• Natasha Narsingh

Beyond traditional investments: cranes, planes and rock ‘n roll

Cranes, planes, and rock and roll may on the face of it seem like they don’t quite fit into the world of hard-core investments, but you may already have them in your portfolio.

What are they doing there?

Against a backdrop of lower returns for longer, asset managers have been forced to venture ‘off the beaten track’ in search of alternative sources of returns, along with a greater focus on risk management, in constructing optimal, well-diversified portfolios.

Lower GDP forecasts mean lower returns going forward

We are living in challenging times and SA’s GDP is expected to be even lower than the recently lowered global GDP forecasts. This is a difficult scenario for portfolio managers as lowered GDP forecasts translate to lower company earnings. The result? Lower future returns from traditional asset classes. The dovish tilt of the Fed gives us some hope, though. Still, the past 10 years’ global tailwind may be coming to an end.

There are also other factors at play, for example demographics, that are putting downward pressure on future earnings. We expect the downward shift in returns relative to risk to be more pronounced in higher-risk assets (i.e. growth assets such as equity and listed property). Saying that, there is still a case for holding a substantial chunk of your portfolio in higher-risk assets. If you look at the Top 40 on a bottom-up basis, and build up a forward P/E for these 40 stocks, you’ll see a number of the Top 40 stocks are trading at a discount to fair value. To be able to extract maximum benefit from these fundamentally-driven valuations, being an active stock picker is therefore important, as there is value to be had – value that an active stock picker is mandated to identify and exploit when constructing a portfolio.

Aiming for the highest possible return per unit of risk

There is more to future returns than only the long-term average that can be achieved. Different assets achieve returns with varying levels of volatility and uncertainty and, on a practical level, the level of ‘choppiness’ with which a portfolio achieves its returns matters to investors.

With such a wide range of possible year-on-year outcomes per asset class, as portfolio managers we make sure that we build enough stability into the portfolio, so that when we have a sub-optimal return in any asset class, there’s plenty of built-in inherent protection to rely on.

A toolkit for stability

There are numerous tools available to bring more certainty to the return outcomes of your portfolio.

1. Playing the long game

This is one of the components of investing that lies within the control of the investor. If you’re able to sit out a market slump, asset class performances should eventually return to their long-term, expected averages.

2. Diversification

Various studies have proven that broad diversification gives investors a smoother return journey. As the portfolio manager of absolute return multi-asset funds at Sanlam Investments, I have one of the most diverse toolkits in the country to build outstanding portfolios. Outside of the traditional asset classes of equity, bonds, property and cash, we also have derivatives, portable alpha and various alternatives including real assets to choose from.

Back to the planes, cranes