The search for higher ground

The 2017 i3 Summit takes a global view of opportunities amid uncertainty

‘Finding higher ground’ was the theme of the fourth i3 Summit, hosted by Sanlam Investments and Glacier by Sanlam. The Johannesburg event took place at the Sandton Convention Centre on 25 May 2017 and was attended by more than 400 delegates, while the Cape Town event on 1 June was hosted at Spier Wine Estate. The speaker line-up included eminent thought leaders from across the world, including former US presidential adviser Dr Pippa Malmgren, political analyst Max du Preez, the president of Wells Fargo Asset Management, Nicolaas Marais, and the chief executive of the Nucleus Financial Group, David Ferguson.

The purpose of the i3 Summit is to host experts in economics, politics and the investment industry, independent thinkers who look at the world through a wide-angle lens and who are at the forefront of their respective disciplines. ‘Many of us here remember the fall of the Berlin Wall, we have spent most of our adulthood in the hope that the world was moving towards unity and that the United Nations would keep the peace. That has more recently proven to not be the case,’ Jurie Strydom, CEO of Sanlam Personal Finance, pointed out. ‘What we do know is that our ability to learn and to adapt is the most powerful tool we have to survive these changes.’

The local political turmoil is causing sleepless nights for many investors, as effective revenue collection and efficient and appropriate expenditure by the state is necessary to grow the economy and with it investment returns. ‘We have seen much darker days as a nation,’ political analyst and author Max du Preez reminded the audience. Du Preez mentioned many positives, including South Africa’s vibrant and free media, a strong Constitution, benign inflation, and the absence of tribal warfare and a dissident military faction. He raised his concerns, though, around the slow capture of our previously strong institutions, such as the Hawks and more recently SARS. ‘But South Africa has a built-in self-correcting mechanism which I have not seen in other countries. And this time it’s not strong leaders like Mandela leading the way, but the people as a collective that are forcing positive change.

‘Radical economic transformation is in the interest of all South Africans,’ said Du Preez. ‘But how do we apply radical economic transformation without it ending up as radical looting?’ Du Preez argued for the reduction of a bloated bureaucracy, the transformation of the education system for long-term results and skills transfer and apprenticeships as a short-term solution, for state capitalism according to the model followed by China and Singapore, expanded family income grants as in Brazil and land reform in the small-scale, collective farming model of countries like India. These reforms will not happen overnight, but long-term investors can look forward to a healthy, more equitable economy once the transformation is complete.

Nazmeera Moola, co-head of Fixed Income at Investec Asset Management, highlighted how the socio-political events of the last decade can be linked to the global financial crisis. ‘History shows that a weak economy is one of the main causes of populism,’ she said.  If growth picks up, we could see a reverse in the current populism trend.

‘Locally, we’ve seen inflows accelerating since the cabinet reshuffle. But these foreign inflows have disguised other factors. Three worrying factors are the growth outlook, weaker government revenues, and the resultant higher borrowing costs. Our growth outlook for this year has been revised down to 0.9% from 1.7%,  due to the negative impact on confidence following the cabinet reshuffle. Rating agencies will take a view on our ability to generate revenue and taxes, as well as our ability to control expenditure,’ she said.

Dr Pippa Malmgren, economist and former US presidential adviser, observed that all countries think their problems are unique, but globally citizens are asking governments the same two questions: 1) Why is my wealth being distributed in a way that does not benefit me? And 2) Why are you in charge? A large portion of the Trump supporters are extremely anxious as they’ve realised they will not be able to retire at age 65. The lack of financial security is the main driver of their conclusion that the social contract between the state and themselves is broken. With the discontent rising, citizens either protest by voting differently than before or taking to the streets, or they innovate. ‘This broken social contract gave birth to a very exciting time of innovation, and more investment opportunities,’ said Malmgren. ‘A likely outcome of the broken social contract is the doing away with money as we know it. Watch out for blockchain and more currencies like bitcoin.’

Innovation and evolution have also been the name of the game in asset allocation and portfolio construction over the past seven decades. Nicolaas Marais, president of Wells Fargo Asset Management, showed how portfolio construction developed from the days of Markowitz until the industry reached a point where there’s ‘an army of people hiring and firing managers and very few focusing on asset allocation.’ With more and more analysts applying the same thinking and with more granular investment universes, unfortunately alpha also came under pressure over the years. Fortunately, smart beta is now available for every possible scenario and that has brought the cost of portfolio construction down for the end client. ‘Deciding which factors to combine is the new active management,’ said Marais. He also explored some areas in which quants could assist fundamental analysis, arguing that keeping these two groups separate has not been in the client’s interest.

David Ferguson, founder of Nucleus Financial Group, gave a very insightful presentation on the lessons learned from RDR in the UK. ‘The winners have been those who cared about clients intensely,’ Ferguson pointed out. In fact, the biggest winners have been those businesses who moved to client centricity for commercial reasons even before RDR. ‘The biggest loser of RDR has been anything that’s commission-led.’ Asset managers also made the mistake of expecting RDR to be toothless for them, but when the rest of the value chain becomes incredibly transparent, the same pressure is applied to fund managers too. Current trends in the UK include the outsourcing of technical aspects, for example portfolio construction to third-party discretionary fund managers, and for planners to emphasise the client relationship and tracking the clients’ progress against their goals.

‘We exist to nurture and grow the wealth of our clients,’ concluded Robert Roux, CEO of Sanlam Investments. ‘And the i3 Summit is where independent investment intelligence meets to obtain as wide as possible a view of the world that affects clients and their portfolios. To make sure we construct the best possible investment solutions for our clients, making use of the opportunities amid all the uncertainty.’