Piet Viljoen, Chairman of RE:CM, a value based asset manager, says that with South Africa experiencing high levels of economic uncertainty, a robust investment strategy is crucial to defend investors against a number of market volatilities. “As investors, there is a huge amount of uncertainty in everything we do.
To deal with this uncertainty, we need a sound investment strategy. There are different types of strategies − some rely on accurate forecasts of the future, others incorporate robustness to deal with the vagaries of the market. This robustness is generally achieved through diversification and intelligent asset selection.”
He explains that the investment strategy that incorporates robustness will always ensure that the investor’s capital remains intact and enjoys reasonable growth over the long term. “On the other hand, a strategy which relies on accurate forecasts can lead to unsustainable losses and possible ruin.”
Viljoen says to avoid economic uncertainty, investors should build a diverse portfolio of cheap undervalued assets, which are able to deal with anything that the future throws at them. “Some investments will fare well, some will not fare so well, but on average such a portfolio should move forward and will not lead to large losses, which is why we consider it robust.”
He says that an effective investment strategy needs to deal with the issue of financial repression. “This is where highly indebted governments, in conjunction with their monetary authorities, depress interest rates to very low levels, to reduce the cost of their debt. In an effort to maintain their income levels, investors are forced to invest in not higher yielding – but riskier – equity assets. Such assets prices tend to get overheated in this environment. One’s investment strategy therefore needs to deal with the government’s attempts to force savers to pay for their profligate ways.
“The monetary authorities want investors to chase high yielding assets, and as a result, investors pay too much for these assets. A robust investment strategy can therefore deal with this by avoiding relatively high yielding assets in the hope of generating income. We believe that the search for yield will generally lead to capital loss.”
Viljoen says that a robust investment strategy needs to be able to deal with conventional wisdom, which tells investors today that they should invest in quality yielding assets. “Conventional wisdom in the past has led investors over many cliffs, and every time that cliff has had a name. During the evolution of the IT world, conventional wisdom was known as The new economy. Investors had to purchase technology stocks because the new economy would, according to John Chambers, CEO of Cisco Systems at the time, “change the way we do things and would lead to growth as far as the eye could see”.
He says another example of conventional wisdom was the Commodity Super Cycle, during 2007/2008, just before the financial crisis and the collapse of commodity prices, as well as any assets related to the cycle.
Viljoen says that conventional wisdom is a comfortable place for investors to gather, but ultimately leads to large losses. “A robust investment portfolio therefore needs to recognise conventional wisdom and avoid it because it leads to highly priced assets, which of course eventually leads to capital loss.”
He says that an investment strategy should also manage the artificial distinction investors make between income and capital gains. “We think investors should be focused on total returns, which is the combination of returns generated by both income or yield and capital gains.
“At some points in the market cycle, yield is cheap, and at other points of the cycle, capital gains or income is cheap. Today we think yield is expensive, while capital gains, in other words assets that do not pay dividends, are very cheap. Our portfolio therefore consists of assets that pay very little in the form of income, but have large potential capital gains in the future, ultimately maximising total return.”
Viljoen says that investors who need income are able to sell off a portion of the portfolio each year. “Whether investors are selling off a portion of their portfolio or gathering dividends from the investments in the portfolio, it results in the same thing.”