INVESTMENT RESEARCH AND STRATEGY REPORT - 2020 Q2 REVIEW - PSG
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INVESTMENT RESEARCH AND STRATEGY REPORT 2020 Q2 REVIEW
CONTENTS
Introduction 3
Increased opportunities seen in emerging markets 4
US Bonds: Where to from here? 11
Fund insights: A balanced view on multi-asset funds 16
Performance of Wealth solutions over the second quarter of 2020 23
Equity insights: The importance of understanding currency betas 25
Previous publications 31
Contents Page | 2
INTRODUCTION Contents
Welcome to our second quarter Investment Research “Happiness can be found, even in
the darkest of times, if one only
and Strategy Report for 2020 remembers to turn on the light.”
It’s been about six months since we first heard about COVID-19, and since – J.K. Rowling
31 December 2019, the world has been completely turned upside down. During
times of extreme volatility, it’s easy for investors to stray from their long-term plans
or simply be uncertain about what to do. But even in dark times, there is hope.
You can navigate this
In this edition, our analysts investigate the investment opportunities we believe document in two ways
emerging markets will start to yield; where US bonds might be heading; the past,
present and future of multi-asset portfolios; and how currency movements have 1. Each of the article names in
influenced shares on our core list. the table of content acts as a
link to a specific article in the
If you have any feedback, questions or insights, please contact us – we always enjoy document. To return to the table
hearing from you. Hope you enjoy our 2Q20 edition. of contents simply click on the
‘Contents’ button in the top
Regards
right hand corner.
2. There are arrows at the top of
each page; use them to flip
Adriaan Pask, PhD through the document.
PSG Wealth Chief Investment Officer
Introduction Page | 3
INCREASED OPPORTUNITIES SEEN IN EMERGING MARKETS Contents
Is the tide turning?
As the world faces an increase in headwinds due to the COVID-19 pandemic, investors
start to reconsider the traditional risk-return dynamic of various asset classes. They
have realised that risks can be found anywhere in the investment world, even in
developed markets (DMs), which were considered a safe bet in the previous cycle.
Hence, I take a closer look at emerging markets (EMs) and the plausible investment
opportunities they could offer in the next few years. Investors have started to desert the
following territories:
EM currencies have underperformed for a prolonged period • EM currencies
Over a 10-year period SA experienced middle-of-the-range weaknesses against • EM flows
the UD dollar. More recently the pressure has escalated, particularly evident in • EM policy certainty index
year-to-date (YTD) numbers like the local currencies’ 20.23% appreciation against
the US dollar.
Over a 10-year period the rand
The key theme for underperforming EM currencies was the strength of the
weakened by 7.93% against the
US dollar. This is true even in relation to other DM currencies, where we have also
US dollar.
seen relative depreciation compared with the US dollar. We don’t expect this trend
to continue indefinitely, but believe the US dollar could surprise to the downside for • DMs have also weakened against
the following reasons: the US with the British pound
weakening by 1.62% over
• The yields on offer in the US have altered the risk-return dynamic, making 10 years.
material downside risks far more likely than any significant upside.
• The relative growth picture outside of the US has become more attractive than
the US case. The International Monetary Fund (IMF) also indicated that the
US dollar is counter cyclical, meaning it typically underperforms during periods
where global growth recovers.
• The US fiscal situation is also deteriorating, including the current account
deficit, despite efforts to place domestic trade first.
• Global inflation and real yields are very compressed.
Graph 1: EM currency performance against the US dollar
110
100
90
80
Base = 100
70
60
50
40
30
2015 2016 2017 2018 2019 2020
SA rand Brazilian real Turkish lira
Australian dollar New Zealand dollar Canadian dollar
Source: FactSet
Increased opportunities seen in emerging markets Page | 4
Contents
Table 1: Currency performance over the past 10 years Table 2: Selected EM economies ranked on
four measures of financial strength
Currency performance Year to
1-month 1-year 3-years 5-years 10-years Strongest Weakest
(USD base) date
Developed markets
Australian dollar 2.39% -5.05% -3.95% -3.55% -2.69% -2.36%
Public debt
(with rank)
GDP, 2020
% of GDP,
borrowing
debt % of
Country
British pound -1.96% -6.95% -2.28% -1.42% -4.19% -1.62%
Reserve
Foreign
Cost of
cover
2020
Euro 1.29% -1.01% -0.75% -0.43% 0.20% -1.03%
Japenese yen -0.57% 0.77% 0.45% 0.92% 2.86% -1.66%
1 Botswana
Norwegian krone 5.37% -9.68% -9.94% -4.62% -4.38% -4.01% 2 Taiwan
Swiss franc 0.42% 0.69% 4.12% 0.22% -0.44% 1.86% 3 South Korea
Emerging markets 4 Peru
Argentine peso -2.47% -12.56% -34.62% -38.29% -33.35% -24.89% 5 Russia
6 Philippines
Brazilian real 2.82% -24.69% -25.50% -15.44% -9.84% -10.20% 7 Thailand
Chinese yuan -1.05% -2.44% -3.25% -1.55% -2.78% -0.44% 8 Saudi Arabia
Mexican peso 8.99% -14.62% -11.53% -5.66% -7.06% -5.25% 9 Bangladesh
Russian ruble 6.04% -11.63% -6.72% -6.92% -5.69% -7.87% 10 China
11 Guatemala
Turkish lira 2.44% -12.78% -14.40% -19.73% -17.15% -13.65% 12 Vietnam
South African rand 5.59% -20.23% -16.89% -9.26% -7.08% -7.93% 13 Poland
14 Nigeria
Cumulative returns are shown for periods greater than one year have been annualised
15 Trinidad & Tob.
Source: Investing.com
16 Indonesia
17 UAE
18 India
Graph 2: Percentage performance versus USD (YTD) 19 Czech Rep.
20 Paraguay
4% 21 Bolivia
0% 22 Kuwait
23 Azerbaijan
-4% 24 Ivory Coast
-8% 25 Malaysia
26 Morocco
-12% 27 Romania
-16% 28 Mexico
29 Colombia
-20%
30 Brazil
-24% 31 Chile
-28% 32 Dom. Rep.
