Sandile Malinga, Chief Investment Officer: Multi-Asset at M&G
Over the past few years, markets have undergone a significant change in how they behave. The speed and volume of innovation, information flow, and price reaction have all increased. Add the pandemic, aggressive interest-rate moves, and geopolitical friction, and it is clear that the macro anchors that once underpinned decades of stability have shifted. The challenge today is distinguishing genuine structural shifts from cyclical ones. This reinforces our view on the importance of starting with long-run fundamentals and fair value, rather than allowing short-term market movements to dictate long-term portfolio decisions.
If we look at long-run real interest rates, they fell for three decades (to Covid) because of a favourable mix of demographics, productivity, and savings-investment dynamics. Now that we are off the zero lower bound, we need to ask which of these three is driving the increases in real interest rates in South Africa post-pandemic. This rise has altered the equilibrium return one can expect from every asset class, public, private, or otherwise, because the real-rate building block upon which all risk premia are stacked has changed. Yet many of the principles that underpin long-term investing remain unchanged. Economic growth is still driven by labour force growth and productivity. Corporate profits cannot outgrow the economy indefinitely, and investors still require compensation for taking risk. What has changed is the level of the anchors, not the need to anchor to them. Therefore, investors should not confuse a noisy market repricing with a permanent structural shift.
For retirement funds, short-term market volatility must be managed in the context of liabilities that extend over decades. And that is not to predict the next shock, chase the latest thematic fad, or overhaul strategy at the first sign of trouble. Forecasting complex economic systems is, at best, a low-odds game. Even when forecasts are directionally right, markets rarely reward them as expected. Investors therefore need to accept that the future cannot be predicted with certainty. This is why portfolios need structural anchors that can hold across a range of outcomes.
Building resilience through a connected process
We build resilience through three connected disciplines. Strategic asset allocation provides the long-term foundation by determining how the portfolio is positioned across asset classes. Once this foundation has been established, we use a bottom-up approach to identify securities within each asset class that offer the best potential returns while also compensating investors for the risks taken.
The same consideration of long-run valuation anchors helps us to take advantage of opportunities when asset classes – think the US stock market – move materially away from fair value. This portfolio tilting at asset class level, known as tactical asset allocation, is the third key discipline that allows us to benefit from asset class mispricings.
This process does not mean we ignore change, but it helps us distinguish between information that alters long-term value and short-term noise that influences market prices. The result is a portfolio shaped by fundamentals, valuation and disciplined position sizing, rather than by a single forecast of what will happen next.
A practical example is Artificial Intelligence (AI). It is easy to conclude that because AI is potentially transformative, every company associated with it is automatically a good investment. Our job is to step back and ask three separate questions: Is the trend real? Which companies will actually capture the economic value? Has the market already priced in that future success? For retirement funds, this distinction matters because exposure to a powerful long-term theme is not a substitute for valuation discipline or appropriate portfolio sizing.
Steering performance with a risk-aware process
Performance should always be assessed over a timeframe appropriate to the portfolio’s objectives and investment approach. Given the narrowness of the recent market rally and the size of certain sectors, it can be difficult to balance diversification with constructing a sufficiently meaningful position to outperform the index in the short term. We choose to be prudent, managing both absolute and benchmark-relative position sizes to ensure that the level of risk remains consistent with the portfolio’s objectives.
Consistent outcomes usually reflect repeatable processes rather than isolated investment calls. If a portfolio is outperforming or underperforming, you should be able to attribute that to decisions made in line with philosophy and implemented in line with process. You should not be too surprised by performance outcomes, and certainly not be changing why and how you invest because of them.
A key part of our philosophy is maintaining the independence to act when our research and valuation assessments identify an opportunity that the market may be mispricing. Any position we take must be supported by evidence, reflect the potential return relative to the risk, and be sized appropriately within the overall portfolio. This may result in a portfolio that looks different from the market, but being different is not the objective. It is the outcome of applying our investment process with discipline.
In the current environment, an appropriate risk allocation framework is key. Investors must understand the potential unintended consequences of their investments and build portfolios that are resilient and can buffer various macro and micro-outcomes. Uncertainty is permanent, and therefore successful investing is about managing rather than eliminating it. We do this through diversification and disciplined, valuation-based decision-making, which remain important disciplines for long-term investors. It is not about forecasting the future but knowing what fair value is and reacting when the market forgets.
ENDS
