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Introduction Q1 2019

30 April 2019

Introduction Q1 2019

Market outcomes are uncertain and investors are skittish
Last year marked the FTSE/JSE All Share Index’s worst year since the global financial crisis, with the overall index down in rand terms at year-end. Even more discouraging was that this signified one of the worst five-year periods the local market had seen in decades, deepening investor disillusionment. A weak economy and heightened political tension have added to the unease, while the escalating threat of international trade wars and geopolitical disruptions have caused similar scepticism towards many global markets.

It’s easy to understand the temptation to disinvest
Behavioural science has shown that loss aversion – a strong preference for avoiding a loss over making an equivalent gain – and recency bias – our tendency to attach more significance to recent events than to events in the past – are inherent behavioural biases that all of us share. In combination, it’s therefore easy to understand that investors may be tempted to switch out of investments that have recently performed poorly, or to exit the market completely.

Staying the course improves the odds of favourable long-term investment outcomes
However, research has also shown that most investors are notoriously bad at market timing. This means that investors who disinvest to try to lower their risk, run the very real risk of missing out on a potential market recovery. By selling when prices are low, investors may lock in losses, especially if they only re-enter the market once prices have already started climbing. While we know that it’s incredibly difficult to act against ingrained instincts, we believe that a long-term mindset and consistent approach are critical to investors achieving their desired objectives. We recognise our responsibility both to apply these principles, and to encourage our clients to do the same.

Consistent and clear communication helps our clients understand our approach
In the opening article of this edition, a few of our investment team members respond to some of the most pressing questions our investors have been asking our client-facing team. They place the short-term underperformance of our funds in context, address perceptions around risk, and speak frankly about mistakes we have made. They also highlight the attractiveness of the current opportunities we’re finding, and note that it may take time for this potential to be realised. We believe that communicating openly fosters trust. It also helps to reinforce our clients’ understanding of our process, which we hope can offer some comfort in difficult times.

If you look at the world differently, panic presents opportunity
We often note that the best opportunities are found in times of fear and uncertainty. Moments of panic invariably result in the prices of quality companies and securities falling along with the rest of the market. While it may be difficult or feel uncomfortable at the time, capitalising on these low prices creates the potential for outsized returns once the panic passes. In their article, Fund Managers Dirk Jooste and Justin Floor delve deeper into the current positioning of our multi-asset funds, highlighting how rare it is to be finding such attractive opportunities across almost all asset classes. They also demonstrate how this has allowed us to construct portfolios with favourable odds of achieving their client mandates under a range of possible future outcomes – a key tenet of our investment philosophy.

Our process is designed to minimise the risk of permanent capital loss
We aim to construct robust, diversified portfolios that are not dependent on any macro forecasts (which we don’t make), currency movements or specific outcomes. To do so, our fund managers rely on the consistent application of our process and the input of the broader investment team − including the security selections our Investment Committees approve for our buy lists and peer assessments of each portfolio as a whole − to test for unintended correlations. At an individual security level, our emphasis on avoiding permanent capital loss extends to how we evaluate each security’s unique characteristics, and the price at which it is trading. In the final article of this edition, Gavin Rabbolini, one of our investment analysts, considers our funds’ investments in Anglo American Platinum. It serves as a practical illustration of our preference to buy when prices are low and to remain disciplined in selling when our required margin of safety diminishes.

We hope you enjoy the read and wish you all the best for the remainder of the year.

Click here to download the article.

Click here to read the next article: Around the table with our investment team by Greg Hopkins, Shaun le Roux and Philipp Wörz.

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