Asset Management

Manty Seligmann
Director – Asset Management

 

 

 

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Investments: Spreading risk and locking in gains – the fundamentals of hedging

In the construction of investment portfolios, regulation prescribed by the financial authorities in South Africa allows the use of hedging tools to ensure efficient portfolio construction and to safeguard client funds. 

Over recent years, economies have experienced heightened market volatility, and – under the current regime of price fluctuations and instability – there have been numerous occasions when the asset management team at GTC has been able to make use of these hedging tools, ensuring currency protection within the investment portfolios.  

These currency hedges have had the effect of providing a more stable return profile and lowering the investment risk  for our clients.

Investment choice in our ‘always on 24/7 world’ has evolved way beyond the initial conservative, moderate, and aggressive portfolios which were available yesteryear. 

 

However, the choice to invest in a portfolio with access to investments across the full spectrum, to diversify risk and optimize returns, remains prudent and smart. 

The spectrum of investments available in a portfolio today will, in all likelihood, include an array of different asset classes, international and currency exposures, to aim at – and achieve – optimal risk-weighted returns.

The South African economy currently offers numerous positive and negative possibilities, making investment choices increasingly difficult.  On the negative side, we find ourselves – as South Africans – mired in political and economic upheaval, high-interest rates, and low growth, in addition to the routine macro and micro influences.

Concurrently our market valuations are cheap(er) as compared with other markets, bond yields attractive, and the rand has weakened considerably, allowing for a (possible) recovery in the next few months.

The Organs of State too are a mixed bag… with SARS and National Treasury notable as doing a good job by any standards, as they continue to uphold their end of the bargain – both fiscally and in adhering to conservative monetary policy.   

On the other hand, we have electricity and rail infrastructure woes, as well as politicians that seem unable to control corruption or to amend their constituent’s attitudes toward paying for services rendered.  

Additionally, the country was recently grey-listed by the FATF for not complying with anti-money laundering and terror proliferation financing.  Thankfully National Treasury has been working hard at rectifying the shortcomings and regaining acceptable credentials.

In revisiting the opening paragraphs, your GTC fund managers have ensured that tactical asset allocations include a spread of offshore assets denominated in foreign currency, whilst simultaneously employing the technique of hedging to secure the gains made in a portfolio through currency appreciation.

Explaining the hedging concept, Manty Seligman, Head of Asset Management at GTC explains that where the portfolio makes gains in value from (say) the dollar appreciating against the rand – with a corresponding diversity of risk – rand hedging ensures that a ‘normalised retraction’ of this dollar strength doesn’t reverse portfolio returns.

GTC applies focused monitoring of market movements to identify variances in currency, for example where there has been a positive pick-up due to an overvalued currency.  At this point, a hedging strategy is applied to the portfolio to lock in the gain that has been achieved. 

Over recent years as we have experienced heightened market volatility, there have been numerous occasions when GTC has been able to place currency protection into the investment portfolios.  The prevailing regime of price fluctuations and currency instability is a case-in-point.  

Often overlooked or actively rejected on a basis of ignorance or a perception that these are outlying,  exotic, derivative instruments, currency overlays or rand hedges are prudent conservative instruments reducing and diversifying risk, which should be included and utilised by a broad range of investors. 

For more information from one of the Asset Management team, or to get into one of our portfolios, please contact your GTC Financial Adviser or a  MAPS team member.