A WORD FROM OUR CIO

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leaving the EU. 8 Nov. 2016. On this day, Americans voted in Donald Trump as the 45th president of the United States. 9
A WORD FROM OUR CIO Recent volatility provides a lesson in robust portfolio construction

Adriaan Pask PhD CIO PSG Wealth

In the past few months investors have been exposed to several events that caused short-term volatility. There were irregularities around corporate finances, sovereign events like the ANC elective conference, and concerns around rising inflation in the United States, which led to a sharp decline in US markets earlier this year.

Volatility is part of the process Higher inflation is a function of a healthy global economy and indicates global economic growth. As it stands, we are experiencing globally synchronised growth for the first time in four years – since the first quarter of 2014. Volatility provides professional investors with opportunities to access markets at lower prices. Market corrections, usually defined as a fall of up to 10% in a stock or index, can return expectations to normal levels, and lower the probability of bubbles forming. Corrections often prompt market participants to perform sanity checks, which is also very healthy.

On the global front we expect the growth story to remain intact We anticipate that growth in earnings could decelerate, and that this scenario is more likely than a market earnings collapse of sorts. We further believe that US bonds could remain under pressure, and therefore prefer the wealth creation properties of equities above those of fixed income assets. We also expect active asset managers will be able to leverage their ability to single out attractive investments and avoid masked risks within a bigger market.

Thorough research and selective buying offer protection Stocks that are already reaching lofty price-earnings multiples are likely to feel the pressure. Less favoured stocks that offer better margins of safety, are likely to prove more resilient and are supported by better valuations. During times of volatility we expect irrational selling in the market, which we can exploit to our advantage and use as an opportunity to buy selected counters at lower prices.

Our focus has always been on the long term Long-term data shows that these short-term bouts of volatility do not influence the performance of wealth-creating products. Short-term volatility is the playground of day traders and rarely raises the eyebrows of long-term focused investors. Our investors rarely need to worry about short-term volatility, because our products are built to withstand short-term volatility and provide consistent, above-benchmark returns over time.

Volatility provides professional investors with opportunities to access markets at lower prices.

PSG Wealth fund performance in the context of some volatile past events Over the 56-month period from 1 May 2013 to 31 December 2017, our global funds still outperformed their respective benchmarks. For example, the PSG Wealth Global Flexible Fund of Funds (USD) delivered 5.89% above its benchmark.

22 May 2013

23 June 2016

Known as the rst 'taper tantrum' after the US Federal Reserve (the Fed) announced that it would begin tapering back its roughly $70 billion a month bond and mortgage backed securities programme. The news made risk assets the ugly duckling of nancial markets.

Most of the UK electorate voted to leave the European Union in a referendum on what has become known as Brexit. On 29 March 2017, Prime Minister Theresa May wrote to the European Council President Donald Tusk, formally triggering Article 50. This has initiated the two-year countdown to the UK formally leaving the EU.

8 Nov 2016

On this day, Americans voted in Donald Trump as the 45th president of the United States.

9 Dec 2016

Then-President Jacob Zuma red the incumbent Minister of Finance, Nhlanhla Nene. The day after, the FTSE/JSE Africa Banks Index crashed by a record 14%.

5 Dec 2017

Shares in Steinhoff International lost over 85% in value from 5 December 2017 to 3 January 2018. This after accounting irregularities came to light, causing the subsequent resignation of CEO Markus Jooste.

FIRST QUARTER 2018

A WORD FROM OUR CIO

Performance of the PSG Wealth global fund of funds range from 1 May 2013 to 31 December 2017 US dollar funds (annualised return reported in USD) Fund name

Fund

Benchmark

Outperformance

PSG Wealth Global Preserver Fund of Funds (USD) D

3.81%

1.88%

1.93%

PSG Wealth Global Moderate Fund of Funds (USD) D

4.56%

3.56%

1.00%

PSG Wealth Global Flexible Fund of Funds (USD) D

8.39%

2.50%

5.89%

PSG Wealth Global Creator Fund of Funds D

9.12%

7.21%

1.90%

British pound funds (annualised return reported in GBP) Fund name

Fund

PSG Wealth Global Preserver Fund of Funds (GBP) D PSG Wealth Global Flexible Fund of Funds (GBP) D

Benchmark

Outperformance

6.38%

3.30%

3.09%

10.79%

3.91%

6.88%

Performance of PSG Wealth domestic fund of funds range from 1 May 2013 to 31 December 2017 Domestic funds (annualised return reported in ZAR) Fund name

Fund

Benchmark

Outperformance

PSG Wealth Enhanced Interest Fund D

6.99%

6.63%

0.37%

PSG Wealth Income Fund of Funds D

7.64%

7.17%

0.48%

PSG Wealth Preserver Fund of Funds D

9.11%

7.60%

1.51%

PSG Wealth Moderate Fund of Funds D

10.89%

8.97%

1.92%

PSG Wealth Creator Fund of Funds D

11.63%

9.65%

1.98%

Performance numbers are annualised. Source: Morningstar Direct

This provides a valuable lesson in the importance of constructing robust portfolios We monitor our products and underlying managers, while providing advice and managing portfolios to best protect the interests of our investors. Diversification between different managers and investment styles is a cornerstone of our investment process and the benefit is highlighted by our stringent selection process. Assets and shares are selected in such a way that if some underperform, others outperform – ensuring less risk of both volatility in the short term and underperformance in the long term.

This is not the first bout of volatility that we will face It will certainly not be the last. However, our financial planning and advice processes remain as robust as ever. These processes are supported by strong and reliable products that boast strong track records over prolonged periods of time, and over previous periods of volatility. We monitor our products and underlying managers, while providing advice and managing portfolios to best protect the interests of our investors.

FIRST QUARTER 2018