What else is on investors’ minds?

Can you do both good and well as an investor? If SA cash is trash, what about  offshore cash? Where to from here for global equity markets?

Sep 22, 2021

3 minutes

Paul Hutchinson
Can you do both good and well as an investor? If SA cash is trash, what about  offshore cash? Where to from here for global equity markets?

In August, we addressed four key questions raised by financial advisors and their clients: What are the alternatives to cash? How much should you invest offshore? Is it too late to invest in South African equities? Are we seeing a change in investment style leadership?1 The article raised several additional questions from advisors, which we discuss briefly below. Please note that we have addressed each question independently, and not with a subsequent answer building on the prior question.

1. Can you do both good (make an impact) and well (generate investment returns)?

In short, yes. But why, and how?

There is growing consensus that the world needs to urgently address climate change, and that accelerated investment is needed to ensure global temperature increases stay within two degrees Celsius. Unfortunately, even a two-degree increase will have a massive impact on our planet. For example, coral reefs will be almost entirely wiped out; people will be exposed to more extreme weather (heat waves, droughts, floods, and tropical cyclones); mountains will lose their glaciers and be more susceptible to landslides; more than 70% of the earth’s coastlines will see sea levels rise greater than 0.2 metres; and certain islands will become uninhabitable.

There is an approximate 90% correlation between carbonisation and economic growth, and therefore we need to change the way the economy works. As a result, the world will need to invest between $2.4 trillion and $4 trillion per annum in areas such as wind and solar capacity, electric vehicles, and battery production over the coming decades to meet this objective. And yet we are currently only investing in the region of $700 billion per annum. This transition has barely begun.

There is an approximate 90% correlation between carbonisation and economic growth, and therefore we need to change the way the economy works.

It is fair to say that we all know what the problem is, but what are the catalysts for change? We have identified three key drivers:

  • Regulation: Countries around the globe are signing up to the net zero carbon pledge.2 The year 2020 saw new policy announcements across Asia and the US, and stronger commitments from Europe. In fact, 64% of global emissions are now covered by “net zero” announcements.
  • Technology: Costs have fallen materially as technologies have improved in areas such as wind and solar energy generation, and battery pack production which has, for example, resulted in an exponential increase in electric vehicle sales over the past decade.
  • Consumer behaviour: Surveys suggest consumers are concerned about climate change and, as a result, are increasingly comfortable that their investment solutions include a portion that is environmentally focused.
Our specialist knowledge and proprietary research help us identify the most attractive opportunities within the complex environmental sector.

The Ninety One Global Environment Fund seeks to benefit from the new structural growth themes of renewable energy (solar, wind, clean power utilities, etc.), electrification (electric vehicles, hydrogen economy, heating and cooling, etc.) and resource efficiency (waste management, agriculture, factories, etc.). Our specialist knowledge and proprietary research help us identify the most attractive opportunities within the complex environmental sector. This approach has been rewarding for our investors, with the fund outperforming the traditional global equity benchmark, the MSCI All Country World Index (ACWI), by more than 16% per annum since launch in February 2019.3

The fund’s differentiated strategy means that it serves as a great diversifier to traditional global equity portfolios, including the Ninety One Global Franchise Fund, which has attractive ESG credentials given the types of companies in which it invests.

2. If SA cash is trash, what can be said of offshore cash?

Well, offshore cash is even trashier. For several years now, offshore dollar, sterling and euro cash investments or money market funds have delivered zero (or marginally negative after fees) returns. While offshore money market returns might improve at the margin should the US Federal Reserve and other central banks start to raise rates, they are unlikely to do so materially in the short to medium term. Investors need to look beyond the perceived safety of these offshore cash funds to earn attractive hard currency real returns.

Investors need to look beyond the perceived safety of these offshore cash funds to earn attractive hard currency real returns.

Conservative investors should therefore take a slightly longer-term view and consider funds such as the Ninety One Global Multi-Asset Income Fund. The fund targets an attractive, resilient yield of around 4% per annum, as a significant part of the overall return. This higher yield reduces the dependency of returns on generating large capital gains, and the associated volatility. The defensive income anchor has also meant that since inception in July 2013, the fund has not delivered a negative calendar year return.

In an article,4 co-portfolio managers John Stopford and Jason Borbora-Sheen said: “Given the importance of income [as a dominant driver of most asset class returns over the long run], the decline in yields, [as evidenced in Figure 1], on most asset classes since the Global Financial Crisis, and the further fall during the COVID-19 crisis, appears to bode ill for conservative investors.” The good news, however, is that the managers are still finding attractive opportunities across a range of asset markets and securities.

