June 2023
Justin Floor, Head of Equities
Asset Management
2022 so far has been a tough market with most assets and asset classes losing value, sometimes brutally. Even the king of defensive asset classes, developed market government bonds, experienced deep and painful losses this year. This has resulted in one of the worst periods for global 60/40 (‘balanced’) portfolios in history.
“ I know it's coming, there's gonna be violence. I've taken as much as I'm willing to take . Why do you say we should suffer in silence - Robbie Williams (Tripping) ”
2022 so far has been a tough market with most assets and asset classes losing value, sometimes brutally. Even the king of defensive asset classes, developed market government bonds, experienced deep and painful losses this year. This has resulted in one of the worst periods for global 60/40 (‘balanced’) portfolios in history. Closer to home, it has also been tough with the average fund in the ASISA High Equity category losing -2.4% for the year to date until end October, and only 21% of the funds in the ASISA High Equity category managing to eke out a positive return (based on Morningstar data until 31 October 2022 and excluding funds of funds). Looking forward, uncertainties around global interest rates, growth, inflation and geopolitics remain elevated. In this context, what strategies and tools can investors use to play defence and hopefully protect capital when markets go through periods of unprecedented upheaval?
The traditional strategy would be to simply de-risk: sell equities and other growth assets and increase cash holdings. While this is sometimes sensible, it is worth noting that this choice confers significant timing risk and opportunity cost on the de-risking investor, which can materially impair the possibility of growing capital. This is especially true if available equity opportunities are very attractively priced. In general, we tend to think timing is very difficult to get right consistently, and instead try to approach this problem differently.
How well has this worked? We are pleased and encouraged that we’ve been able to both protect and grow our investors capital across our funds in what has been a very tough year, contributing to a healthy performance profile over all meaningful periods.
Painful price corrections and excessive levels of volatility is a good environment for sensible, unconstrained and active management of portfolios. Looking forward there is a lot we do not know, and a posture of humility and curiosity is as important as ever to successfully navigate the future. This, perhaps more than the others, is the essential ingredient of continued success.
Justin Floor is Head of Equities at PSG Asset Management
Investors typically do not give the benchmarks of their funds much attention. However, we would argue that the choice of benchmark deserves more consideration from investors, especially in the case of multi-asset income funds that have access to a broader investment toolkit.
Read moreIn this edition, we evaluate the impact of unwinding global imbalances on our assessment of risk, and unpack the opportunities we see in an environment that looks appreciably different to that of the past. In the first article, Head of Research Kevin Cousins argues that under-owned old economy and emerging market assets are well suited to today’s economic fundamentals with low ‘true risk’ despite historically higher price volatility. Fund Manager Ané Craig then argues that the importance of price risk should not be underestimated when searching for a safer bet amongst South African fixed income assets. Lastly, Fund Manager Lyle Sankar provides insights into how we navigate the inflation inflection point for investors in the PSG Diversified Income Fund.
Read moreUncertainty seems to have been on a relentless upward trajectory since the beginning of the year. The S&P 500 Index had one of the worst starts to the year since the 1970s. Even traditional safe-havens like US bonds have not offered sanctuary, while cash rates remain negative in real terms in most parts of the world. But our sense of escalating uncertainty is not only driven by the dislocations that we are witnessing in global markets.
Read moreIf you have spent some time with a toddler, you probably know that they can often become very attached to a specific object. Whether it is a favourite soft toy or blanket, small children can often derive a sense of security from this familiar and well-loved object. Woe betides any parent if said object goes missing (or needs to be washed)! In many respects, markets can behave like toddlers too. The previous time when the US Federal Reserve (the Fed) decided to taper its quantitative easing (QE) policy in 2013, the market responded by throwing a ‘taper tantrum’. In the end, the panic proved to be short-lived, but the deeply emotional response to the ‘loss’ of stimulus the system had come to take for granted, was every bit as intense as the best effort any two-year-old could put forward.
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