33 Uruguay
JPY
TWD
CHF
CNY
ILN
PEN
EUR
BGP
AUD
IDR
NZD
CLP
TRY
RUB
NOK
COP
MXN
ZAR
BRL
34 Croatia
35 Qatar
% Spot performance versus USD 36 Kazakhstan
37 Eqypt
YTD = 1/1/2020 to 27/4/2020 38 Namibia
Sources: HSBC, Bloomberg 39 Uganda
40 Costa Rica
41 Ethiopia
Graph 3: The Economist’s Big Mac Index 42 Kenya
43 Pakistan
$8.00 44 Turkey
Cost of McDonald’s Big Mac by country (USD)
45 Iraq
Swiss franc, $6.91 46 Senegal
$7.00 Currencies are 47 South Africa
20% overvalued
“overvalued” 48 Ghana
above the line 49 Hungary
$6.00 Line = $5.71 = Cost of Big Mac in the US 50 Jordan
Currencies are 51 Panama
$5.00 Australian dollar, $4.58 “undervalued” 52 Gabon
20% undervalued below the line 53 Ukraine
54 Ecuador
$4.00 55 El Salvador
56 Jamaica
British pound, $4.28 57 Argentina
$3.00 58 Oman
25% undervalued
Japanese yen, $3.64 59 Mangolia
60 Tunisa
$2.00 36% undervalued
61 Sri Lanka
Chinese yuan, $3.10 62 Angola
$1.00 46% undervalued South African rand, $1.86 63 Bahrain
64 Zambia
67% undervalued 65 Lebanon
$0.00 66 Venezuala
Source: The Economist 1= Top ranked
Source: Economist
Increased opportunities seen in emerging markets Page | 5
Contents
SA has dealt with its fair share of headwinds over the past 15 years
The impact of the strong US dollar has also placed massive strain on emerging
market economies and investments, and SA was no exception. Political turmoil in the
country added an element of uncertainty, which has also placed considerable strain
on both business and consumer confidence, even before the COVID-19 pandemic
took effect.
An analysis by The Economist magazine highlights the dire fiscal situation SA faces.
Ratings agencies voiced similar concerns, which were echoed in the Supplementary • The 2008 Global Financial
Budget delivered by Finance Minister Tito Mboweni in June this year. There has been Crisis (GFC) and the COVID-19
a general fear that increased taxes will impact wealth, but a pure tax approach will pandemic has caused the largest
be unsustainable and would place pressure on an already vulnerable tax base. The market pullbacks in recent
real need is for pro-growth policies that will support structural growth. While our history.
country’s debt challenges are huge, there are a few small blessings:
• Our maturity profile still looks quite conservative, with debt being spread out
• The FTSE/All Share Index (ALSI)
over a longer period, and a significant portion only due much later.
has delivered a return of about
• The debt cost applied to debt is low now, as funding organisations recognise 13% for the past 15 years. This is
the broader need to access capital. Many countries have approached these
in line with our forecast for the
organisations for funding support during the crisis. To date (30 June 2020),
period of inflation plus 7% for
nearly 80 countries have already requested financial assistance from the IMF.
this asset class.
COVID-19 has exacerbated the strain on our economy
Debt to gross domestic product (GDP) ratios for BRICS and PIIGS countries have
increased, placing global growth under further pressure. The need for funding has
also increased to support those affected by COVID-19, adding further pressure to
both public and private finances. For this reason, we foresee sovereign debt-to-GDP
ratios deteriorating. In his Supplementary Budget Mboweni indicated that SA is now
an exception.
Graph 4: EM government and private sector debt levels reach new all-time highs over
this cycle
% of GDP
60 150
140
130
50 120
110 • Moody’s global emerging market
(EM) coverage has risen to
100
106 sovereigns and over
40 90
1 600 non-sovereign issuers.
80
70
30 60 • The 12-month trailing ratio of
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
downgrades to upgrades across
EM investment-grade and
EM general government debt (% of GDP) high-yield non-financial
EM private sector debt (% of GDP, right axis) corporates increased to
5.9x in April 2020, from
Sources: J.P. Morgan, BIS, IMF, US National Statistics, Haver Source: BCA Research 1.5x at the end of 2019.
Increased opportunities seen in emerging markets Page | 6Contents
In May 2020, the ratings agency Moody’s, warned that EM issuers “These projections imply a
are taking a hit from the COVID-19 pandemic as the global cumulative loss to the global
recession deepens economy over two years of over
$12 trillion from this crisis.”
Moody’s rates 106 EM sovereigns — a figure which has seen consistent growth from
just 63 in 2004 — and over 1 600 non-sovereign issuers from 70 EM countries. – IMF
Latin American issuers account for 31% of all rated EM non-sovereign issuers, with
28% of these issuers from Brazil. Negative bias has elevated in the region, with
35% of ratings carrying a negative outlook or being downgraded at the end of
April 2020. Moreover, around 90% of issuers in Argentina have a negative bias,
driven by sovereign pressures. Latin America also accounts for 26% of rated EM
non-financial corporates, with 44% of those from Brazil. On 30 April 2020, 33% of
rated companies had a negative bias, driven by sovereign pressures in Mexico and
broader deterioration of entities’ credit profiles in Brazil and Peru.
IMF warns of an uncertain recovery ahead
The IMF now projects a deeper recession in 2020 and a slower recovery in 2021
compared with the April 2020 World Economic Outlook (WEO) forecast. In its June
WEO the IMF anticipates global growth to decline by 4.90% in 2020. This is 1.90
percentage points lower than the previous forecast. The organisation projects a
5.40% decline in global growth for 2021, leaving the year’s GDP growth rate nearly
7 percentage points lower than predictions at the beginning of the year.
The slower recovery is a direct reflection of social distancing measures that are
expected to continue well into the last two quarters of the year. While several
countries have resumed business activities and gradually reopened their economies,
the absence of a viable vaccine makes the strength of this recovery highly uncertain,
and the impact across sectors and countries highly uneven. Moreover, the IMF has
warned that waves of infections can halt economic activity again and trigger debt
distress. For countries battling to control infection rates, an extended lockdown
will further hamper economic activity. The IMF has also observed that the global
economy can only begin to stage a recovery in 2021 as countries grapple to bring it
back to stability.
Where are the opportunities?
In their April 2020 report, the IMF indicated that EMs should outperform their
developed counterparts and recover much faster. Looking at GDP numbers, we think
that EMs will navigate this period better and experience a less-severe drawback
than developed markets. Given that EMs struggled over the previous cycles, and
valuations came under pressure, we think that this is an interesting area to look for
opportunities.
Graph 5: IMF growth scenarios as at June 2020
5.9
5.4 4.8 3.7
2.9
1.7
-4.9 -8.0 -3.0
2019 2020 2021 2019 2020 2021 2019 2020 2021
Global Advanced Emerging market and
economy economies developing economies
April’s predictions
Sources: IMF, PSG Wealth research team
Increased opportunities seen in emerging markets Page | 7Contents
Interest rate cuts have provided some relief Graph 6: EM nominal policy rates
However, the impact is likely to be somewhat delayed as some benefits can only be 9
8
harvested in a more open economy. The harder lockdown also compromised the 7
efficacy of the monetary support provided. As the economy gradually starts to open, 6
Rate %
5
the benefits should become more accessible to consumers and corporates.
