31 January 2022
INVESTING YOUR LUMP SUM IN 2022
Global investing: Cash and diversified equities best in volatile conditions ERIC LONERGAN Portfolio Manager for Multi-Asset and Macro Funds at M&G Investments (UK)
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hile there are still attractive investment opportunities in global markets these days, careful diversification and more active management and intervention are needed to get the best results in an offshore portfolio, due to the relatively expensive valuations and higher volatility now prevailing, according to Eric Lonergan, portfolio manager for multi-asset and macro funds at M&G Investments (UK). Speaking at the launch of the M&G Investments brand in Cape Town (previously Prudential Investment Managers), Lonergan said that the global investment manager currently prefers cash and diversified global equities in their asset allocation, while global bonds remain expensive across most maturities and investors are paying up (or even losing money) for their diversification and duration benefits. Is higher inflation here to stay? Weighing in on the current debate around ‘transitory’ versus longer-lasting higher inflation around the world, Lonergan said that investors can’t conclude that higher
inflation will necessarily become a more permanent feature of national economies and result in much higher interest rates and future stagflation, as some are forecasting. “The Covid pandemic saw unprecedented and unplanned shutdowns across national services sectors and manufacturing. Producers postponed investment in expanding their capacity and instead cut costs. Supply chains have consequently had difficulties gearing back up to meet consumer demand – which has jumped amid the re-opening of economies – in turn causing supply bottlenecks and rising prices. The extremes of the economic downturn, and its following rapid rebound, mean that we can’t predict when supply and demand will rebalance across different sectors. Pricing mechanisms still need to fully adjust, in our view, and it’s premature to say whether or not we have an inflation problem.” He also observed that predictions of longer-lasting higher inflation ignored the fact that global growth was being driven by several structural engines, including the recoveries in three main regions: the US, Europe and China. Lonergan noted that the global rate hiking cycle had begun, with several developed countries having started raising interest rates – but notably, several were in response to factors other than inflationary pressures. Positioned for higher returns with cash and equities The group favours cash and equities (well-diversified and not concentrated in any particular sector or geography). Developed market bonds are expensive and generally to
Offshore diversification and quality in a tough local property market KIRSTIN GOVINDASAMY Investment Professional at Marriott Investment Managers
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he South African listed property sector has had a tumultuous 18 months, from being the worst performing sector in 2020 to the best
performing sector in 2021, year-to-date. Credit can be given to management teams who navigated their way through a difficult time by focusing on supporting tenants and bolstering the balance sheet. Further credit can be given to debtholders who remained pragmatic and supported landlords through the crisis. The sector is now out of its deepest troughs as collections have recovered to more than 100% in some instances, and fears of covenant breaches have since eased. Although these short-term fears have dissipated, some of the longerterm negative structural impacts of the pandemic remain. The divergent impact of the pandemic has resulted in ‘winners and losers’ in the various sectors. The retail sector is, unfortunately, one of the losers against the backdrop of rapid growth in ecommerce, and the office
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be avoided, only being useful for diversification purposes. M&G Investments had, instead, identified more attractive opportunities elsewhere; that is, in emerging market government bonds, such as Chile, that would add value to portfolios over the medium term, for example. Lonergan said episodes of bond market volatility and mispricing had increased significantly, especially since the onset of the Covid pandemic, making it advantageous to adopt a more active (or interventionist) tactical asset management approach to get added alpha from the asset class. “This means we have been taking advantage of mispricing more frequently, buying and selling assets more quickly to add alpha to client portfolios,” he explained. Having cash on hand for flexibility in tactical asset allocation (TAA) was important in executing this strategy, he added. As for global equities, M&G Investments considers the MSCI All Country World Index (ACWI) to be “reasonably priced” from a historical perspective. With valuations trading around fair value, their portfolios are positioned broadly neutrally from an asset allocation perspective, he revealed. Within the asset class, however, investors need to be well-diversified, largely due to the wider divergence across company earnings, sectors, national policies, and different growth prospects around the world. M&G Investments has focused on being well-diversified in their equity exposure and holding more cash than usual to capitalise on sudden asset price swings. Lonergan cautioned global developed bonds are best avoided. M&G Investments believes that being more interventionist, and taking on more and smaller bets in portfolios, are among the best responses to market conditions amid the global recovery from the Covid crisis.
sector being negatively impacted by the work-from-home trend. On the other hand, the logistics and distribution warehousing space has emerged as a relative winner of the pandemic as it has benefitted from the rapid growth in ecommerce, as well as supply chain optimisation. Although the outlook for the South African property sector remains subdued given the structural headwinds and weak economic outlook, it is important to be mindful of the variance among portfolios offered in the listed property sector. On a look-through basis, approximately 50% of the South African listed sector is based in properties offshore. This phenomenon aids in geographical diversification and provides an escape from the weak fundamentals locally. It is likely that the operating performance of a property portfolio like Sirius, who own business parks in Germany, and Nepi Rockcastle, a landlord of shopping centres in the Central and Eastern European region, will differ vastly from a property portfolio predominantly exposed to South Africa. The disparity of fundamentals within the listed property sector gives us the opportunity to cherry-pick portfolios exposed to quality properties in relevant sectors with strong fundamentals, low
balance sheet gearing, and management teams with good track records and specialist advantages. This combination of factors, we believe, will result in stable, defensive income streams in the future. Companies have also opted to employ pay-out ratios between 75%-95% – an income that is not lost but will aid in further strengthening the balance sheet and maintenance of current portfolios. This will improve the overall sustainability of dividend payments over the long term. Although property has benefitted from the rebound trade this year, we are aware of the challenges in the local environment and structural changes facing the sector. As quality-focused managers, we are not benchmark-cognisant, and only the best companies are included in our portfolios. We believe selecting relevant portfolios that should be able to reasonably weather any further obstacles remains a prudent strategy. Given our filtering process, the average loan-to-value of the portfolio is 31%, relative to the FTSE/JSE SA-listed property index (SAPY) at 37%. This past year has been a true testament to the direct correlation between balance sheet strength and dividend payments. The Marriott Property Income Fund currently offers an income yield of 7% and expected growth in income of 3%.
