is our job.”
2. Embrace the technology revolution
Abax Investments investment manager Omri Thomas advised investors at the summit to look at investment opportunities that married technology and assets, citing examples such as Airbnb and ride-hailing service Uber.
“In the next few years, we will probably see driverless, automated cars in SA, so I recommend delaying purchasing a new car until automated vehicles are released locally,” he suggested.
Increased technological advancement and automation magnifies many of the existing issues influencing the global economy – including weak demand, subdued inflation, low wage growth, and inequality, said Alice Leedale, fixed income strategist at Schroders.
With inflation remaining permanently lower, developed world bond yields would likely fall further. This is because the premium that bond investors typically demand to compensate them for the risk of inflation would be greatly reduced, she added.
“If we are optimistic and the global economy is able to surface from its current state due to the rise of automation and technological advancement, developed market bond yields should finally break out upward from its five-year range, and improved sentiment could even drive buoyant, demand-driven inflation.
"In a sense that would represent an amplification of the ‘reflation trade’ witnessed following the election of President Trump,” Leedale said in a recent investment note.
This environment should encourage the potential for growth in developed world risk assets, while commodities and inflation-protected assets could similarly do well, she explained.
3. In tobacco we trust?
Adopting a potentially unpopular position, Abax Investments’ Anthony Sedgwick believes investment upsides can be found in studying the more hedonistic traits of human behaviour.
According to the fund manager, people are largely predictable in the consumer decisions they make – particularly if these purchases soothe a short-term pleasure.
“Why do people continue to consume things that are bad for them? Because the consumption of pleasurable products is what makes life worth living and bearable.
"That’s why [demand for these products] won’t go away,” he contended.
Among the sectors devoted to human pleasure-seeking, the South African alcohol industry would not be the best place to start investing, he cautioned, arguing limited opportunities, a flooded market, high valuations and threats in the form of a burgeoning craft beer industry.
The local gambling sector is similarly high-risk, with most casino developments trading under its peak price, an unsustainable level of debt, an inability to pass on inflationary price increases and “massive” expenses associated with the maintenance of bricks-and-mortar infrastructure.
Sedgwick’s recommendation? Invest in the tobacco industry.
“It’s not for me to question the ethics of benefitting off the fallibility of human nature, so look for these opportunities,” he advised the summit.
“The tobacco industry has been the target of vexatious and vehement attacks, but the tobacco businesses don’t want to kill clients.
"In fact, they’ve spent billions of dollars to develop healthier smoking options, such as vaping [or combustible] products. The tobacco industry has pricing power and is becoming increasingly popular and healthier.
“Put all of this together, and it’s a tremendously compelling investment opportunity,” he enthused.
4. Look for a mix of clicks and bricks
Truffle Asset Management fund adviser Iain Power advises investors to look for opportunities arising as a result of considerable changes in retail behaviour towards e-commerce.
While initially slow to take off in SA, online shopping has recently gained momentum, with a recent PayPal and Ipsos cross-border commerce report indicating that 58% of online adults in SA shopped online over the past 12 months, amounting to an estimated total spend of R37.1bn.
“The end game of the retail sector will be a combination of bricks-and-mortar infrastructure, which allows proximity to consumers, with online platform and scale,” Power noted during an address at the investment gathering.
Online spend in SA is forecast to grow to over R53bn by 2018, presenting significant growth potential for online vendors such as Takealot, Spree and Superbalist, which are all owned by Naspers*.
5. Focus on what you understand and know the context
Invest in industries you understand, advised Veritas Asset Management fund manager and head of the global division Andrew Headley.
“Stick to the things that you know about, because you are more likely to be able to predict them, and avoid the areas that are likely to be disruptive.
"Focus on companies with mass competitive advantage and big market shares,” he commented at the summit.
“Predictions are highly influenced by the context they are made in,” added Headley. “There is an inability to accept that the status quo is temporary and an inability to predict major changes, even when they are right on the horizon.
"All our hypotheses [as investors] should include potential wrongness,” he advised.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article originally appeared in the 24 August edition of finweek. Buy and download the magazine here.