Figure 1: Where do we find income today?

What else is on investors’ minds? - graph 1

Source: Bloomberg, BofAML, yields as at 31 August 2011 and 31 August 2021. 1 month deposit rates for cash; 10yr Government bonds – generic sovereign yields; investment grade bonds: BofAML Sterling Corporate & Collateralised All Stocks Index; BofAML US Corporate Index; BofAML Euro Corporate & Pfandbrief Index; BofAML Japan Corporate Index; High yield bonds: BofAML Asian Dollar High Yield Corporate Index; BofAML US High Yield Index; BofAML Sterling High Yield Index; BofAML Euro High Yield Index; Emerging market bonds: JP Morgan GBI-EM Global Diversified Index; JP Morgan EMBI Global Diversified Blended Index; JP Morgan CEMBI Diversified Broad Composite Index; equity indices as stated. For further information on indices, please see the Important Information section.

It is these attractive opportunities that make their way into the fund. The managers are, however, selective in what to own and what to avoid, as the highest-yielding assets are often compromised and can deliver disappointing returns with significant risks. Better returns for less risk can generally be found in moderately high-yielding securities, where the yields are properly underpinned by resilient excess cash flows.

3. Global equity markets have run hard, now what?

While global equity markets appear expensive when looking at broad market indices, we believe that there are still unique opportunities for active stock pickers, as captured in the Ninety One Global Franchise Fund.

We believe that our Quality capability’s purist approach to quality investing is well suited to current conditions and for the uncertain times ahead. The team is solely focused on identifying attractively valued best-of-breed “franchise” companies with the following key attributes:

  • Hard-to-replicate enduring competitive advantages,
    for example, ASML (EUV lithography, DUV lithography)
  • Dominant market positions in stable growing industries,
    for example, Estée Lauder (brands include Estée Lauder, Bobbi Brown, Clinique and MAC)
  • Low sensitivity to the economic and market cycles,
    for example, Nestlé (brands include Gerber, Nescafé, Maggi, Nespresso, Purina)
  • Healthy balance sheets and low capital intensity,
    for example, Verisign (.com, .net)
  • Sustainable cash generation and effective capital allocation,
    for example, Visa

The result is a high conviction, concentrated portfolio of currently only 27 stocks. There is also very little overlap with the Top 50 MSCI ACWI stocks - only eight are included in Global Franchise and only two of these are in in the top ten holdings (Microsoft and Johnson & Johnson). In fact, the fund’s active share5 is 93%, meaning that the fund is highly differentiated from the MSCI ACWI and so is likely to also be very different from many other global funds, especially passive index funds.

Companies in the Ninety One Global Franchise Fund are valued at a discount to the broader market.

Importantly, the companies in the Ninety One Global Franchise Fund are still generating far superior returns on capital but are valued at a discount to the broader market.

What else is on investors’ minds? - graph 2

Source: FactSet, Ninety One, 31 August 2021. *Index: MSCI AC World NDR (pre Oct-11, MSCI World NDR). The portfolio may change significantly over a short period of time. The above reflects the portfolio characteristics reweighted excluding cash and cash equivalents. Inception date: 30 April 2007. For further information on indices, please see the Important Information section.

Conclusion

Investors faced with one or more of the issues raised above may best be served by seeking professional financial advice, tailored to their individual circumstances.

Download the PDF


1 What’s on investors’ minds?
2 Net zero refers to the balance between the amount of greenhouse gas the world produces and the amount removed from the atmosphere. Net zero is achieved when the amount produced is no more than the amount taken away. Reaching net zero is vital to avert the extremes of harmful global warming.
3 Source: Morningstar, 30 June 2021. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in US dollars. Highest annualised return since its launch: 88.1% (31.03.21), A Acc USD. Lowest annualised return since launch: -7.3% (31.03.20), A Acc USD.
4 Thriving in an income desert, July 2020.
5 Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index.

Paul Hutchinson
Sales Manager

Important information

All information provided is product related and is 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 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, Ninety One 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 Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.ninetyone.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, RMB, 3 Merchant Place, Ground Floor, Cnr. Fredman and Gwen Streets, Sandton, 2196, tel. (011) 301 6335. The fund is a sub-fund in the Ninety One Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. Ninety One SA (Pty) Ltd is an authorized 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.

Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable. MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This document is the copyright of Ninety One and its contents may not be re-used without Ninety One’s prior permission. Ninety One Investment Platform (Pty) Ltd and Ninety One SA (Pty) Ltd are authorised financial services providers.