4
3
As things stand, South Africa falls in the middle relative to other EMs in terms of 2
both nominal policy rates and real rates. As inflation declines further, the scope for 1
0
further rate cuts increases. At this stage we expect negative real yields over the near
Turkey
Mexico
Russia
Indonesia
India
China
South Africa
Brazil
Philippines
Taiwan
Hungary
Korea
Chile
Poland
Thailand
Peru
Czech
term and an additional 50 basis point (bps) cuts for the remainder of the year.
Judging by the level of interest rates cuts, the response from the South African
Sources: Trading Economics, PSG Wealth research team
Reserve Bank (SARB) has been quite strong and assertive. Currently we rank amongst
the most responsive EMs around the word, and we expect this position could be
sustained throughout the year. Our prime lending rate is now at the lowest levels in Graph 7: EM real policy rates
more than 50 years, remaining highly supportive of lending and growth. 4
3
Although we have technically been in a monetary stimulus phase (rate cuts) for three
2
years, the cuts have been so small, slow and gradual that no real material impact was
Real rate %
1
felt. Hindsight is a perfect science, but we would have been far better off cutting 0
rates more aggressively sooner. -1
-2
That said, the recent assertive action has been decisive, and we feel that the positive
-3
impact will be felt. Moreover, banks have been given some leeway in terms of their
Turkey
Mexico
Russia
Indonesia
India
China
South Africa
Brazil
Philippines
Taiwan
Hungary
Korea
Chile
Poland
Thailand
Peru
Czech
balance sheet strength, which will ultimately aid them to support the rest of the
economy, as we start to work on a recovery.
Sources: Trading Economics, PSG Wealth research team
Data from IRESS supports our view that the current rate cut cycle has been way
too tentative until recently. The data also indicates that share prices have not yet
benefited from the monetary stimulus. Graph 8: EM policy rate changes:
Dec 2019 to May 2020
There are also signs of a material disconnect in foreign currency markets, with the
Hungary
US dollar being the sole beneficiary in currency markets, at the expense of other Taiwan
China
players. Korea
Indonesia
Thailand
Russia
Poland
Graph 10: SA prime lending rate India
Philippines
Chile
Brazil
30 Mexico
Czech
Peru
South Africa -275
Turkey
-400 -350 -300 -250 -200 -150-100 -50 0
25 basis point change
Sources: Trading Economics, PSG Wealth research team
Prime lending %
20
Graph 9: EM policy rate changes:
Dec 2019 – Dec 2020 (estimate)
Hungary
15 Taiwan
China
Thailand
Russia
Poland
Korea
Philippines
Indonesia
10 Chile
India
Czech
Peru
Brazil
South Africa -325
Mexico
5 Turkey
-700 -600 -500 -400 -300 -200 -100 0
60 65 70 75 80 85 90 95 00 05 10 15 20 basis point change
Sources: IRESS, PSG Wealth research team Sources: Trading Economics, PSG Wealth research team
Increased opportunities seen in emerging markets Page | 8Contents
What about South Africa? Table 3: Government gross debt-to-GDP
(2019)
South African corporate debt to EBITDA (a measure of earnings) compares favourably
to other EMs. Although the debt-to-GDP ratio is a serious problem in South Africa, 2019 %
the same can be said for most countries now, both in EMs and DMs. As central banks
and policy makers respond with relief measures, we should expect these metrics to Brazil 75.79%
be under significant pressure. Russia 14.60%
Interestingly, EM debt-to-GDP looks better than DM debt-to-GDP, as some of the India 69.62%
larger economies around the globe sit with large amounts of growing debt. The
China 50.50%
world is in dire need of growth to repair these numbers.
South Africa 62.20%
Graph 11: EM countries and sectors net debt to EBITDA Portugal 117.70%
Italy 134.80%
Net Debt to EBITDA (ex Fin) 15-year average
3.5 Ireland 58.80%
3.0
2.5 Greece 176.60%
2.0
1.5 Spain 95.50%
1.0
0.5 Source: Trading Economics
0.0
-0.5
-1.0
Philippines
Chile
Thailand
Brazil
Mexico
Argentina
Malaysia
Turkey
India
Czech
Peru
Poland
Colombia
UAE
China
South Korea
Greece
Indonesia
Russia
Hungary
South Africa
Qatar
Saudi Arabia
Taiwan
Egypt
Pakistan
Caveats for our views include:
• Better fiscal discipline required
to attract capital to EMs.
Net Debt to EBITDA (ex Fin) 15-year average
5.0
• A shift from growth to value
4.0
is needed, as that is where
3.0
EMs will benefit. This has not
2.0 happened yet. It is likely only
1.0 to start once the cracks start
0.0 to appear on the earnings
-1.0 results of shares that are
Communication
services
Healthcare
Information
technology
Utilities
Industrials
Materials
Consumer
discretionary
Energy
Consumer
staples
currently believed (mistakenly,
in our opinion) to grow into
perpetuity.
• Market re-ratings:
Sources: Bloomberg, MSCI, J.P. Morgan
– Current stance on rerating’s
seems to be that “expensive
Graph 12: Median public debt-GDP in EMs and DMs can get more expensive as
long as there is growth”,
% of GDP while cheap shares remain
120 out of favour in the absence
100 of growth.
80
– We think the new theme
will be more focussed on
60 understanding the true value
40 of growth and how certain or
stable that growth really is.
20
– Be mindful of shocks on
0 expensive index-heavy
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 counters in the S&P 500.
Emerging markets Developed markets Index.
Source: Citi Research
Increased opportunities seen in emerging markets Page | 9Contents
Except for capital goods, all MSCI SA sectors are trading at a • MSCI SA ex Naspers 12-month
discount versus the MSCI forward P/E is at its cheapest
While SA’s real GDP growth has flatlined around 1.50% over the past 10 years, it level on record.
is ironic to note the growth rate for MSCI SA’s earnings per share (EPS) has been at • MSCI SA’s discount to MSCI
around 9.60% p.a. over that same period compared with the 2.70% p.a. for MSCI EM is at GFC levels and in very
EM peers. Considering this data, it seems that local companies have defied gravity, attractive territory.
especially if we consider the dismal GDP growth backdrop.
Our data shows that forward earnings for the S&P 500 is much higher than its
historical average. As such, the premium investors are paying for shares on the S&P
compared with EM shares is now at record high levels. The flight to growth and
quality has seemingly stomped out any approach that is cognisant of valuations. We
believe this situation will unwind and will have a significant impact on some of the
more expensive US counters, as well as stocks in EMs.
