Only 8% of investors to increase domestic exposure

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A snap audience poll run at the fourth annual Schroders Investment Symposium for South African investors indicated that 49% of the attendees expected to increase their offshore allocation, with only 8.5% keen to increase domestic exposure. Some 42% expect to maintain their allocations to offshore investments, according to Doug Abbott, Schroders South Africa Country Head and MC at the event. “It is clear that trends in offshore investing remain very important for South African investors,” he said.

Jessica Ground, Global Head of Stewardship at Schroders, spoke about the growing importance of sustainable investment and stewardship. Despite only 35.9% of the investors currently investing in ESG or sustainable strategies, 65% of attendees said they expected to increase their exposure in the future, signalling a growing interest in local markets.

“The world is changing faster than ever and sustainability is no longer a ‘nice-to-have’,” she said. “It is crucial, therefore, that investors understand what constitutes good sustainability in asset management and how this will impact the industry going forward.” She highlighted South Africa’s reliance on coal, which could have a major impact on the local economy. “South Africa is more reliant on coal for its energy needs than China and its industries are heavily exposed to the risk of carbon taxes and higher carbon prices globally. Some industries, like mining, could lose up to 60% of their EBITDA – earnings before interest, taxes, depreciation and amortisation – as a result,” she explained. 

Remi Olu-Pitan, Multi-Asset Fund Manager, discussed whether equities can be solely relied upon to deliver high levels of return over the next ten-year period. “When it comes to diversification, it shouldn’t just be for risk management, but also for return management through multi-asset allocation – particularly today, when clients are requiring a high level of return, and we’re unsure whether equities can consistently deliver that return. As such, it’s important to let the other asset classes play a role in delivering these returns,” she explained.

Adding to that, Abbott said that South African investors have become very used to investing in balanced funds, both onshore and offshore, but these often give investors equity beta rather than fully diversified exposure.

“Interestingly, the audience expected equities to be the highest returning asset class on a long-term basis, with 85% of attendees voting for South African and offshore equities as their favourite asset allocation picks on a seven-year view,” he noted. 

Exploring a new approach to emerging markets, Gavin Ralston, Head of Official Institutions and Thought Leadership, posed some interesting arguments around whether there is still a case for emerging markets in the future, particularly China and India. “Global indices do not capture the breadth of opportunities in both countries, and with both countries accounting for a significant share of global GDP, the case for separate, stand-alone allocations to China and India is gaining strength. Additionally, the opportunity for sizeable outperformance of domestic indices through active management is far greater in these regions,” he said.

A poll at the event showed that the vast majority (83.7%) of attending South African investors and their investment advisers do currently have exposure to China in their portfolios, yet only 12.1% have exposure to China through a China-focused fund. 

Finally, Mark Ainsworth, the head of the Schroders Data Insights Unit, explored how fund managers can utilise data science to complement the traditional, fundamental analysis that uses customary sources of information such as audited financial statements, management visits, regulatory updates and so on.

“In a world of machine learning and artificial intelligence, it’s not enough to just have access to data; we need to know how to make sense of this data in order to effectively drive profitable investment decisions,” he noted. 

Ainsworth concluded by stating that Schroders believes the best results are obtained from utilising the power of technology – AI, machine learning and data science – to augment rather than replace the traditional and fundamental analysis undertaken by fund managers.