Ninety One Global Strategic Managed Fund update

Financial markets are likely to remain highly volatile in the coming quarters as investors weigh up the economic impact from efforts to contain the coronavirus outbreak, the results and progress of containment measures in supressing the spread of the virus, and the impact of material monetary and fiscal stimulus. That said, we believe the significant expansion in risk premia and depressed valuations present opportunities for medium-term investors and we will continue to take advantage of compelling opportunities.

Apr 28, 2020

6 minutes

Financial markets are likely to remain highly volatile in the coming quarters as investors weigh up the economic impact from efforts to contain the coronavirus outbreak, the results and progress of containment measures in supressing the spread of the virus, and the impact of material monetary and fiscal stimulus. That said, we believe the significant expansion in risk premia and depressed valuations present opportunities for medium-term investors and we will continue to take advantage of compelling opportunities.

Performance review

For the quarter, the portfolio delivered negative absolute returns, underperforming its benchmark.

The portfolio produced a negative absolute return in US dollars, gross of fees , underperforming its benchmark. The equity allocation detracted, with markets globally entering a turbulent period driven by the combined impact of the coronavirus pandemic and an oil price war between Saudi Arabia and Russia. These shocks contributed to dislocations in credit markets, one of the most rapid declines in developed market equities in the past century, and what is set to be a sharp contraction in global growth. As a result, central banks and governments have moved to ease policy aggressively in seeking to support the functioning of financial markets and to assist the household and business sectors through what is set to be a very. challenging period. This helped markets regain some ground in the second half of March. The largest detractions came from US equities and from the financial sector in particular, with US mortgage insurance and large cap bank exposure suffering notable weakness. Asian equity positions fared somewhat better as China showed signs of recovery as the early onset of the virus and associated economic shutdown began to abate by the end of the period, with digital consumption names such as Alibaba and Netease performing relatively well.

Return contributions from the portfolio’s fixed income positions were also mixed as developed market bonds rallied following emergency rate cuts by central banks in light of a deterioration in growth outlooks. A long position in Canadian short dated government bonds added to performance, while positions in curve steepeners neither contributed, nor detracted over the period. Positions in emerging market debt sold off driven by a stronger dollar and a pickup in global recession fears, with notable weakness in South African and Russian positions. In contrast, the portfolio’s position in gold added to returns as it appreciated over the period.

Market background

The first quarter was dominated by three shocks to markets: the coronavirus (COVID-19) global pandemic; an oil price war between major energy producing nations; and the consequent market weakness resulting in disorderly price action and dislocation across all asset classes. As a result, central banks and governments moved to ease policy aggressively in seeking to support the functioning of financial markets and assist the household and business sectors to an unprecedented scale. The US Federal Reserve (Fed) alone, for example, expanded its balance sheet by almost US$1 trillion in the space of just two weeks.

Growth assets universally generated negative returns. Oil was by far the worst, falling 70% from peak due to falling demand and increasing supply. Equities across the board struggled with almost all major indices posting double-digit losses and UK and emerging market equities among the worst performers. Chinese equities were the relative best performer. Real estate stocks fell, while an exodus from emerging market assets saw yields on sovereign debt rise as prices fell leading to double-digit losses for both local and hard currency debt. Credit spreads rapidly widened towards the latter half of the quarter leading to 10-20% falls across credit and an implied default rate several times higher than that seen in a typical recession.

Traditional defensive assets offered limited shelter, with developed market bonds delivering a small positive return as yields fell, although not consistently. Continued flows into the US bond market saw the 10 and 30-year Treasuries rally as their yields dropped to record lows yet again before pulling back in the second half of March. The US dollar demonstrated ‘safe haven’ characteristics although with some volatility during March. The Japanese yen and gold performed well, though the latter’s price action proved unstable. Investment grade credit was a notable underperformer, driven by investors’ rush to raise liquidity.

Portfolio activity

The portfolio had been positioned for an emerging economic recovery entering 2020 and we saw strong return potential from the portfolio over a two to three-year horizon based upon the balance between attractive valuations versus strong underlying fundamentals in the portfolio’s active positions. As such, the portfolio entered this turbulent period with an overweight equity position and an underweight exposure to developed market government debt, due to extended valuations, but with a high cash balance.

Although uncertainty about the future remains high, the sell-off and dislocations in financial markets have now created compelling investment opportunities for medium-term investors, in our view. So far, we have used this sell-off in markets to begin to deploy the portfolio’s cash balance – buying the shares of companies we have wanted to own in the past, but had been held back by prior elevated valuations, and adding to existing positions, as well as building exposure to developed market credit where dislocations have been particularly stark.

Post the sell-off in markets, we added to positions in high quality companies, many with defensive characteristics. In addition, we believe the largest dislocation in financial markets appeared in developed market credit, with investment grade credit spreads having widened materially and disproportionately versus other asset classes, while high yield debt markets haven’t been too far behind. As a result, we used some of the portfolio’s cash balance to build a position in investment grade credit.

Outlook and strategy

The current macro environment displays a high degree of uncertainty and there is a risk of a more pronounced economic downturn that would likely weigh on equity and credit markets further. However, we take some encouragement from the patterns relating to the lockdowns of populations and containment of new infection cases. In addition, we are also encouraged by the steps that authorities have taken in seeking to limit the economic damage from containment measures. On the former, the pattern in China and South Korea has been for new cases to peak and then decline two-three weeks after the implementation of stringent social distancing measures. Similar evidence is starting to emerge in Europe. On policy, the speed and magnitude of the measures being announced and implemented is unprecedented. This differs somewhat from the major economic crises of the past, such as 2008 where it was authorities letting Lehman Brothers collapse that caused trust between banks and businesses to breakdown and broader confidence across the economy to evaporate, amplifying the downturn. It was only in the months after this that central banks and governments then implemented significant measures, amounting to c.22% of GDP in the US, to backstop the system. There were also delays in the 1930s, but it took years rather than months for authorities to respond with adequate measures.

We estimate that the sum of monetary and fiscal packages announced as at 31 March 2020 in the US, eurozone and the UK are 53%, 50% and 36% of GDP, respectively. We believe the aggressive and rapid nature of this action significantly reduces the tail risk of a more pronounced, prolonged downturn, and it should aid a faster bounce back in activity when the time comes.

Financial markets are likely to remain highly volatile in the coming quarters as investors weigh up the economic impact from efforts to contain the coronavirus outbreak, the results and progress of containment measures in supressing the spread of the virus, and the impact of material monetary and fiscal stimulus. That said, we believe the significant expansion in risk premia and depressed valuations present opportunities for medium-term investors and we will continue to take advantage of compelling opportunities as and when they are presented by volatile markets, while maintaining the flexibility to hedge exposure if we see the likelihood of a more pronounced downturn materialising.

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All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. Additional information on the funds may be obtained, free of charge, at www.NinetyOne.com. Ninety One SA (Pty) Ltd (“Ninety One SA”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). Investment Team: There is no assurance that the persons referenced herein will continue to be involved with investing for this Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Fund at any time without notice. Investment Process: Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective. A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a CIS which levies its own charges which could then result in a higher fee structure for the feeder fund. In the event that specific funds are mentioned please refer to the relevant minimum disclosure document in order to obtain all the necessary information in regard to that fund. This presentation is the copyright of Ninety One SA and its contents may not be re-used without Ninety One SA’s prior permission.