Graph 13: Global markets forward P/E ratings
24 80%
21 70%
18 60%
15 50%
12 40%
9 30%
6 20%
3 10%
0 0%
0 5 06 07 0 8 09 10 11 12 13 14 15 16 17 18 19 20
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/ 5/
/0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0
01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01
Relative premium (rhs) S&P 500 MSCI Emerging markets
Sources: Bloomberg, PSG Wealth research team
Graph 14: MSCI SA ex Naspers versus MSCI EM 12-month forward P/E ratio
20
18
16
12m Fwd P/E, x
14
12
10
8
6
96 98 00 02 04 06 08 10 12 14 16 18 20
South Africa ex Naspers Emerging markets
Sources: MSCI, FactSet, PSG Wealth research team
Increased opportunities seen in emerging markets Page | 10US BONDS: WHERE TO FROM HERE? Contents
Numerous risks currently in this space • Bonds form part of the
investment universe we can
With lower interest rates in the US to combat the COVID-19 pandemic, one must consider for inclusion in our
wonder: funds.
– This includes both local and
• How could this lower interest rate environment benefit US bonds? offshore bonds.
• What will happen once rates start to increase (normalise) again? • In the offshore space, the US
government bond universe
The bigger picture reveals that US bond yields have been falling is a vast and liquid area of
for almost 40 years investment and is often referred
This has left both real and nominal yields at historically low levels when comparing to as risk-free, considering that
data from 1971 until present. This accommodative monetary policy environment payment is backed by the US
fiscus.
has been fuelling a massive bull market in US Treasuries over the period. Data from
J.P. Morgan also indicates how yields have declined in line with lower interest rates,
– However, these bonds are
spurring on the multi-decade US bond market.
not without risk. As with any
bond, they dislike increasing
In fact, these bonds have become so popular that even the 2-year yields are now interest rates, and the more
threatening to turn negative - meaning you will pay interest on your investment and rates increase the less attractive
not earn interest. they become.
Graph 1: Nominal and real 10-year Treasury yields from 1958 till present
20%
Average
30 Sep, 1981: 15.84% (1958 - YTD 2020) 30 Jun, 2020
15% Nominal yields 5.94% 0.66%
Real yields 2.29% -0.58%
Inflation 3.65% 1.24%
Fixed income
10%
Nominal 10-year
Treasury yield
5%
30 Jun, 2020: 0.66%
Real 10-year
Treasury yield
0%
30 Jun, 2020: -0.58%
-5%
‘58 ‘63 ‘68 ‘73 ‘78 ‘83 ‘88 ‘93 ‘98 ‘03 ‘08 ‘13 ‘18
Source: J.P. Morgan
Graph 2: Can 2-year yields turn negative?
%
2-year govt. bond yields
3.5
3.0
2.5
2.0
1.5 China
1.0
0.5 Australia
US
0 UK
Japan
-0.5 France
2014 2015 2016 2017 2018 2019 2020
Source: BCA Research
US bonds: Where to from here? Page | 11Contents
The yield curve has continued its downward trend New York Times 9 September 1981
As the US Federal Reserve (Fed) embarked on more monetary support, the yield
curve has become even lower and flatter. Negative real yields (negative yields after
accounting for inflation) across the curve are now a real possibility. While all data
points to yields threatening to turn negative on the shorter end of the curve.
This photo of an article that featured in The New York Times on 9 September 1981
indicates how US bonds (10-year and 30-year) were trading at 15% at the time.
Ironically, the article states: “Long-term Treasury bond yields rose briefly to 15%
yesterday, but even that record yield for a 30-year bond backed by the United
States Government was not enough to attract much investor buying.” Back then
15% could not attract any buyers; today, the yield is down to 1.43% and investors
continue to buy. It could be that since July 2018, 30-year Treasuries have handsomely
outperformed both Amazon shares and the Gold Price Index, returning almost 60%.
This begs the question, is there a bubble brewing in the US bond market?
Graph 3: US Treasury yield curve
4.5%
3.96%
4.0% 3.72%
31 Dec, 2013 Sources: New York Times, London Business School
3.5%
3.04%
3.0%
Fixed income
2.5% 2.45%
• Just in the last six months the
2.0%
1.75% 30-year Treasury has rallied by
1.41%
1.5% 1.18% 24.91%.
30 Jun, 2020
1.0% 0.78% 0.66%
0.49%
0.5% 0.38% 0.29%
0.16% 0.18%
0.0%
3m 1y 2y 3y 5y 7y 10y 20y 30y
Source: J.P. Morgan
Graph 4: 30-Year Treasury compared with Amazon shares and gold
Gold
160 3-year T-Bond
Amazon
140 30-year T-Bond Amazon
Gold
120
100
80
JUL OCT JAN APR JUL OCT JAN APR JUL OCT
2018 2019 2020
Source: BCA Research
Table 1: YTD returns for US Treasuries
Yield Return
US Treasuries 6/30/2020 3/31/2020 2020 YTD
2-year 0.16% 0.23% 2.96%
5-year 0.29% 0.37% 7.31%
TIPS -0.68% -0.17% 6.01%
10-year 0.66% 0.70% 12.70%
30-year 1.41% 1.35% 24.91%
Source: J.P.Morgan
US bonds: Where to from here? Page | 12Contents
For Treasury yields, the broad CRB Raw Industrials commodity
benchmark is particularly important
This is because the ratio between the CRB Index and the price of gold closely tracks
the 10-year Treasury yield, as exhibited by the research from BCA Research. In a
typical economic downturn, we first see Treasury yields and the CRB Index fall
together as global demand weakens. Then, monetary policy responds by turning
more accommodative, leading to a rebound in the price of gold as investors start to
anticipate the potential long-run inflationary impact of monetary stimulus. Eventually
yields bottom, however, this will only occur once the stimulus seeps through to the
real economy and gains in the CRB Index start to outpace gains in gold.
BCA notes it is viewing poor US economic data, which raises the possibility that we
are close to the trough in US economic growth. However, demand outside the US,
particularly in China, is not improving. This is crucial because bond investors will
need to see the light at the end of the tunnel before concluding that US economic
activity will trend higher.
Graph 5: 10-year US Treasury yields versus CRB Raw Industrials Index
%
45
3
40
2 35
30
1 US 10-year Treasury yield (LS)
25
CRB Raw Industrials/Gold ratio (RS)
Graph 6 explanation:
$/Oz
CRB Raw Industrials (LS) • Above the horizontal line are
Gold (LS) 1600 yields.
600
• Below the line are capital losses
1400 for a 1% increase in interest
500 rates.
1200 • On the left, a range of different
400 local bonds.
• To the right, a range of different
Source: BCA Research global bonds.
