Global markets have been in decline since the end of February as the coronavirus (COVID-19) became a global pandemic.
In a time of crisis, one often hears people remark that “this time it’s different” as the narratives around market downturns almost always change; in this case it is the coronavirus while in the Global Financial Crisis it was mortgaged-backed securities.
The one thing, however, that doesn’t change during times of market turmoil is how humans react to uncertainty. The primal responses kick in – flight, fight and/or freeze. Some investors panic and cash in their investments while others feel they need “to do something” and make changes to their portfolios.
While investors can’t control the economic consequences of a crisis they can, with some assistance, control some of these primal responses, which often turn temporary investment value declines into permanent losses.
REFLECTIONS FROM THE GLOBAL FINANCIAL CRISIS
Twelve years ago, I started my career in the investment industry, during what later became known as the Global Financial Crisis. For someone starting their career it was an exciting time as there was something happening almost every day, including the Lehman Brothers, a 150-year-old investment bank that went bust and the insurance giant, AIG, that needed to be bailed out. These events were invaluable from an investment experience perspective as it showed me the real consequences of risk and that risk is not the same as volatility.
There are several other lessons I learned from the Global Financial Crisis which apply to investments, your business and personal finances:
1. Liquidity is REALLY important. The ability to access savings or investments to carry you through difficult times is one of the most important risk management tools. This is as important in managing a fund where you are likely to see big withdrawals in times of crisis.
2. Credit and leverage: They are great tools to access growth, but in times of distress they can destroy even the strongest balance sheet.
3. Broad diversification: There is no substitute for diversification – the broader the better – and especially diversification across different economic drivers! Concentrated portfolios can work for you or against you. It is significantly less risky to invest in broad markets where your risk is spread across thousands of holdings, different regions and currencies.
4. Avoid complexity and black boxes. It is very difficult for investors to stay the course and not to panic if an investment strategy doesn’t deliver “what’s on the tin”. Hedge fund and other “black box” disappointed investors never truly understood these strategies due to their inherent complexity.
5. Staying invested for the full market cycle. There is a saying, “this too shall pass”, which applies to most market corrections. Sometimes markets rebound within a very short period, such as in 1987, while at other times it can take years as we saw in the 1970’s. A number of fund managers got their timing right before the Global Financial Crisis but completely underestimated the recovery and the impact of quantitative easing.
CORE GLOBAL FUND – DESIGNED WITH RELIABILITY IN MIND
The Nedgroup Investments Core Range of rules-based, multi-asset portfolios were designed in the wake of the Global Financial Crisis. In a previous newsletter we covered how these funds were designed with reliability in mind by incorporating three important elements; investor behaviour, risk management and cost-effective implementation. We will now look at how these elements were incorporated in the design of the Nedgroup Investments Core Global Fund, which is also used for offshore exposure in the SA Core range.
The Nedgroup Investments Core Global Fund was designed to provide offshore exposure for South African investors and the locally domiciled Core Range. It therefore provides broad global exposure with no home bias as the South African market is already highly concentrated. Several lessons described above were incorporated in the design of the fund:
• The fund only invests in five liquid asset classes, which can be implemented using a passive investment strategy: Equity, listed property, government and corporate bonds, inflation-linked bonds and cash.
• The corporate bond allocation is only 2.5% of the fund and consists mostly of large multi-national corporates. The Fund does NOT invest in high yield or Leveraged Exchange Traded Funds (ETFs).
• The fund offers broader diversification across and within asset classes than any of its peers. It also offers diversification across different regions and currencies.
• The fund offers investor simplicity and transparency by only using market capitalisation weighted index funds. It does NOT invest in any smart beta or other “black box” quantitative strategies, which are difficult to understand or may lead to disappointing results.
• The fund’s rules-based investment strategy ensures that it is rebalanced periodically so that investors stay invested throughout the market cycle.
IMPLEMENTATION – PARTNERING WITH EXPERTS
One of the main benefits of rules-based investing is its low overall cost, mainly due to much lower asset management fees and transactions costs. Over time, these cost savings compound and have a meaningful impact on savings growth. The Nedgroup Investments Core Global Fund was designed to be implemented in a cost and tax efficient manner by reducing portfolio turnover, which results in lower brokerage fees and Securities Transfer Taxes (STT).
The Nedgroup Investments Core Global Fund is implemented by BlackRock Investment Managers. BlackRock is the largest asset management firm in the world managing $7.4 trillion (Q4 2019) of which around $4.7 trillion is in index fund strategies.
The Index Asset Allocation team at BlackRock makes use of Exchange Traded Funds (ETFs) and Index Mutual Funds to gain exposure to the underlying asset classes in Nedgroup Investments Core Global FundEach of these investment vehicles has their own pros and cons and it’s therefore important to choose the appropriate vehicle to achieve the desired outcome. In a previous newsletter we introduced the concept of total cost of ownership, which is a combination of internal and external factors which influence the frictional costs within a portfolio. BlackRock uses this concept to select the optimal mix between the ETFs and Index Mutual Funds.
The Nedgroup Investments Core Global Fund provides South African investors with broad global exposure accros different asset classes, regions and currencies with no home bias. Its low fees of only 0.35% per annum (Total Investment Charges of 0.53%) makes it an ideal core holding in any investor’s offshore portfolio.