​Press Room

WTF? (Where’s the future?)


Stephen Katzenellenbogen
Oct 19, 2018
Does the global economic and political environment necessitate a change to your strategic asset allocation?

In the current investment climate, clients and advisors must reaffirm the appropriateness of investors’ asset allocations.

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The onslaught of political, market and economic news needs to be considered in financial wellness. Picture: Shutterstock


I’m writing this article while spending a few days on the North Coast of South Africa, far from Johannesburg’s madding crowd. I feel a sense of relief at having created some distance between myself and the world of wealth management. Don’t misunderstand – I love the work I do, so my escape is not from my clients.

No, it’s the onslaught of political, market and economic news – local and global – that needs to be considered these days when I’m working on the financial wellness of my clients and their families. Added to this – and equally disturbing – are investment returns which are under pressure in the short term.

Not so long ago, if we discussed a blue-chip share portfolio to include ResilientSteinhoffMTN and Aspen there would have been a sense of ease and comfort. Now? WTF?

Who would have thought that Brexit would be on the table, and that more than two years later there’d still be no clarity and Western Europe would be in a state of malaise? WTF?

In September this year, Venezuela’s inflation rate reached a staggering 488 865% (yes, that’s four hundred and eighty eight thousand eight hundred and sixty five percent). WTF?

Developed stock market stability and global inflation are dependent on a US and China trade war where nobody wins except egos (who Trumps whom?). WTF?

South Africa finally has a president who inspires hope yet we are not sure if he will remain our president in the upcoming elections. If he does, will he be in a position to make decisions without always having a political agenda, which often hinges on him remaining in favour within his own political party? WTF?

Naspers, until recently the mono-directional juggernaut of our market, is down approximately 30% year-to-date because of uncertainty around Chinese online gaming rules impacting Tencent. WTF?

There are so many unthinkables and uncertainties (tax, crime, politics, economics, social dynamics) that I could carry on WTFing, but you get the idea. Staring at the ocean gives you space to think and I’ve been considering what has changed in the context of portfolio construction.

Do the observations above necessitate drastic changes to the way we wealth managers put together client portfolios? The easiest way to approach this without creating even more confusion is to break up different components of financial planning and portfolio construction, and assess them one by one. I’ve made a conscious effort to steer away from statistics and charts.

Let’s start off with tax. No matter how successful President Ramaphosa is in turning around South Africa’s fortune, we will always be an economy that requires the rich to support the poor. Economic policy will never be focused on advancing the life of the already-wealthy and will always be focused on uplifting the poor. (At least there’s one certainty).

This means that portfolios need to create tax efficiencies where possible and take advantage of any tax benefits that are thrown our way such as retirement annuities, tax-free savings accounts and Section 12Js (with the focus on the investment thesis and not the tax thesis). Endowments, sometimes referred to as wrappers, are also tax beneficial for marginal taxpayers, as well as for trusts which have only natural beneficiaries. (FYI – to clarify, my comments around tax are in no way suggestive of tax evasion but rather supporting the use of the available investment tools).

I do think (hope!) that income tax has peaked, but there is scope to increase capital gains tax and estate duty.

"These two taxes impact the cost of dying and my sense is that life cover will become more relevant to provide a cash buffer for death taxes, instead of having to sell off assets and reduce your legacy."

As for the asset allocation aspect of portfolio management and construction – the allocation to cash, bonds, property and equity within a portfolio, locally and offshore – at a high level nothing that’s going on politically and economically has, in our view, necessitated a fundamental change to typical asset allocations. The current investment climate does, however, need us (client and advisor) to reaffirm the appropriateness of investors’ asset allocations and their suitability for specific portfolios and circumstances.

From 2003 to 2013 an investment into the JSE would have delivered unparalleled global returns in both rands and US dollars. In some instances, this resulted in portfolio bias to local equity assets. Many investors are still realigning their portfolios to get the correct local and foreign mix, although this is difficult with a very volatile exchange rate and differing opinion around currency direction. Also, we all know that equity will provide the best long-term return.

With inherent short-termism we sometimes forget what long-term actually means for an equity investment: seven to ten years or longer if possible. We always want the best return, which means high equity allocation.

"My advice is to take time to ensure your asset allocation and objectives are appropriate and achievable."

You must have noticed our disproportionate aversion to loss compared with our feelings about gain. We feel far worse about a 10% loss than we feel good about a 10% gain.

We believe that nothing has happened to necessitate changing typical asset allocations, but within this framework you can still potentially take advantage of market conditions. Your strategic asset allocation dictates how your long-term portfolio is assigned to the different asset classes. The partner to strategic asset allocation is tactical allocation, which requires shifting around relatively small percentages of an asset class (or classes) to capitalise on a situation. For example, you might reduce your SA equity exposure by 5% in favour of cash if you felt the SA market was heading for a correction.

Tactical asset allocation very often takes place at a fund level rather than at portfolio level; the funds you are invested in will often shift their fund assets around (mandate dependent) to cater for their current market views. It’s usually more efficient for the fund managers to make these tactical moves than doing it yourself, because they can often move quicker, more cost effectively and tax efficiently.

A sub-sector of asset allocation is geographic/country allocation: the question of where you allocate your foreign cash, bonds, property and equity. Part of the never-ending international news flow represents the very slow – but visible – shift in global power. The aspects of portfolio construction I’ve mentioned so far haven’t required any change, but this is one area that does deserve attention, although not immediate action.

It is very likely that the East will become increasingly important in its contribution to global GDP. In turn, its currencies, most likely the renminbi (China), will become more relevant.

"Sometime within the next few years it may make sense to have a few percent of a portfolio exposed to eastern equity markets and, possibly, bonds."

Sometime in the future we are also likely to see a shift from the USD being the only viable currency joined by, probably, China’s renminbi. This will take a long time (more than ten to 20 years) to play out. My gut feel is the Eastern currency viability is further off than equity market viability.

This article is not all-encompassing but I do hope it’s thought-provoking. When making investment decisions it’s important to lift your head above the turbulence and take some time to think about what matters, what’s here to stay and what’s passing noise. Where’s the future (WTF)?