It would be an understatement to say that the first quarter of 2020 has been a wild ride. The US’s three major stock indices — the Dow, the S&P 500 and the Nasdaq Composite — dropped 23.2%, 20% and 14.2% respectively for the quarter. The MSCI World, meanwhile, slumped 21.9% for the quarter in USD and the JSE ALSI fell by 21.4% in rands and by 38.4% when converted into dollars!
Few markets and asset classes have been spared in this rout. Nonetheless, our investment philosophy and the steps we have implemented during what we regarded as the mature phase of an extraordinarily long bull market, have significantly protected our clients against what investors, in general, have experienced in this first quarter of 2020. This includes our bias towards quality investing, maximising clients’ offshore exposure to manage local currency risks, and the way we embed risk management into the design of our portfolios.
Against this background of market turmoil which we believe is likely to continue for the foreseeable future, we are taking a range of actions to defend your wealth in the short- to medium-term as well as to position your portfolio for growth over the longer-term.
But first, let’s take a closer look at how our key funds have fared in the first quarter of the year:
Offshore Fund Performances
Our table below illustrates the performances for various periods, as measured in dollars. It can be noted that in the majority of cases, our clients remain in positive positions since 1 January 2019, notwithstanding the sharp drawdowns experienced during Q1 2020. The returns, net of all fees, are summarised below:
The Ci Global Funds do not have one-year returns as yet.
Please note, in line with the changes to our investment approach over the last number of years where we prefer specialist managers, as opposed to multi-asset funds (where each fund manager is responsible for being an expert across different asset classes), we have commenced switching out of the Coronation and Nedgroup Funds on a client-by-client basis during the past number of months.
Domestic Fund Performances
The local Dynasty Funds have continued to outperform their benchmarks, but nonetheless showed negative performances for the quarter. The performances of these Funds, net of all fees, for various periods, are shown in the table below.
Defending your wealth
We continue to take steps to adjust clients’ portfolios for a fast-changing and uncertain environment. This includes adding exposure to active and passive funds with a bias towards quality, noncyclical stocks that have the balance sheets and consistent revenues to weather ongoing economic fallouts in the wake of Covid-19. Specifically, we are increasing our exposure to quality from 60% to 80% in the global equity portion of our house-view portfolios.
In addition, we are evaluating strategies such as minimum volatility and alternative managers to determine what may be more suitable for future anticipated market conditions. These steps will see us increasing our exposure to active fund managers in the months to come, with a view to identifying those that can outperform the passive beta funds.
Dynasty is building cash reserves in expectation of a second wave of market sell-offs in the days, weeks and months ahead. Over the past year, we have reduced our exposure to property in the local and offshore markets. We are thus already underweight listed property and are removing the last of that exposure as a capital preservation strategy.
Please note from our other article in this newsletter, that we remain bearish about the rand over the long-term and will retain our focus on offshore markets. We are thus positioning for the risk of a weaker rand over the short-term, whilst hedging against a stronger rand over the medium term. However, amid South Africa’s downgrade woes, we are also identifying other opportunities which should bear fruit on a 12-18-month timeframe. For example, we have, to date, stayed away from investing in long-dated SA government bonds in our local Preserver Funds. But these bonds are now offering an attractive real yield over the next five to 10 years. We believe that the impact of the recent Moody’s downgrade of South Africa’s sovereign credit rating is now largely priced into the market, and accordingly, we are viewing this as a buying opportunity.
Balancing risk and opportunity
It’s impossible to call when the local and international markets will bottom, or how effective stimulus from government and central bank support will be in reviving the world economy. Much depends on how long we live in a state of shutdown and how world leaders, scientists and epidemiologists navigate us through the current crisis.
But, as always, there are opportunities to invest astutely during market downturns. We are advising clients with available cash to prepare themselves for swift action should market-pullbacks occur from current levels, which is a distinct possibility in the lead-up to the release of Q2 corporate results when the financial impact of economic lockdowns is revealed in harsh reality. As we have learnt from previous economic crises, missing the onramp when markets start to turn, amounts to losing out on the opportunity to grow and consolidate wealth for the long term.
Additional reading:
ANALYSIS | Covid-19: What happens after the lockdown? – Alex Welte
