The New Year will see the trend towards passive and real asset investing continue, with ongoing volatility in a positively trending global market, a potential recovery in Emerging Markets and the rise of robo-advice in South Africa. This is according to Hywel George, Director of Investments at Old Mutual Investment Group, in his 2016 outlook where he highlighted the overall investment trends to expect from the year ahead.
George points out that globally, there has been a huge shift towards passive investing, with demand for Exchange Traded Funds and smart-beta index funds growing exponentially. “We expect South Africa to experience a similar trend for a number of reasons. Firstly, for the past few years there has been continued downward pressure on fees because, in a generally lower-return environment, fees comprise a higher proportion of returns, eating into the net returns delivered by funds. In addition, over a five-year period, a relatively large proportion of South African active fund managers have underperformed their benchmarks and this has increased investor interest in passive funds,” he explains.
“Lastly, in its review of retirement funding costs over the last few years, National Treasury has come out in support of passive funds, saying they are underutilised in South Africa.”
George also believes that 2016 will see the allocation of more investment in real assets in the search for higher returns. “As global yields have trended lower, the one place asset owners have been able to achieve the higher returns they’ve been seeking is in real assets, which include an illiquidity premium,” he says.
“Also, there is less perceived volatility in real assets because they are not marked-to-market on a daily basis − and they offer a smoother, less correlated, inflation-driven return path.”
Volatility in positively trending global markets is also expected to continue, according to George. He says that in the wake of the first, long-anticipated US Fed rate hike, developed economies are likely to go back to business as usual, with growth of about 3% a year. Over the longer term, the deflationary impact of technology on prices and imported deflation from emerging markets’ manufactured goods – given the very strong dollar – means that inflation and interest rates are likely to remain lower for longer, with inflation of around 2%.
“Against this backdrop, developed stock markets, which are generally not trading at expensive levels, are likely to achieve double-digit returns,” he says. “However, investors should expect continued global market volatility as investors move between risk-on/risk-off positions, which could be exacerbated by any uncertainty around Chinese growth prospects.”
Lastly, George highlights the rise of robo advice in SA in 2016. “The use of robo-advice has exploded globally, with estimates that assets under management could grow by 2 500% to US$489bn by 2020* from US$18.7bn currently. Robo-advice, which is online, automated portfolio management advice, is gaining traction as investment costs come under greater scrutiny and both young and older investors become more comfortable with migrating onto digital platforms,” he explains.
“In anticipation of robo-advice coming to South Africa, the industry needs to be smart about how we digitise the delivery of our savings products − for direct client contact and, importantly, supporting investment advisers. Also, digital advice is better suited to goal- rather than input-based investing and therefore it is important for the investor to build up a full picture of their financial situation.”