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The New Year will see the trend towards passive and real asset investing continue, with ongoing volatility in a positively trending global market, a potential recovery in emerging markets and the rise of robo-advice in South Africa.
Globally, there has been a huge shift towards passive
investing, with demand for Exchange Traded Funds and smart-beta index funds
growing exponentially.
In South Africa for the past few years there has been continued downward pressure on fees because, in a generally lower-return environment, fees comprise a higher proportion of returns, eating into the net returns delivered to clients.
Secondly, over a five-year period, a relatively large proportion of South African active fund managers have underperformed their benchmarks and this has increased investor interest in passive fund.
It will be important for clients to embrace passive investing within a blend of active and passive strategies.
Such a blend helps reduce the fee load for the client whilst still offering the opportunity to beat the index.
2016 will see the allocation of more investment into real assets in the search for higher returns.
As global yields have trended lower, the one place asset owners have been able to achieve the higher returns they’ve been seeking is in real assets, which include an illiquidity premium.
Also, there is less perceived volatility in real assets because they are not marked-to-market on a daily basis − they offer a smoother, less correlated, inflation-driven return path.
Volatility in positively trending global markets is also expected to continue.
In the wake of the first, long-anticipated US Fed rate hike, global economies are likely to show growth overall of about 3% a year.
At the same time, the deflationary impact of technology on prices and imported deflation from emerging markets’ manufactured goods – given the very strong dollar – means that inflation and interest rates are likely to remain lower for longer.
Against this backdrop, global stock markets, which are generally not trading at expensive levels, are likely to achieve double-digit returns.
However, investors should expect continued market volatility as investors move between risk-on/risk-off positions, which could be exacerbated by any uncertainty around Chinese growth prospects.
Lastly, the use of robo-advice has exploded globally, with estimates that assets under management could grow by 2 500% to US$489bn by 2020 from US$18.7bn currently.
Robo-advice, which is online, automated portfolio management advice, is gaining traction as investment costs come under greater scrutiny and clients become more comfortable migrating onto digital investment platform.
In anticipation of robo-advice coming to South Africa, the industry needs to be smart about digitising the delivery of savings products.
Digital advice is also well suited to goal-based rather than input-based investing and therefore it is important for the industry to help the client build up a full picture of their financial situation.
* Hywel George is group director of Old Mutual Investment Group