Graph 6: Impact of 1% interest rate increase on bond yields
12
10 10.36
8 9.48 9.08 8.69
7.67
6
6.07
4
2
1.99 (0.36)
0 1.08 0.80
2.40
-2 3.48
4.62
-4
6.62 6.67
-6 7.29 7.67 7.14
8.21 7.81
-8
-10
Beassa ALBI Beassa ALBI Beassa ALBI Beassa ALBI Beassa ALBI Barclays Barclays Barclays Barclays Bloomberg
1-3 years 3-7 years 7-12 years 12 years+ Global Agg US Treasury Global Agg US HY 2% Barclays Series E
7-10 years Corporate USD Issuer Cap Germany Govt
7-10 years
Current yield (Local) Current yield (Offshore) Modified duration
Source: PSG Wealth research team
US bonds: Where to from here? Page | 13Contents
What if interest rates increase?
Our analysis shows that even seven year bonds are set to experience losses of 7.70%
for each 1% increase in interest rates. We know the Fed is targeting a 2.50% interest
rate, which currently sits near zero. This would imply losses of around 17% on these
bonds. On 30-year Treasuries, which are most sensitive to interest rates hikes, a 2.50%
interest rate hike could see investors half their capital. So, although these bonds have
been stars over preceding periods, one has to be very careful at current levels.
So, where to from here for US bonds? “Our analysis shows that even
7-year bonds are set to experience
Graph 7 illustrates US federal funds rates from the past and the differences in rate
losses of 7.70% for each 1%
expectations between those expected by the Fed’s monetary policymaking body, the
increase in interest rates.”
Federal Open Market Committee (FOMC) and market participants. The table in the top
right shows the FOMC’s economic projection over the next few years and their long-run
estimates.
We can see that both policy makers and market participants expect rates to remain
low, especially given the higher levels of unemployment and lower rates of inflation.
That said, economic cycles do turn, and the expectations are that rates will normalise
towards 2.50% over the longer term. That is a significant jump that will be very painful
for investors who choose to stick solely to US Treasuries.
Graph 7: FOMC and market expectations for US federal funds rates
7%
Federal Funds rate
FOMC June 2020 forecast
FOMC year-end estimates Percent
6% Market expectations on 6/11/2020
2020 2021 2022 Long run
FOMC long-run projection
Change in real GDP, 4Q to 4Q -6.5 5.0 3.5 1.8
5%
Unemployemnt rate, 4Q 9.3 6.5 5.5 4.1
PCE inflation, 4Q to 4Q 0.8 1.6 1.7 2.0
4%
3% 2.50%
2%
1%
0.13% 0.13% 0.13%
0.04% 0.00% 0.04%
0% 0.13%
‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17 ‘19 ‘21 Long run
Source: J.P. Morgan
US bonds: Where to from here? Page | 14Contents
What can US policymakers do to mitigate the risk?
In recent weeks the talk has been all about a somewhat mysterious policy measure called
‘yield-curve-control’. As the name implies, the strategy essentially involves government
intervention in the form of bond purchases to keep yields at predetermined levels.
So, if the Fed wanted the yield on the 10-year note to be 50 basis points for example,
they would buy or sell enough bonds in the open market to shift yields to that level.
We can think of it as quantitative easing through bonds purchases that are specifically
aimed at reaching specific yields for specific bonds.
Ultimately, investors may end up being protected if these measures come into play.
The trade-off, however, will be a severely bloated US balance sheet, which is already • Interestingly, the Fed adopted a
stretched past the $7 trillion mark. One must wonder what will become of the US yield-curve-control policy in
balance sheet? And what will the market reaction be once yield-curve-control comes to April 1942 to assist the US
an end (if it is introduced)? Ultimately, the market will have to restore its natural supply Treasury’s financing of the
and demand price dynamics. Second World War. Quite like
today, at that time, no one really
Interestingly, the Fed adopted a yield-curve-control policy in April 1942 to assist the knew if this policy would work.
US Treasury’s financing of the Second World War. Quite like today, at that time, no one
really knew if this yield-curve-control policy would work.
The Federal Reserve Bank of Cleveland states that “The program could indeed collapse
if investors, fearing inflation, sought higher interest rates than the yield-curve-control
program offered. In that case, the Fed must buy every security that the Treasury issued—
an unlikely prospect, given the massive government spending that must accompany the
war—or simply allow yields to rise.”
In a similar vein, we too are somewhat skeptical of the long-term impact of yield-curve-
control. This could severely bloat the US balance sheet. Yet, in the absence of that, the
near-term risk to the bond market remains material.
US bonds: Where to from here? Page | 15FUND INSIGHTS: A BALANCED VIEW ON MULTI-ASSET FUNDS Contents
“The best way to measure your investing success is not by whether The returns that you realise will
you’re beating the market but by whether you’ve put in place a depend to a large extent on:
financial plan and a behavioural discipline that are likely to get • your portfolio’s asset allocation
you where you want to go.” – Benjamin Graham (how you diversify your
investments across asset classes);
The second quarter of the year is behind us and 2020 continues to be a challenging • your investment time horizon;
time for investors with high levels of volatility across global markets. The impact of and
COVID-19, the subsequent lockdowns to curb the virus spread and other actions of • your ability (and willingness) to
governments on global economic growth remain unclear.
stick to your investment plan.
For domestic investors, the COVID-19 crash and subsequent volatility follow five years
of patchy returns across domestic growth assets. This further increases investors’
uncertainty about where to invest their hard-earned savings. This volatility will likely
be with us for some time to come and the uncertainty created will surely (and already
does) impact investor behaviour.
Within any business, it is important to monitor trends, and the same holds true for
PSG Wealth. In the case of the PSG Wealth FoFs, we have seen significant changes
over the past few years regarding the percentage of assets invested in multi-asset
funds, as well as the split between local and offshore flows.
Graph 1: Breakdown of historical net flows in the Wealth FoFs
Yearly net flows: Domestic FoFs
100%
80%
60%
40%
20%
0%
-20%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020YTD
Cash (enhanced interest) % Fixed income (income) %
Multi-asset (preserver and moderate) % Equity (creator) %
Source: PSG Wealth research team
Graph 2: Split of PSG Wealth net flows between domestic and offshore FoFs
100%
80%
60%
40%
20%
0%
-20%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Total local % Total offshore %
Source: PSG Wealth research team
Fund insights: A balanced view on multi-asset funds Page | 16Contents
Data shows a reduction in allocations to multi-asset portfolios
What stands out from the data is that our advisers have significantly reduced their
allocation to multi-asset portfolios since 2017. For the period 2010 to 2016, the
multi-asset portfolios (Preserver FoF and Moderate FoF) consistently received 60%+
of our domestic net flows per annum. In 2017, this decreased to 40% and more
recently has fallen to below 20%, with advisers preferring to use more single-asset
funds on the domestic side, specifically cash, while also allocating more to offshore
over the past three years.
