Despite the recovery in share prices globally and in South Africa following the sharp sell-off in March, it is evident that significant downside risk remains due to muted consumer demand, distressed companies, and consensus of a global recession amidst no clear timeline for a return to normality.
Market risks are also evidenced by necessary and unprecedented fiscal and monetary stimulus interventions domestically and globally, said Benedict Mongalo, chief investment officer at independent fund manager, Novare Investments.
“In South Africa’s case, even greater vulnerabilities are presented by the weak sovereign fiscal position and resulting credit rating downgrades. There have been a number of corporates filing for business rescue or initiating retrenchment discussions with labour unions. We therefore hold the view that significant market risks will persist at least for the time being.”
“Our investment philosophy as a multi-manager is underpinned by diversifying strategies to yield results. Our flagship fund of hedge funds exhibited resilience in protecting the downside, and again showed the benefits of including hedge funds as a diversifier in a portfolio.
Mongalo commented that Novare Investments’ assets under management have remained relatively stable despite the unprecedented market sell-off experienced in March 2020.
“Managers are blended based on, amongst others, style and asset classes, to combine the best of breed in their respective niches. In a highly volatile market like the one experienced in recent months, funds of hedge funds have shown negative correlations to the indices.”
From an operational perspective, staff wellbeing and uninterrupted client service have been the priorities as staff work from home with full technology support, and with the option to work from the office given the investment management industry’s classification as an essential service.
Looking ahead, Mongalo said capital markets will recover just as they have after experiencing numerous exogenous shocks over the years. “However, we hold the view that this recovery is likely to be protracted, and not V-shaped as some have suggested. In this regard, our portfolios are biased towards managers focused on quality constituents in their portfolios.
“Diversification across asset classes is critical, and we will continue to implement tactical asset allocation decisions as markets stay fluid.”
Mongalo said he expects continued buying opportunities for quality assets that have experienced sharp declines. Despite the recovery in markets, which have rallied since March, Novare Investments sees continued volatility necessitating various risk mitigation strategies, including derivatives to protect the downside risks.