A highwire act: matching clients’ expectations with reality

by Mike Adsetts | 5,Nov,2023 | Investments, Momentum, Q4 2023

Investors can find “safety” in SA asset valuations

Mike Adsetts, Chief Investment Officer, Momentum Investments

There are periods of time during which it seems that very little changes. The investment industry is one where this is most definitely not the case.

On the local front, the relaxation of exchange control allowing up to 45% of assets to be invested offshore is a significant change. It is no longer tenable to simply allocate assets offshore without being mindful of the integration and alignment of the local and global components of portfolios.

The increased offshore exposure as well as the upcoming implementation of the two-pot retirement system has and will change local market dynamics, impacting liquidity and available capital. This is an important issue as there is increased need for illiquid investments, such as infrastructure, at the same time that there is a greater need for liquidity in the markets.

Over the last few years, the investment universe has increased rapidly, with the recent increased allocation to offshore assets further leading to a significant increase in the number of investment options that are available.

A portfolio manager needs to consider multiple competing factors when constructing and managing a portfolio. A strong risk management focus is an essential requirement when considering asset allocation, and crucially important is the split and alignment between local and global assets, as well as ensuring a robust balance between liquid and illiquid assets. To manage all these competing factors it is important to follow a well considered investment philosophy. The crucial role of a philosophy is that it is a mechanism for defining the purpose and characteristics of a portfolio, providing a tool that allows all investments to be considered and how best to incorporate them into a portfolio. This ensures that the portfolio in aggregate is a harmonious unit with no particular investment dominating the risk of the portfolio.

My view is that with the increase in the number of available investments, thereby increasing the degrees of freedom a portfolio manager has, the essential components that underpin an investment philosophy include a well defined goal, a clear risk budget (or appetite) and investment horizon. It is important for South African investors that the relevance and place of peer comparisons between investment managers need to be reconsidered as the increased number of investment decisions that a portfolio manager needs to make will inevitably lead to a greater volatility and range of performance outcomes across portfolios.

It is important that investors consider what their own investment requirements are and to what extent they have a broad investment philosophy and belief system. This will allow for more precision in expressing and defining their investment needs and expectations. This serves as an important consideration when considering portfolio managers and their investment philosophy. Greater alignment will result in a more purpose driven approach that better manages towards the required investment outcomes and will also lessen the extent to which there are mismatched expectations between investors and their portfolio managers. Trying to match clients’ expectations with reality means constructing a portfolio that can meet the needs and financial goals of a retirement fund or business. Any approach that bridges the gap between expectations and reality, lessening the likelihood of unexpected surprises, is worthy of paying attention to.

Mike Adsetts
Chief Investment Officer at Momentum Investments | + posts