We are already deep into the second half of the year and the External Distribution Channels (EDC) lunches which we host in Pretoria, Johannesburg, and Cape Town are now focusing to the franchises which hold risk assets.
Asset allocation has become increasingly difficult in the last five years. Fortunately for us, no one understands this dynamic better than Kurt Benn, Head of the Absa Balanced Franchise and his co-portfolio manager, Greg Kettles. The pair was our focus for the month of July. They manage the portfolios using a multi-counselor approach, which means that they both have an equal say in how the portfolios are constructed; they independently construct their portion of the portfolio; they both keep in mind the CPI plus 5% target, over a rolling 60 month period; and also remain cognizant of the investment process and philosophy. This has been extremely challenging given the underperformance of risk assets in recent times, making the CPI+5% target hard to achieve, even in the long term. The multi-counselor approach is where both managers’ views are reflected in the overall portfolio. This is beneficial because it ensures a diversity of perspectives and ideas, which is essential in volatile markets. Neither portfolio manager gets to dominate or stifle the creativity of the other, therefore results in the portfolio ultimately reflecting the best ideas.
Over the last three years, domestic bonds remain the asset class to beat, followed by global equities and local cash. No traditional asset classes are currently beating CPI+5%.
Source: ABAM (July 2019)
The Absa Balanced fund has one of the higher cash allocations, as shown below, in comparison to peers, and this has served the fund well and continues to give the team optionality. At just over 14% cash in the fund, there is ample ammunition when opportunities come up to buy equities at attractive levels.
With global growth slowing, South Africa (SA) does not have enough levers to pull in order to secure insulation of the local economy from this negative trend. What will protect the SA economy in the short to medium term will be lower interest rates for longer and sustained global liquidity. The United States (US) and China trade wars has kept global markets on edge since last year and that is unlikely to abate. Locally the picture continues to deteriorate. Market participants hoped that things would turn positive after the May National elections, but that positivity has not filtered into the data and markets are losing patience as the harsh realities of the structural issues in SA set in. The consumer remains under constant pressure from all directions with high tax rates, bracket creep, 15% VAT, high fuel levies, increasing pump prices of fuel, and increasing administered prices (electricity, water, and rates). There is little business confidence, which is constraining willingness for corporates to invest in local markets. To add to a bad situation, the investment world is in risk aversion mode. Fortunately, we know that every downward cycle is followed by an upward cycle. The tide will turn, it’s just a question of “when” and not “if”; and also a question of what the catalysts for change will be.
This communication has been produced by Absa Asset Management (Pty) Ltd (ABAM), an Authorised Financial Services Provider. The information contained in this presentation does not constitute an offer or solicitation to enter into any transaction, nor does it constitute any recommendation, guidance or proposal to enter into any transaction. The information is provided for illustrative purposes only and is not guaranteed. Past performance is not an indication of future performance. While every effort has been made to ensure the accuracy of the above information, ABAM does not accept any liability or responsibility for any loss, damage or expense incurred neither in relying on the above information nor in the use thereof, nor makes any representation as to the accuracy or completeness of the above information. Anyone making use of the information contained in this presentation does so entirely at their own risk.
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