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Sunday, January 1, 2012
Low yield challenge

The daunting prospect of negative real returns will soon drive growing demand among financial advisers for a survivor’s guide to prudent investment, predicts Absa Multi Management.

Negative real returns even endanger ‘safe havens’ such as cash which can lose out significantly to inflation, says Miranda van Rensburg, lead analyst at the multi-manager. Meanwhile, uncertain markets push up risks. “The way forward requires best-of-breed fund management that’s nimble enough to dodge the downside and deliver enough out-performance to keep wealth intact.
“When median performance might lose out to inflation and market weakness, outperformance by a blend of top asset managers is demanded – which is why we believe advisers could drive a significant trend to multi-managed solutions.
“Investors need a survival guide. The nearest thing to it is expert selection of top performers backed by constant monitoring to ensure no backsliding.”
Numerous factors contribute to current difficulties, including:
• A continuation of historically low interest rates;
• Rising inflation;
• Potentially flawed intuitive responses (buying riskier equity assets may seem appropriate but I-net data on five-year annualised Alsi real returns shows low rates are poor predictors of future real equity returns);
• Negativity outweighs conviction (few asset managers remain at record low equity weightings, despite risks around valuations and future earnings, but only because other assets don’t offer much value either);
• Bonds offer little promise in view of unattractive local yields and risks across US and European bond markets;
• Safety becomes costly, with US inflation-linked bonds trading at negative real yields as demand for such protection inflates prices;
• Local inflation-linked bonds seem promising, but come with high volatility because of their long duration;
• Commodities provide some inflation protection, but success relies on a weak rand, implying big currency risks;
• Gold may seem safe, but even sophisticated investors are unsure whether to buy the metal or listed gold-miners;
• Buying into market weakness may appeal to those with deep pockets and long horizons, but unprecedented crises may drive markets even lower; and,
• Locking in profit on every upturn may look good but in a market trading sideways is not always possible.

“As we enter a new era of low growth and negative real rates, asset managers will have to work hard and be more agile than ever,” says Van Rensburg.
“Low investment returns also heighten fee sensitivity among financial consumers; another argument for multi-management as manager selection and diversification can be combined in one cost-effective solution customised to an investor’s profile.
“Just as carefully picked stocks can provide sound relative returns even in a low yielding market, carefully selected managers can provide positive returns in a negative-return era. A low return environment will therefore spotlight good performance and the benefits of a multi-management approach along with it.”

Copyright © Insurance Times and Investments® Vol:25.1 1st January, 2012
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