December 4, 2021

What is an investment multi-manager?

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RYK VAN NIEKERK: Welcome to this Market Commentator podcast, where I speak to the leading investment professionals in the country. My guest today is Gyongyi King. She’s the chief investment officer at Alexander Forbes Investments, which is one of the largest multi-managers in the country. Multi-managers do not manage assets themselves, but rather find fund managers responsible for buying and selling securities.

Gyongyi has been in the asset management industry for 21 years. She spent seven years at Henderson Global Investors in the UK and five years at the Swiss private banking group, EFG Asset Management. She later moved to South Africa, where she was the CEO of Caveo [Fund Solutions] and she was appointed as Alexander Forbes’ chief investment officer in 2017.

Gyongyi, thank you so much for joining me. First of all, who is the largest multi-manager in the country?

GYONGYI KING: Thanks for having me today. The largest multi-manager we think is actually us. When we look around the market and we look at multi-management specifically, obviously from an asset management [perspective], it’s very different. But multi-managers? We think it’s us.

RYK VAN NIEKERK: I always find multi-managers interesting because you look at the managers of money, other asset managers, and not actually underlying investments. Take us through the process of what you look for when you try to find the best asset managers.

GYONGYI KING: It’s a multi-faceted process. There’s no one or two things you can look at to identify the best-of-breed asset managers. What we’re looking for is skillsets. We’re looking for a consistent application of a process.

We are looking for something unique that can really capture returns for investors, and we look to combine many different types of investments so that we can achieve the best return with the best risk profile.

So when we’re looking at asset managers, we spend a lot of time with asset managers to understand their processes, ask them how they get to their investment decisions, what stocks they are buying, why they bought one company and not another, or why they wanted to buy one bond or another. And it’s the reason we go through that process and it’s very iterative. So we do it again and again to ensure consistency and to ensure that the process is followed, not just on a consistent but a sustainable basis to achieve the returns, because markets do change and things are volatile.

It’s about understanding that when things do move against, for instance, an asset manager, the process remains intact so that when the market moves back and they can catch the returns again, we can capture that for our investors as well.

It’s very much an ongoing process. As Alexander Forbes Investments we look at all the asset managers in South Africa, and we look at all different types of asset classes to ensure that we have the full scope of the opportunity set.

RYK VAN NIEKERK: We’ll talk about the asset classes in a minute, but you say you look at all the asset managers in the country. We have very, very big ones – the Ninety Ones, Coronation, Allan Gray and the like – but how many of the smaller boutique asset managers do you actually regard as really good and invest through?

GYONGYI KING: We invest [through] the full range – the big, the medium and the small. What we’re looking for is expertise in certain areas. When we are looking at asset managers, we’re looking for the expertise, for instance in selecting stocks in a certain style. We invest in hedge funds, for instance, with a lot of boutique asset managers actually represented in the hedge-fund industry. When looking at those, you do look through a bit of a different lens because they don’t have a full product suite. As you mentioned some names earlier, they’ve got many, many different types of products. So you would have kind of a different way of evaluating them.

But from our business angle we look at all asset managers. Certainly there are differentiating factors with bigger versus smaller, but that doesn’t mean that smaller firms can’t have the same performance factors or the same outcomes as the bigger managers. So you do need to be on top of the whole full spectrum.

RYK VAN NIEKERK: Alexander Forbes is also the biggest administrator of pension funds on behalf of I think more than 2 400 companies in South Africa. Of course you manage their money through this multi-management approach, but does it add a layer of cost to such investments?

GYONGYI KING: Unfortunately in the investment space there are costs involved. So from an investment spectrum, you would add on that cost. It’s a separate service versus the administration costs, for instance. The administration is the one level, but the investment level is obviously at a different layer of the value-add. It’s about making sure not just that the administration’s done from the pension fund, but that it is being invested in a certain way and the cash flows are being handled obviously by the administrator through to the multi-manager. So without doubt it’s about making sure that there’s value for money in all those different layers of costs, and the end investor, which is the retiree, is getting the outcome that they need.

RYK VAN NIEKERK: If you’re working at a company, a normal salaried individual, and you have the option – I know legally you can’t – of contributing towards an RA [retirement annuity] or investing through Alexander Forbes, what would the cost difference be?

GYONGYI KING: It’s hard to say because all circumstances are different. But there is certainly a benefit to being with, for instance, a big aggregator, a big investor such as ourselves because, like with most things in life, size does make a difference from a cost perspective because you get the economies of scale, and we certainly think there is a big benefit from an individual versus being with the scale of Alexander Forbes. You can certainly get a cost benefit from that.

