Trevor Garvin: Head of multi-management at Nedgroup Investments
Given everything that markets have experienced in 2020, what lesson stands out most?
During times of market stress, it always becomes apparent how important liquidity is. It is crucial to invest into assets that trade daily, are priced daily and are liquid. This enables you to be able to reposition the portfolio appropriately based on changing market conditions.
It is vital to be able to match the expectations of the client with the way the portfolio is managed – long-term investors with long-term investment horizons can handle a higher degree of volatility.
Secondly, having a robust and consistent investment process is important. Although it goes against our natural impulses and emotions, having a buying discipline based on agreed valuation levels as the markets are falling can enhance returns and capture the upswing in markets when it occurs. Having some ‘dry powder’ to invest is critical during times of market dislocations.
What is the most important asset allocation decision you made this year?
Without a doubt, our best call was materially increasing our domestic fixed income exposure when bond yields spiked to over 12.5% at the peak of the market fall and risk off environment. We more than doubled our fixed income exposure to double overweight positions and rode out the fall of yields back to the current 9.5% levels, attaining some good capital gains.
Of course, the decision on whether to maintain or reduce it is the decision we have to make, including our level of duration. We have also managed to have a rigid process to trim our offshore exposure on extreme rand weakness and increase it on rand strength.
Did you allocate to new managers in 2020, and why or why not?
We have not allocated to new managers at this point but have changed our relative exposures to several of them quite materially. We are also in the process of assessing a couple of new managers at the expense of two that we may reduce or disinvest from.
We have tended to have a bias over time with several ‘value’ type managers who, as we know, have now struggled over the last three to four years relative to more growth-orientated investment styles. This will turn at some stage.
The domestic market is now dominated so heavily by Naspers and Prosus that getting that call correct is very often critical. In addition, whether managers have got the call of rand hedge stocks versus SA Inc stocks has also materially affected their relative performance.
Finally, gold stocks have been the sector that has run the hardest – some managers have held a large exposure versus some that have held very little to none. This has made a material impact on returns this year.
What is the most valuable discussion you had with an asset manager during this period?
We have continuous and ongoing discussions with our managers all the time. This has been for two main reasons – understanding the reasons for their investment performance, as well as getting to hear their views on markets, asset classes, expected returns and currency movements.
It is always interesting hearing their views as it helps with our own internal discussions and analysis when it comes to asset allocation. We have also had several interesting discussions with managers in terms of their views of assessing global equity markets versus the SA equity market and which areas they feel will offer the better returns on a three- to five-year time horizon. This is critical in deciding the level of offshore exposure you have within the funds.
What has been the most important attribute for fund managers to display in 2020?
I think this answer has two parts. Firstly, we have always said that an asset manager adds the most value in falling markets in terms of the degree to which they provide capital protection. They can do this via stock selection, cash management and buying stocks at appropriate prices. Therefore, we would like to see our managers fall less than the market in general.
We would also like to see these managers buying appropriately when the markets are in decline in order to benefit from any market rebounds. As markets fall, they provide an increased amount of buying opportunities based on a valuation model.
The second attribute we would like managers to show is on the communication and transparency side.
During times of market stress, when investors show a higher-than-average degree of anxiety, it makes our lives much easier if managers communicate regularly, explain their performance clearly and provide regular performance updates. The more information we can gather, the better. Having access to fund managers to better understand their views is also critical.
If you look back on 2020, what would it mean for an asset manager to have added value?
I think a manager would ideally have protected capital during the fall as best as possible, would have repositioned the portfolio with buying opportunities as valuations showed opportunity and then benefited nicely in the rebound.
We would look for managers to have a well-constructed, diversified portfolio, balancing the various risks of the markets in order to achieve above-average risk-adjusted returns.
In addition, we would’ve wanted a manager to have communicated on a regular basis and explained their positioning and performance.