Personal circumstances – not the economy – motivates most SA entrepreneurs to de-risk – Reyneke van WykPublished on 29 Oct 2020
Take time to tilt portfolios and maintain more control
Our most recent Four Pillars research (Source: Stonehage Fleming, 2020) found that 34% of respondents plan to reduce risk in their portfolios following the Covid-19 pandemic. Although the numbers are lower – at 10-20% of clients – this trend is clearly reflected in our South African client base. The reasons, though, are not perhaps what you might expect them to be.
Among those looking to de-risk, were some for whom the fallout from the coronavirus was the first major market correction they had experienced. Having sold their businesses within the last five or so years, theirs was an emotional reaction. Watching the correction unfold, they started to question whether their investment mandate was in line with their actual risk appetite, which suddenly felt lower than they’d previously thought. This group, however, was a minority.
The majority of entrepreneurs we work with were motivated by more practical considerations – change in their personal circumstances, caused by the short- to medium-term health of their businesses and uncertainty. Rather than fundamental fears about the economic outlook, this group’s main concerns were about oncoming requirements for more capital. The natural course of action for them is to adjust the risk/return objectives of their portfolios.
By reducing more volatile risk assets, investors can minimise the likelihood of realising losses from taking out capital while assets are down. It makes sense, therefore, to keep the proportion of capital they may require in the short term in lower risk, liquid assets so they are readily available when needs must. Doing this over a number of weeks or months is often the prudent thing to do. Allowing adjustments at more attractive levels gives investors more control as markets bounce.
It is simply not possible to predict the future with consistency; any inclination to ‘time’ the market should be discouraged. Far better to ‘tilt’ investment portfolios so they are optimally positioned to benefit from the market environment.
In the post coronavirus world, we have introducied gold into portfolios for the first time in many years and increased the allocation to inflation-linked bonds, both of which should help protect client portfolios against a potentially weaker dollar. Reducing a portfolio’s allocation to ‘value’ in favour of ‘quality’ equity managers who invest in companies with strong balance sheets and focusing on sectors like technology and healthcare should also provide confidence.
Reyneke van Wyk is Head of Stonehage Fleming's Investment Division in South Africa.
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