<strong>By: Schroders</strong>

<h2>Only 8.5% of professional SA investors are planning to increase domestic exposure in the next year</h2>

A rising trend of sustainability in the face of climate change, the evolution of multi-asset strategies, and increasing industry digitisation and transparency, are among some of the biggest shifts that global investors are currently grappling with.

While these were some of the topical themes explored at the fourth annual Schroders Investment Symposium for South African investors, Doug Abbott – SchrodersSouth Africa Country Head and the event MC – was cognisant that, for South African investors, there are added pressures. Abbott explains that these come in the form of an uncertain political landscape, lagging economic growth and a volatile currency - which make the task of determining a suitable allocation between local and offshore assets ever more critical.

This became apparent after running an audience poll which asked attendees how they expect their offshore exposure to change over the next 12 months. “Out of the 150 institutional and retail clients who took part in the poll, 49% said they expected to increase their offshore allocation, with 42% expecting to maintain their allocations to offshore investments. This means that only 8.5% were looking to reduce offshore investments and allocate more to domestic assets,” says Abbott.

“It is therefore clear that trends in offshore investing remain very important for South African investors. This explains why we attracted such a high-quality audience to hear from our international experts on the developments and challenges that global asset allocators are facing in a rapidly changing industry and economic environment,” he adds.

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”. It is crucial, therefore, that investors understand what constitutes good sustainability in asset management and how this will impact the industry going forward,” said Ground, who presented research completed by Schroders, which suggests that the reliance of South Africa on coal 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, then discussed whether equities can be solely relied upon to deliver high levels of return over the next 10-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 says 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.”

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 <em>augment</em> rather than <em>replace</em> the traditional and fundamental analysis undertaken by fund managers.

Adding to this, Abbott says that the work Schroders is doing in this area is market leading.  “We remain at the forefront in this respect and believe that, over time, the use of data to augment traditional research will give our fund managers an edge over our peers,” he concludes.