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RYK VAN NIEKERK: Let’s talk about asset classes. Of course you don’t invest only in equities. What other asset classes are you looking at?

GYONGYI KING: One of the asset classes that’s actually done very well for our investor base in the last few years is hedge funds. Hedge funds can be quite misunderstood out there.

Hedge funds are really designed to be less volatile than your general asset classes, and add value in times which are volatile – which we certainly know the last two years have been.

They have added a lot of value to portfolios over the last couple of years. We look at private market investments. These are investments that aren’t in the listed space.

RYK VAN NIEKERK: What type of hedge funds are you looking at?

GYONGYI KING: We look at all of them. Most of the hedge funds in South Africa are equity-related; they buy and sell, or [they] long- and short-list equities. But we’ve also got fixed-income investments. We’ve got the full range, a full mixture of anything really that’s available in South Africa. We don’t necessarily invest in all of them, but we do the full range.

RYK VAN NIEKERK: Can you name a few of the funds you actually invest in?

GYONGYI KING: I can. There are some of the older hedge funds in South Africa, such as Peregrine [and] 36One. Certainly, if you look on some of our fact sheets, you can see many less familiar names; like I said at the start, much more boutique firms probably less well-known to the investing public versus some of the larger firms that we now advertise quite a lot and [which] are quite familiar to everybody – the man on the street, as it were.

RYK VAN NIEKERK: The other asset classes you are looking at? I would assume private equity is also in there.

GYONGYI KING: Yes. We also invest in private equity. It is a bit tricky in the private equity space because of liquidity; investors obviously have different liquidity flows when they need their cash available, and private equity by its construct means that you do tie up the capital for quite a long time. Again, I think that’s the benefit with being a bigger investment firm such as our own, that we have obviously a lot of investors that buy and sell, and obviously units in their own investments that we can look through kind of for the long-term investment.

It is quite difficult for individuals to access this area because of liquidity in the lockups. But we are fortunate, given our scale, that we are able to access them – and they do offer different types of return profiles.

RYK VAN NIEKERK: Which of the asset classes are actually the top-performing ones at the moment? Let’s take a three-year view.

GYONGYI KING: Three-year forward-looking or backward-looking, because it can often be quite different?

RYK VAN NIEKERK: Let us start with backward-looking, and then what you expect for the next three years.

GYONGYI KING: It’s been a very volatile time from an equity perspective. We had a draw-down last year, but equities generally have performed quite well. Your global assets have done quite well in the environment that we’ve been in. Most growth assets have been supported by low interest rates, and what had been low inflation. So your growth assets such as equities had done very well. And if you drill through things like technology, it’s quite well known that technology stocks have performed very, very well – straight through the pandemic as well.

What we have found just recently in this year after a very big kind of dip last year is that global property has performed exceptionally well. It’s actually the best-performing asset class this year.

RYK VAN NIEKERK: And going forward?

GYONGYI KING: Going forward it’s becoming increasingly more difficult to have some visibility. Inflation’s a big worry for the market at the moment. If inflation does start to increase more than we expect – when I say ‘we’, that’s the market – it could have some material effects on most asset classes.

So what you’ll probably find is a bit more of a shift towards inflation-protected assets. They’re things like infrastructure, assets that derive their cash flows directly linked to inflation.

They can increase the cash flow because it’s linked to the inflation rate. You could see a pickup in those kinds of asset classes.

We do think it’s going to be a tricky time because there’s a lot of volatility out there and news flows are affecting the market quite dramatically. So I think volatility. If you can get some more absolute-return investments, investors might start switching towards those.

RYK VAN NIEKERK: We are seeing inflation rising all over the world. We’ve recently seen the US inflation rate reach 5.4%, which is a lot higher than the interest rates, so interest rates will start to rise in the US. The question is just how fast they will rise. So, if you want to hedge yourself against that and want to invest in asset classes like infrastructure, how do you go about doing that?

GYONGYI KING: It’s very tricky. Obviously because we’ve an institutional basis we have access to a lot of things that you actually can’t get access to. I think it’s about really understanding the inflation effects in your own portfolios. It is difficult. It’s a difficult area and it’s about also ensuring that there are certain kind of equity strategies that could also protect against inflation, depending on your type of strategy. I can’t really say exactly what, because it all depends on the individual. But I would say that it is getting increasingly difficult to predict that inflation spectrum because, if you listen to the US Federal Reserve, it’s telling you that this is transitory – which means you shouldn’t be too concerned. That’s their message.