This matches what has been a trend seen across the local fund industry, with many
investors questioning the role of multi-asset funds. This is reflected in industry
numbers where inflows to multi-asset funds were minimal in 2017 and 2018. About
R21bn left these funds in 2019, while fixed income benefited from R105bn of
• By investing in more than
inflows. one type of asset, you can
spread risk and improve your
This article aims to explore the rationale behind investors losing confidence in the potential for returns.
multi-asset approach and how these portfolios still have a place in helping investors
reach their investment goals.
What is multi-asset investing?
In its simplest form, it is investing in a portfolio consisting of different types of asset
classes such as equities, bonds, property and cash. The biggest benefit of multi-asset
investing is diversification. By investing in more than one type of asset, you can
spread risk and improve your potential for returns. Balanced funds are one form of
multi-asset investing – generally, with 60%+ in equities and the rest in fixed interest,
cash and other asset classes.
Domestic balanced funds – primary aim • The primary aim of a high
The primary aim of a high equity multi-asset or balanced portfolio is to achieve equity multi-asset or balanced
equity-like returns in the long term, with less volatility than a full allocation to stocks. portfolio is to achieve
This investment style has come under pressure over the last five years in South Africa, equity-like returns in the long
with many claiming that its investment thesis and efficacy no longer hold true. term, with less volatility than
a full allocation to stocks.
We believe a large part of this negativity is due to the relative underperformance of
growth assets, especially when compared with income, as equities and cash returned
2.50% and 7.20% per annum respectively over the last five years. Below we will
interrogate whether the average balanced fund in South Africa has kept true to its
target of equity-like returns with less risk. To test this hypothesis, we used the time
frame of January 2002, just after the dot-com crash, to May 2020. In this 18-year
period, we have split the return series into four sections as indicated in table 1.
Table 1: Market periods
Dates Explanation Market type
Jan 02 - Oct 07 Post dot-com Bull
Nov 07 - Dec 08 GFC Bear
Jan 09 - Jan 20 Post GFC Bull / Flat
Feb 20 - May 20 COVID-crash Bear
Jan 02 - May 20 Total All
Source: PSG Wealth research team
Table 2: Market period capture ratios
Dates Market type Return capture Risk capture Risk-return ratio
Jan 02 - Oct 07 Bull 68% 70% 0.97
Nov 07 - Dec 08 Bear 40% 52% 0.77
Jan 09 - Jan 20 Bull / Flat 92% 61% 1.49
Feb 20 - May 20 Bear 46% 53% 0.88
Jan 02 - May 20 All 88% 64% 1.38
Source: PSG Wealth research team
Fund insights: A balanced view on multi-asset funds Page | 17Contents
Return and risk comparison over 18 years
Over these various time frames and for the 18-year period in total, we will compare
the return and risk characteristics of the ASISA General Equity Sector (equity funds)
and the ASISA MA High Equity Sector (balanced funds), all on an annualised basis.
First, we compared two bull (and/or flat) markets, from January 2002 to October 2007
and from January 2009 to January 2020. In these instances, you would expect the
equity sector to perform quite strongly and outperform the balanced sector, which it
did, returning 28% and 10%, respectively. However, that strong performance came
with high volatility, 13% and 11% respectively. If we now look at the balanced
sector, it returned substantially less, 19% and 9%, but also with notably less risk,
9% and 7% respectively.
Second, we compared two bear markets, from November 2007 to December 2008
and from February 2020 to May 2020. In these instances, you would expect the
equity sector to fall by more than the balanced sector. Again, this was true as the
equity sector fell by 24% and 12% respectively, with volatility of 19% and 46%. If
we now look at the balanced sector, we can see again that it performed as expected, • By investing across multiple
falling less than its equity-only counterparts and with less volatility, returning -10% asset classes that are not
and -6% respectively, each with volatility of 10% and 24%. perfectly correlated,
multi-asset funds reap the
Finally, if we considered all these periods, from January 2002 until May 2020 the benefits of diversification. This
data shows that that the equity sector returned 11.60% per annum with a risk
is particularly beneficial during
of 13.40%. In comparison, the balanced sector returned 10.20% per annum with
8.50% volatility. All of this can be summarised by the risk-return ratio in table 2 on
times of high market uncertainty,
the previous page and graph 3 below. like the present.
In table 2, we can see that in the bull (and/or flat) markets the balanced fund sector
underperformed and captured between 68% and 92% of the equity sector’s return,
but only exhibited between 61% and 70% of its volatility – summarised by the
risk-return ratios of 1 or better, which is desirable during positive markets.
During the bear markets, we can see that the balanced fund sector outperformed,
falling by only 40%, while its equity peers fell 46%, and did so with approximately
half the risk – summarised by the risk-return ratios of 0.9 and lower, with anything
below 1 being desirable in down markets.
For this full 18-year period, we can see that the balanced sector participated in
88% of the equity sector’s returns, while only exhibiting 64% of its volatility. This
reflects positively in the risk-return ratio of 1.4, well above 1. This indicates that the
average balanced fund in South Africa has been performing as its thesis suggests,
providing equity-like returns (88%) with less volatility (64%), if measured across
various market cycles over the past 18+ years.
Graph 3: Risk and return – Equity fund sector versus balanced fund sector
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
Jan 02 - Oct 07 Bull Nov 07 - Dec 08 Bear Jan 09 - Jan 20 Bull/Flat Feb 20 - May 20 Bear Jan 02 - May 20 Total
Balanced return 18.98% -9.64% 8.93% -5.50% 10.19%
Equity return 28.02% -24.10% 9.72% -11.76% 11.61%
Balanced risk 8.95% 9.74% 6.56% 24.27% 8.52%
Equity risk 12.81% 18.79% 10.67% 46.11% 13.41%
Sources: Morningstar, PSG Wealth research team
Fund insights: A balanced view on multi-asset funds Page | 18Contents
A view of SA balanced funds over the last five years
The previous section illustrates that over extended periods, balanced funds have
managed to deliver on their promise of equity-like returns with less volatility.
However, for many investors, the past five years have delivered very disappointing
returns on balanced funds.
The unit trust sector’s recent poor track record led Pieter Koekemoer, Head of Personal
Investments at Coronation Fund Managers, addressing the recent Investment Forum, • The abnormal period of asset
to ask whether “balanced funds are just battered and bruised or [are they] bombed class returns experienced in
and broken?” Diversifying across asset classes is not an investment model that is SA over the past five years
broken, but over the past five years there has not been enough beta, or return from saw conservative assets
financial markets, Koekemoer said. significantly outperforming
growth assets. This goes against
What he is referring to is the abnormal period of asset class returns experienced
in South Africa over the past five years, which saw conservative assets, specifically what is traditionally expected
cash, significantly outperforming growth assets like equities and property. This in investments – that over the
goes against what is traditionally expected in investments – namely, that over the long-term riskier assets should
long-term riskier assets, specifically equity, should outperform and this growth outperform.
exposure is required to beat inflation.
