Jacques Magliolo
INSTITUTIONAL portfolio managers across South Africa are unprepared, confused and in for a rude awakening if they do not change their portfolios to reflect rapidly changing political and market trends.
Says one head of research: “I’m concerned that many portfolio managers do not realise that this is a new game, with new and unknown players.”
Heads of investment departments say old rules no longer apply, but to “drill that into portfolio managers is like flogging a dead horse”. However, there does seem to be general consensus that, to survive in the new South Africa, market experts will have to become “more street wise and understand politics”.
The latter, they say, will continue to dominate markets for a long time to come. The implication is that the new government is not bound to the old order’s methods of handling political, economic, financial and business issues and that it has very different priorities.
This has been highlighted often recently and includes the reconstruction levy of 5 percent imposed on individuals and companies during the last Budget and government’s commitment to the Reconstruction and Development Programme. In addition, this week’s political move to appoint another businessman as finance minister _ after Derek Keys’ resignation _ pinpoints the importance of understanding both financial and political trends.
Essentially, market forces will be influenced by as yet undefined rules _ and often surprising moves _ by government. And, to complicate comprehension of present portfolio management thinking, many believe there is little and a mostly unsubstantiated link between our market and those overseas.
“Despite major warnings signals from the local and US market, many portfolio managers are not changing their way of handling billions of rands worth of pension and provident funds,” says a Cape-based stockbroker.
He points out that the industrial index has “since 1980 closely tracked the Dow Jones”. Both the Dow and JSE industrial indices show that, since the beginning of 1993, the markets are more expensive than the pre-1987 crash.
Yet Syfrets Balanced Fund portfolio manager Anet Ahern says: “The outlook for the investment environment would support the view that equities remain a good hedge against inflation in the long term.”
She adds: “Our Balanced Fund will also maintain a relatively full exposure to equities, the target being 65 percent.” This view is supported by managers who believe that institutional weight of funds will continue to bolster equities and substantiate their argument by comparing equity returns to inflation. It denies the possibility of a crash.
Metropolitan Life head of equity research Charles Foster confirms this: “There is high capital risk and low yield in equities at present.” The company is one of few financial institutions which has a strategy “of having less exposure to shares”, says Foster. Compared to Syfrets, Metropolitan Life has only 45 percent of its R7-billion invested in shares.
Another graph substantiates the need for portfolio managers to move funds out of equities. In terms of earnings potential, short-term interest rates indicate that they still offer growth, while equities reached a peak in 1989.
While it is understood that institutions are not traders in the sense that they take long-term views, there is a desperate need for these financial houses to move in line with international trends.