Market Commentary: As it stands now
BVSA Konsult – Changes in 2021:
The year 2020 forced our business, as many others, to change our thinking, innovate, and become more relevant.
We reviewed our offering to our clients as well as our investment process. From January 2021, we entered into a collaboration agreement with MitonOptimal and created a joint investment committee. MitonOptimal was founded in 2004 and has since become an established name in the fund management industry. They have local and international offices and manage 1.2Bn US Dollars on behalf of clients.
The investment committee is responsible for compiling BVSA Konsult clients’ risk assets (equities and real estate). For this, a Model Portfolio (hereinafter “Model”) was created which consists of different commodities, asset classes, local and foreign, as well as the funds of different fund managers and their respective strategies.
Within a client’s portfolio the Model therefore replaces the current risk assets. The Model diversifies client portfolios more than the current composition in terms of asset classes, fund managers and strategy styles. Foreign exposure is also currently higher in the Model than in the current composition.
The advantage of the Model is that BVSA Konsult and MitonOptimal are given a mandate to adapt the Model on behalf of clients as and when necessary. All clients are therefore treated the same and adjustments can be made immediately if necessary. There is also no administration for the client.
The name of the Model is IP Flexible Growth.
Local Commentary – May 2021
What an incredible year it has been since the advent of Covid-19 in capital markets. The global fiscal reaction to Covid-19 and lockdown of economies – which could be described as a reaction to a global ‘Covid’ war – has been astronomical and dwarfs the fiscal stimulus post-WWII and the global financial crisis. Despite the fact that most of the stimuli was targeted at developed market citizens, it has had positive knock-on effects in commodity-based countries like South Africa.
Commodity prices jumped in reaction to low supply and high demand as global superpowers announced infrastructure plans and moved towards a greener economy to minimise emissions driving prices of commodities like platinum, palladium, rhodium and copper higher.
A weaker USD, higher commodity prices and SA exports all improved our terms of trade and contributed to a stronger Rand, appreciating by more than 20% to the US Dollar over the past year.
Improved local business confidence and higher than expected SA company earnings results all contributed to the global factors and resulted in an 18% improvement in the JSE All Share Equity Index for the year to date.
SA risk assets trades cheaper relative to their emerging and developed market peer group, leading to a stronger ZAR after foreigners also started to repurchase our nominal bonds in May. Our equity market is still valued 20% below its long-term average and trades at a discount of between 20-30% relative to our Emerging Market and Developed Market peer group.
Google mobility indicators also show that consumer behaviour in SA is no more than 7% below pre-Covid activity levels. All these factors have contributed to our improved outlook and expectation of SA risk assets, especially relative to cash.
Some global equity markets – especially US large cap stocks – are stretched from a valuation perspective, but we see more investment opportunities in US and non-US value stocks/sectors and have rotated our funds and portfolios accordingly. Equity markets have rallied hard; one can expect a small correction in the short-term in commodity and equity prices, but this will provide late comers with an opportunity to load up their allocations as the massive fiscal stimulus programs in developed markets could contribute to a healthy V-shaped global economic recovery, despite well-telegraphed fears of higher inflation or the risk of 3rd and 4th waves of Covid-19 infections.
Portfolio Commentary – IP Flexible Growth
Our main conviction for our portfolio is the power of diversification. The diversification of asset classes and the multitude of counsellors (by having several specialist asset managers) in one portfolio is one of the many reasons for the success of our portfolio to date.
The IP Active Beta Fund (managed by MitonOptimal) uses low-cost indexation building blocks to manage a CPI +5% p.a. mandate over a rolling 4–5-year period. In conjunction with the exposure to the Satrix MSCI World Equity Index Fund, the portfolio exposure to low-cost indexation is 26%. Our two main global equity components are therefore the Satrix Index fund and NinetyOne Global Franchise fund – the manager has a quality and growth approach with a very successful long term track record.
Our SA Equity mandates are divided between Fairtree, Allan Gray, Coronation and Prudential. Each manager has a different process to manage their long-term growth mandates. The Fairtree Equity portfolio is a high conviction equity that invests in large, mid, and smaller cap shares. We identify their style as momentum investors. Allan Gray Equity is a large manager and their bottom-up valuation-driven style as well as the Orbis offshore equity component makes them different to other managers in the portfolio. The Coronation Top 20 fund is another high conviction manager, but they are different to Fairtree in that they are more valuation driven and have no ability to add offshore equities in their fund. Prudential Dividend Maximiser focus on SA and Global Dividend stocks and compliments our diversification strategy.
Our SA Property mandate is managed by Coronation Property Equity.
We have two additional active managers to complement our own exposure to SA and global risk assets in Rezco Value Trend and Coronation Optimum Growth, both having excellent long-term track records. The Rezco Value Trend fund is constrained by Regulation 28 rules and therefore will balance the portfolio between SA and global risk assets according to their views. Coronation Optimum Growth is more focused on a diversified global asset class portfolio and high exposure to global equities with a valuation-driven approach.
It therefore comes as no surprise to us that this portfolio has outperformed both the SA Multi Asset Worldwide Flexible and SA Multi Asset High Equity Sectors over 1, 2, 3, 4 and 5 years.
Current Asset Allocation
Managing Director & Head of Portfolio Management
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