To illustrate the abnormality of the last five years, we look at the risk-return
relationship of the major domestic ASISA sectors over the past 15- and five-year
periods. Graph 4 reflects the last 15 years, and in this chart, we can see that as you
went higher on the risk spectrum (SA Equity) you were rewarded by higher absolute
returns.
Graph 4: Risk/Return of domestic ASISA categories over the last 15 years
10.5
10.8
(ASISA) South Africa EQ General
9.5
(ASISA) South Africa MA High Equity
9.0 • The muted returns of the past
Annualised return
(ASISA) South Africa MA Medium Equity five years have resulted in large
outflows from balanced funds
8.5 and a move to fixed income
funds buoyed by good bond and
(ASISA) South Africa MA Low Equity money market returns.
8.0
(ASISA) South Africa MA Income
7.5
(ASISA) South Africa IB Money Market
7.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Risk (Standard deviation)
Sources: Morningstar Direct, PSG Wealth research team
Fund insights: A balanced view on multi-asset funds Page | 19Contents
The risk-return relationship has been skewed over the past five
years
In comparison, graph 5 shows what occurred in SA over the past five years – the risk-
return relationship between conservative and growth assets was inverted with the
least risky asset, cash, providing the highest return. Thus, funds with high SA growth
asset exposure struggled, and multi-asset funds across the risk spectrum suffered
due to this abnormal period of returns. To have done well over the past five years,
you needed to allocate your SA assets to cash – which goes against the objectives of
multi-asset investing.
“The risk-return relationship
It has been an unprecedented time in investment markets. The poor returns had between conservative and growth
resulted in many investors withdrawing from balanced funds and moving mostly to
assets was inverted with the least
fixed income funds, buoyed by good bond and money market returns.
risky asset, cash, providing the
Multi-asset funds have a few factors that might work in their favour over the next highest return.”
five years:
• cash rates at historical lows
• low valuation opportunities in various growth assets, including SA equity and
property, some emerging markets and sectors of the developed equity market
• attractive yields offered from SA bonds
• economic uncertainty is likely to dampen returns for some time; however, the
unprecedented level of government stimulus can provide some tailwinds across
various asset classes
Graph 5: Risk/Return of domestic ASISA categories over the last five years
9.0
8.0
(ASISA) South Africa IB Money Market
(ASISA) South Africa MA Income
7.0
6.0 “Investors must be careful not to
fall prey to the recency bias and
(ASISA) South Africa MA Low Equity extrapolate forward recent trends.
5.0
Annualised return
The poor returns from the local
equity market reflect a lost decade
(ASISA) South Africa MA Medium Equity
4.0 of economic growth, but investors
(ASISA) South Africa MA High Equity should also not forget that the
3.0
decade from 2000 to 2010 was a
lost decade for the US.”
2.0
1.0
(ASISA) South Africa EQ General
0.0
0 2 4 6 8 10 12 14 16
Risk (Standard deviation)
Sources: Morningstar Direct, PSG Wealth research team
Fund insights: A balanced view on multi-asset funds Page | 20Contents
Why should investors still invest in multi-asset funds?
Diversification remains the largest reason to utilise multi-asset funds and one should
not overlook its benefits. You will have heard the saying, “Don’t put all your eggs in
one basket.” It’s generally wise to avoid investing too much in one single investment
vehicle because investors could find themselves in a world of financial hurt if that
one single investment loses value quickly.
Diversification works because different types of investments seldom perform in the
same way at the same time. For example, share prices often go up while bond
• Multi-asset strategies still
prices are falling, and vice versa. This is because factors such as economics, interest
managed to reduce drawdowns
rates, politics, conflicts and even the weather can impact different asset classes in
different ways. What’s positive for one may be negative for another. Having a diverse
compared with equity-only funds
multi-asset portfolio can protect an investor against market swings and volatility, in the recent market downturn.
thereby offering a smoother return profile. This is valuable for investors that
seek some level of protection in
Speaking to returns, there have been many studies which found that a portfolio’s their portfolios.
asset allocation explained the majority (93.60%) of a portfolio’s variation in
returns over time with security selection and market timing playing minor roles
(Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebower). • Within the PSG Wealth FoFs
More recent research conducted by Vanguard confirmed this with their statement investors gain the additional
saying, “Strategic asset allocation explains 80.50% of a diversified portfolio’s benefit of diversification between
volatility over time.” Both studies point to the importance of asset allocation and the various investment strategies –
reason we believe there is still a place for multi-asset funds in an investor’s portfolio. and this diversification further
protects investors against
With all good things though, there are some caveats. As mentioned above, asset underperformance from a single
class diversification is the key point with this type of investing, and it can come with source within their portfolios.
some cons. Although the investor will be protected from volatility and major market
downturns, it is important to remember that these portfolios will not necessarily
perform as well as their pure equity counterparts, due to this diversification.
Cash, bonds and other asset classes will cause a drag on the multi-asset portfolio
returns given a strong bull market. Younger investors or those seeking a higher risk
profile or longer investment horizon will more likely prefer a full equity portfolio, as
it offers a better opportunity to maximise returns – if they can stay the course when
market corrections occur.
Graph 6: Drawdown of domestic ASISA sectors over the last 20 years
0
-5
-10
-15
-20
-25
-30
-35
-40
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
(ASISA) South Africa MA Income (ASISA) South Africa MA Low Equity (ASISA) South Africa MA Medium Equity
(ASISA) South Africa MA High Equity (ASISA) South Africa EQ General ASISA) South Africa IB Money Market
Source: PSG Wealth research team
Fund insights: A balanced view on multi-asset funds Page | 21Contents Few asset classes were immune to the recent market pullback However, multi-asset strategies still managed to reduce drawdowns compared with equity-only funds. This protection during a market pullback still holds a lot of value for investors that want some level of protection in their portfolios. While domestic assets have experienced a tough half a decade, it is important not to fall prey to recency bias and extrapolate forward recent trends. Diversification is “Diversification is the mantra of the mantra of a multi-asset investment approach. With all else remaining constant, multi asset investment approach.” diversification offers numerous benefits to an investor employing the multi-asset approach. But diversification goes further than a combination of assets. Within the PSG Wealth FoFs, investors gain the additional benefit of diversification between various investment strategies – and this diversification further protects investors against underperformance from a single source within their portfolios. Fund insights: A balanced view on multi-asset funds Page | 22
PERFORMANCE OF WEALTH SOLUTIONS OVER THE SECOND Contents
QUARTER OF 2020
Domestic Funds
The second quarter of 2020 was one of the strongest in recent history. This steep
market rally seemed disjointed from reality as the world fought a global pandemic,
economies and borders were closed and COVID-19 cases soared. However, we must
remember that the financial markets are a forward-looking mechanism and had “We must remember that the
already priced in the bad news in the first quarter of the year and we are now financial markets are a
looking forward to 2021 and beyond. forward-looking mechanism and
had already priced in the bad news
A second point to note is that equity markets are currently dominated by technology
in the first quarter of the year and
companies, whose sphere of influence in the world has only increased in the new
we are now looking forward to
social-distancing world. In table 1 we can see the asset class returns, in rand, for
2021 and beyond.”
