Andriette Theron: Head of research at PPS Investments
Given everything that markets have experienced in 2020, what lesson stands out most?
The events that transpired since the beginning of the year emphasised the importance of diversification. The key benefit of a multi-managed portfolio is the ability to combine different but complementary manager strategies, with the aim of including managers that think differently about the world. As a result, the solution is well-placed to perform in several different environments.
This benefit really came to the fore as strategies that performed strongly during the market sell-off in March generally underperformed during the subsequent rally in April. Having exposure to a more diversified mix of manager strategies resulted in a portfolio that delivered reasonable performance despite short-term challenges.
The advantage of allocating to managers that are willing and able to take advantage of opportunities presented by changing market environments over a relatively short period of time, by assertively reallocating between asset classes or instruments within asset classes, was another key lesson that was highlighted this year.
What is the most important asset allocation decision you made this year?
We took advantage of the pronounced market volatility since the beginning of the year to appropriately position our portfolios for the future. Throughout this period, we have maintained our overweight exposure to foreign equities, which added meaningfully to performance.
Our view is that domestic bonds are offering equity-like returns well in excess of inflation and are significantly more attractive compared to domestic equity, given the challenging outlook. As a result, we have moved to a maximum domestic bond overweight and have downgraded domestic equity to an underweight position.
We continue to favour global equities over domestic given that this asset class is less constrained by structurally low growth, with a wider opportunity set available for managers to find attractive investment ideas.
Did you allocate to new managers in 2020?
We made a number of changes to our manager line-up since the beginning of the year. Most of these changes had been in the making for a number of months prior and were unrelated to the events that transpired during the first quarter of the year.
We have been quite deliberate in allocating to managers that are more nimble and adaptable in the face of adverse market conditions and whose investment approaches and performance profiles face fewer constraints. We also launched the PPS Global Equity Feeder fund earlier this year with Capital Group as our investment partner for this strategy.
As one of a handful of investment management firms with a track record that spans the 1930s Depression, the 1940s World War, the 1970s stagflation, the 1987 stock market crash, the 1998 emerging market crisis, and more recently the trio of market crashes in the 2000s (the tech bubble, the Global Financial Crisis, and the Covid-19 crash), Capital Group is particularly well-positioned to navigate the current market volatility. Not only do they have the resources to weather the storm but they also have the necessary experience to successfully manage assets through this type of environment.
What is the most valuable discussion you had with an asset manager during this period?
For us, it is critical that we understand the investment strategy employed by the manager and not be surprised by the performance delivered. Any engagement with an asset manager, where the manager is willing to openly discuss their thinking and rationale for their investment decisions, adds significant value to our process of building well-diversified portfolios.
What has been the most important attribute for fund managers to display in 2020?
Adaptability – the ability and willingness to make the required adjustments in response to changing circumstances. This could involve revisiting a long-held investment view, testing their model assumptions, redefining their outlook or making appropriate changes to the portfolio to better reflect the prevailing investment environment.
If you look back on 2020, what would it mean for an asset manager to have added value?
As a multi-manager, we don’t judge adding value necessarily by whether the manager outperformed over the short term or not. Given that we combine different manager strategies, each manager has a very specific role to play in the portfolio.
More important for us is whether the manager performed as expected, given the current market environment and their unique investment approach. A manager could have added significant value during these very volatile and unprecedented times if they remained true to their investment philosophy and continued to manage the strategy as we have come to understand, and delivered the expected returns.