Economics, Politics and Funds

GAINING A DEEPER UNDERSTANDING INTO GLOBAL FUND MANAGERS | Economics, Politics, and Funds are all interlinked it seems in the world of fund management and investments.

As a small boutique discretionary fund manager, we have incorporated technology to help us navigate the world of global fund managers and global markets. Though many of the quantitative aspects are captured in our evidence-based process, the qualitative aspects are much harder to negate by means of AI only. It is thus crucial to continuously ensure you meet with managers in person too. The Citywire Retreat offered us such an opportunity. The 5th and 6th of June we were privilege to meet up with several leading global fund managers in small, interactive, and in-depth workshops. This aided us in understanding more in terms of the economics at play in this uncertain political landscape.

It was the first time Amity attended this event. The event was certainly enriching, both from an idea generation perspective (exposure to products and fund houses not yet available in South Africa) and from the perspective that it bolstered our insight into fund managers we have researched in the past.

There were also three keynote speakers focusing on the topics of not just team spirit (I know, quite an interesting topic for such a conference) but also economics, politics and funds.

It was a valuable time connecting with our peers (other allocators of capital) on both the retail and institutional side of the financial services and DFM sector.

Views from political and economic and political experts:

The outcomes from the Government of National Unity will be largely unclear as it is difficult to determine which policies the involved parties would sacrifice or hold as non-negotiable in these behind-closed-doors negotiations.
The ANC is likely to have to woo their voters as to why they are willing to partner with parties like the DA/EFF should a coalition be formed, given their commentary against working with them in the past. This also applies to any opposition party willing to partner with the ANC in the GNU.
Economic growth in South Africa will remain scarce.
Emerging markets will likely continue to grow in dominance. This despite reduced globalisation trends. The typical EM market consumer bases (because of population growth and growing middle income brackets) are a tailwind in this multi decade theme.
Accelerated digitalization will continue across industries. The interesting predicament globally, at current, is that emerging leaders can act without any accountability examples include Donald Trump and Jacob Zuma to name the obvious.

Views from foreign fund managers broadly:

In terms of interactions with fund managers it does seem a key theme across the board remains Artificial Intelligence. In most instances this them is said to continue to be the driver of earnings that still has a lot of room to unlock value across industries in its ability to reduce cost.
The prevalence of niche thematic funds and ETFs is also growing in the South African market. Foreign managers see South Africa as an attractive market given our sophisticated Financial Services industry. These concentrated bets are best understood in a portfolio context with a professional fund manager given their concentrated nature.
The climate response will produce opportunities as energy becomes scarcer as producers grapple with increased legislative obstacles. Equally ESG themes add a premium to the valuation of innovation and technology stocks because they meet the requirements to improving ESG outcomes.
Foreign fixed income will become more popular given that interest rates globally exceed inflation and are set to do so for the medium term.

Our analyst views:

The perpetual upward expectation of the effect of Artificial Intelligence, albeit significant, can lead to risks specifically as fund managers overestimate earnings growth. There are also a lot of fund managers that do not require that technology holdings be profitable in the current period- which is very typical behaviour in a trend bubble.
The positive effects of AI can be adopted into nearly any industry, and it is not necessary to have an overly large allocation to technology (and related) stocks to participate. Some examples are for instance the automotive industry which will incorporate robotics to lower cost. Another two examples would be the agriculture sector as well as the retail sector. You will not necessarily miss the opportunity by moderating a clients portfolio allocation to technology sectors specifically.
South African investors deserve better options in the foreign fixed income universe! Given that this asset class is becoming more and more prominent (given the consideration to Regulation 28 offshore allowances), investors can benefit from better diversification and positioning along the yield curve
Foreign fund managers seem optimistic with regards to South Africa and Emerging Markets where it falls within their investment universe and skillset (baring the volatile currency as we seek to form a new government).

It was overall an incredibly insightful event. We would like to extend our thanks to the team from Citywire SA for arranging the event and inviting some of the globe’s best fund managers.

As an investment team working in an outcomes-based environment, we are eager to see how some of these managers filter through our proprietary scorecard and look forward to some future engagements. We believe over time more of these managers may find their way in some of the global model portfolios in the range we manage and at time of writing this blog, we are as busy as ever to sit as an investment committee and digest all the qualitative information and see how we marry it with our robust quantitative process.