various time frames. SA growth assets had a strong quarter, but property is still
down considerably for the year and all the way out to five years. Bonds remain the
standout performer in the SA market over the medium to long term. Global assets,
but equity, in particular, remain the best performers over almost all periods.
Please click here to access the complete quarter two review of the local funds.
Table 1: Fund performance versus sector average
2020/06/30
2020/06/30
2020/06/30
2020/06/30
3-months
3-Years
5-Years
1-Year
Rank
Rank
Rank
Rank
to
Fund
to
to
to
PSG Wealth Creator FoF D 22.9 32 -5.6 59 1.4 67 1.8 38
South African EQ General Sector Average 19.5 165 -7.5 158 0.4 139 0.3 106
PSG Wealth Moderate FoF D 14.8 79 -1.0 131 3.2 102 4.0 56
South African MA High Equity Sector Average 13.5 200 0.5 193 3.6 168 3.5 118
PSG Wealth Preserver FoF D 9.6 46 1.6 119 4.6 91 5.3 54
South African MA Low Equity Sector Average 8.3 155 3.2 150 5.2 133 5.2 98
Source: PSG Wealth research team
Offshore Funds
PSG Wealth Global Preserver
The Global Preserver FoF experienced headwinds in the first quarter of the year.
However, we saw a strong bounce back in the second quarter as risk assets rallied
post the sell-off. The fund produced a return of 8.10% for the quarter outperforming
its sector average by 1.07%.
PSG Wealth Global Moderate FoF
“We saw a strong bounce back in
With recent changes made to the fund, we saw an exceptional bounce back in the
second quarter with our underlying managers performing well. The fund produced the second quarter as risk assets
an 11.70% return over the quarter outperforming the custom sector average by 78 rallied post the sell-off.”
basis points.
PSG Wealth Global Flexible FoF
The Global Flexible FoF has performed exceptionally well in the current market
environment. With the exposure to ESG-focused (environmental, social and
governance) or so-called socially responsible investing, companies and managers
being more conservatively positioned adding significant protection in the recent
downturn and has not jeopardised their performance over the second quarter, nor
over the long term.
Performance of Wealth solutions over the second quarter of 2020 Page | 23Contents
PSG Wealth Global Creator FoF
The global creator held up exceptionally well during the first quarter of 2020. “What was interesting over the
However, we saw a disjointed market play out in quarter two. The fund produced a quarter was that those managers
return of 17.40% slightly underperforming the sector average by 14 basis points for more exposed to higher quality
the quarter. What was interesting over the quarter was that those managers more companies lagged, whereas those
exposed to higher quality companies lagged, whereas those more exposed to the more exposed to the tech sector saw
tech sector saw stellar growth. stellar growth.”
Please click here to access the complete quarter two review of the offshore funds.
Graph 1: Offshore solution performance over five years
0.2
0.15
0.1
0.05
0
-0.05
-0.1
3-months 6-months 1-year 2-years 3-years 5-years
PSG Wealth Global Preserver FoF D USD PSG Wealth Global Flexible FoF D USD
PSG Wealth Global Moderate FoF D USD PSG Wealth Global Creator FoF D USD
Data as at 30 June 2020
Sources: Morningstar, PSG Wealth research team
Performance of Wealth solutions over the second quarter of 2020 Page | 24EQUITY INSIGHTS Contents
The importance of understanding currency betas • Having an idea of what the
currency rate will be can assist
As the strength of different currencies fluctuate, so too do the share prices of investors in ensuring optimal
companies in relation to these currency movements. Companies with high currency
portfolio positions in counters.
betas tend to see large share price changes in reaction to changing currency strength.
Emerging market (EM) stock exchanges typically have higher betas and more volatile
exchange rates. This is mainly due to international investors being quick to sell/buy
shares of companies in EMs when volatility and/or perceived risk increases and/or
decreases.
While it would require some economic forecasting, having an idea of what the
currency rate will be can assist investors in ensuring optimal portfolio positions
– especially in counters which are more likely to outperform given the expected
currency movement. This quarter our equity analysts investigated the up and down
betas of companies relative to various exchange rates. The up beta provides an
indication of the degree to which the share price of a company will move, relative to
an improvement in the exchange rate. The down beta indicates the same, relative to
a weakening of the exchange rate.
Some core list companies selected to illustrate this impact
To provide a complete picture, we have identified a handful of companies from
the various GICS sectors on the local core list that show the highest sensitivities
to currency changes. Locally, when the rand appreciates, real estate and industrial
firms show the highest betas and tend to see the strongest outperformance. At the
same time, consumer staples and healthcare significantly underperform due to low • The idea is to combine the
and/or negative betas. Under a weaker rand scenario, the communication services areas of research in attempts to
and consumer staples sectors tend to be better off due to low betas, while real enhance portfolio construction
estate and consumer discretionary sectors experience the greatest degree of and to make optimal tactical
underperformance, again, due to high betas. asset allocation decisions.
Table 1: Local GICS sector performance analysis
ZAR- ZAR+ ZAR+
ZAR- relative
GICS sector performance relative performance
performance
rank performance rank
Communication
Outperform 1 Underperform 6
services and IT
Consumer Limitations to the scope of the
Underperform 7 Outperform 4
discretionary
research
Consumer staples Outperform 2 Underperform 8 • The scope of our research has
been limited to companies
Financials Underperform 6 Outperform 3
which show a high positive
Healthcare Outperform 4 Underperform 7 or high negative beta with
an appreciating/depreciating
Industrials Underperform 5 Outperform 2 currency.
• In other words, companies
Materials Outperform 3 Underperform 5 with low betas, and therefore
small expected share price
Real estate Underperform 8 Outperform 1 movements in a currency pair,
have not been included.
*Out- and underperformance is measured relative to the 50th percentile performance of the local core list.
Source: PSG Wealth research team
Equity insights Page | 25You can also read