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However, if we have a long-term inflation outlook, it could shift investments. So it is difficult to say because it all depends on the different portfolios.

RYK VAN NIEKERK: Have you in your main portfolios started to become more cognisant of the risks inflation has, and are you investing in these inflation-protection assets, to put it like that?

GYONGYI KING: We are very diversified. We have adopted a diversified approach. We’ve had these assets in our portfolios for quite some time. In the private investments that I’ve been speaking about we’ve had infrastructure investments, for instance in South Africa, for quite some time and globally. We don’t follow a very targeted approach of calling any one asset class. We think the prudent thing is to be diversified across all that we think will generate returns over the long term. So we have had it for quite some time.

We are looking at the various ranges available, and really at the moment it’s about making sure that the risks are balanced in portfolios.

What can happen when things are volatile is sometimes risks can creep into portfolios that you’re unaware of. So obviously there is a cautionary note for investors.

RYK VAN NIEKERK: Do you think a fund manager can be overly diversified?

GYONGYI KING: I think that’s definitely the case – in multi-management, probably your biggest risk. It’s something that multi-managers should always be reviewing – the number of managers, for instance, that you have in your portfolios. You don’t want to end up with so many stocks that you end up looking like an index portfolio. So you definitely can. That’s really about making sure that you’ve got the right analysis to understand that you’re not overly diversified, and that you still are taking active risk to get the returns that you need to get. So it definitely is something that can happen, and it’s something that everybody needs to be aware of.

RYK VAN NIEKERK: Let’s talk about the local market, the equity market. How do you view the current valuations?

GYONGYI KING: We do speak to a lot of people in the markets; a lot are viewing South Africa in a positive light. It does depend on which sectors you’re looking at. Obviously certain sectors have done better than others in the last year or so, reacting to, for instance, the big resource climb that we’ve seen. The South African market in itself is obviously a market that’s quite concentrated in a few areas and not very diversified nor reflective of the real economy, actually. So it can be difficult to match the two. But in our world of multi-management, we don’t take a view on the South African market. We rely on the asset managers to do so. So I can’t really comment further than that.

RYK VAN NIEKERK: You obviously have to adhere to Regulation 28. Apart from the normal limitations, does it affect you in a significant way?

GYONGYI KING: Yes. It’s quite restrictive about how much you can have for instance offshore. You can have only 30% in a retirement fund offshore, and you tend to find most of your growth strategies have that. It also regulates how much you can have in things like hedge funds or private markets, and it also does limit your growth assets from an aspect of equities and property. But it does give you restrictions. It’s obviously intended to protect investors so they don’t end up with too much of one type of risk in portfolios; they are diversified. It’s a global regulatory thing to be more prudent in portfolios and in South Africa there’s obviously a local bias as well from that regulation, forcing about 70% of the portfolio to be local assets.

RYK VAN NIEKERK: Do you think that is detrimental to the returns? If there wasn’t Regulation 28 do you think people saving for retirement would be better off?

GYONGYI KING: I think when saving for retirement we always must be cognisant that we’re saving for a rand-based retirement. Obviously it’s not the case for everybody but if you take that as a generic view, you need to be very careful about currency risks.

So, for instance, when there’s the offshore-onshore debate, we need to be quite cognisant that currencies are very volatile and that 70% is almost taking out a lot of that currency risk. I think it does depend where we are in the cycle, and where the valuations are. Sometimes it’s difficult to get to the returns that you need to get to, and other times there’s a lot of opportunity. I think there are opportunities in South Africa that creep up from time to time in terms of valuations. We do know that the rand, for instance, can be very volatile and go to extreme levels, and that does give opportunities for portfolio managers to shift portfolios around.

But I think generally speaking we need to be quite cognisant of the fact that liability is in the rand, so we always need to be thinking about the rand-based effects of anything that we’re doing. In many respects, even if it was unencumbered from a regulatory perspective, I doubt you’d be a hundred percent globally allocated from a retirement-fund perspective.

RYK VAN NIEKERK: Gyongyi, thank you so much for your time today and thank you for sharing your insights.

GYONGYI KING: Thank you for having me. It’s been a great pleasure.

RYK VAN NIEKERK: That was Gyongyi King. She’s the chief investment officer at Alexander Forbes Investments.

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