/ 21 April 2017

Active managers: Prepare for high and low roads

Peter Brooke
Peter Brooke

The recent sovereign rating downgrade of South Africa to sub-investment grade or “junk” status highlights that we are at a crossroads in our young democracy and we cannot tell which way we will end up going.

Will it be the low road if Zuma remains president, or the high road if he is removed from his post?

Peter Brooke, Old Mutual Edge 28 Fund Manager, believes that the rating downgrade is likely to cement resistance to Zuma’s recent decisions and that resistance could bring change.

“In any event, active investment managers need to be well balanced and well diversified enough to cope with either of these scenarios, though they would understandably be adversely impacted if the low road were to materialise.

“In times of uncertainty, it is crucial to take a long-term view. When it comes to investments, sometimes bad news can turn into good news and one should be investing in exactly the opposite way to your initial gut reaction. Past and recent political events have taught us this. We brought money back into rands after ‘Nenegate’ and bought equity after Trump’s election,” explains Brooke.

He says this is a crucial period for South Africa, but the country has always come through.

“Irrespective of this, we could well face a very volatile time in the next six months, with potentially divergent outcomes. However, volatility also creates opportunity, which will require active fund management.

“For instance, 5% of the Old Mutual Stable Growth Fund has been invested into US dollar cash ahead of recent events. I am sure the fund manager will sell those dollars in the future when the timing is right. This is why sticking to your plan and allowing the solution to work for you is better than panicking.

“So, despite the bad news, we think our solutions are well diversified and [we] will weather this storm. All of our funds or investment solutions have a big component of foreign assets (typically 25%), which provide diversification to bad news in South Africa. In addition, the Johannesburg Stock Exchange is heavily geared to a weaker rand through shares such as British American Tobacco, Naspers and Sasol. The Old Mutual Balanced Fund has a further 25% of its investments in assets geared to a weaker rand. This means 50% of the portfolio benefits from a weak rand.

“On the other side, only 30% of the portfolio benefits from a stronger rand, through banks, bonds, listed property and retailers. Our funds are well diversified and robust risk management means that there will be parts of the portfolio benefiting from this bad news,” says Brooke.