31 May 2019 | www.moneymarketing.co.za
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MoneyMarketing's insight on the short-term insurance industry
THE INCREASING IMPORTANCE OF DFMs IN THE WEALTH MANAGER’S BUSINESS It will be interesting to see how DFMs adapt as their role grows Page 7
RISKY ASSETS: ARE THEY WORTH IT? The temptation in volatile markets is to try and time them Page 27
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The trade-off between risk and return
W
e are living in a time of heightened risk in global markets, taking into consideration factors that include the US coming off the longest period of unbroken growth in its history, ultra-low interest rates that exist in the developed world, rising economic populism in several countries, a fragile China and the UK’s Brexit, while South Africa’s economy faces challenges that include load shedding, unemployment and rising levels of frustration. Coronation’s Chief Investment Officer, Karl Leinberger, believes that in general in the asset management industry, “people talk far too little about risk as they’re obsessed with returns, never really knowing about the risks taken to deliver these returns”.
RISK IS AN UNDERSTANDING ‘THAT MORE THINGS CAN HAPPEN THAN WILL HAPPEN’
In his presentation to the Investment Forum 2019, entitled Managing the trade-off between risk and return in challenging times, Leinberger explained that Coronation is not simply a return house and that managing risk and understanding the frailties of retirement capital is deeply ingrained in the asset management company’s values. He points out that among the noise, numbers and short-term pressures, the industry is seeking to preserve capital, protect capital and grow capital – all this over several decades – a daunting task, bearing in mind how many succeed over periods of a few years, but how few succeed over multi-decade periods of time. By contrast, mental bandwidth on a day-to-day basis includes an obsession with performance over very short periods of time, as well as an obsession with relative performance – as opposed to what really matters to the client. There is also an obsession with return league tables “with far too little thought on the risk taken to deliver those returns”.
At Coronation, risk is defined as “the risk of a permanent loss of capital” and managing risk is deeply woven into its values and research process, Leinberger emphasises. “I firmly believe that after twenty years in the industry, a manager reaching for return at the expense of risk can get away with it for much longer than any of us realise – for many years – but over a long period of time, like 20 or 25 years, they will ultimately be exposed.” He adds that managing retirement capital “is not a game”, and the first rule of investing is to never lose money. In an industry of smart people with intimidating IQs, it shouldn’t be forgotten that no one knows what the future will bring. “Hubris needs to be fought on a daily basis as the world is extraordinarily complex and uncertain.” Leinberger explains that Coronation sees risk as mattering more than returns – and that it The meaning of risk constantly forgoes extremely cheap For Leinberger, risk is the single most poorly considered assets that it believes carry high concept in financial theory. Risk should not be seen levels of risk. “There are many as volatility, as most textbooks would suggest. “Risk is stocks that we think could go often the highest when volatility is low and complacency up three, four or even five abounds, and we would use the Minsky moment* to times in the next five to ten debunk the myth that risk means volatility.” years – and yet we don’t Risk is an understanding “that more things can own them because the happen than will happen – just because your house risks are too high,” he says. Karl Leinberger, didn’t burn down, doesn’t mean you wasted money Chief Investment on insurance”. Continued on page 3 Officer, Coronation
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Annualised performance shows longer term performance rescaled to a 1-year period. Annualised performance is the average return per year over the period. Actual annual figures are available to the investor on request. Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up and as well as down as past performance is not necessarily a guide to future performance. CIS’s are traded at a ruling price and can engage in script lending and borrowing. Performance has been calculated on the A2 class using net NAV to NAV numbers with income reinvested. The performance of each period shown reflects the return for investors who have been fully invested for that period. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestments and the dividend withholding tax. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of the capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Prescient Management Company (RF)(PTY) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Ltd, Registration number: 2007/026029/07 is an authorised Financial Services Provider (FSP34142) under the Financial Advisory and Intermediary Services Act (No.37 of 2002). For any additional information such as fund prices, brochure and application forms please go to www.lauriumcapital.com
