Fund managers who claim they can make money in all market environments are living a fantasy, according to Sanlam Investments’ Mike Pinggera, who says they should be more upfront with clients about what they can deliver.
The coronavirus sell-off of the past few weeks – exacerbated by today’s collapse in the oil price – has brought home to investors the importance of having some form of capital protection in their portfolio.
Yet Pinggera warned this is not possible without a trade-off when it comes to returns – which is something that fund managers are not always honest about.
“I’ve been in the City now for 31 years and pretty much every client I’ve met has had one fairly simple requirement: just go and make some money,” he explained. “But, of course, if you can’t make it, then don’t lose it.
“I built the Sanlam Multi Strategy fund with that very simple philosophy right at its heart, which is essentially to participate when you can and defend when you need to.
“Everything we do when we go about our daily business, whether we see opportunities or risks, is always matched back to that simple objective.
“One important distinction is that it is not to make money in every environment. I personally think that is a bit of a fantasy mandate. It’s quite simply, when the going gets tough, my job is to defend.”
Pinggera’s fund is based around three strategies: a global equity strategy, including exposure to six global equity markets and equity derivatives; a thematic strategy which refers to real assets that every society relies on; and a short-duration bond ladder strategy.
Sanlam Multi Strategy has proved its capital-protection credentials in the past few weeks – during the sell-off, a number of put options kicked in, reducing the equity exposure from a 2020 high of 28 per cent to a low of 1 per cent.
As a result, its maximum drawdown this year is just 3.21 per cent, compared with 14.71 per cent from the FTSE All Share, although admittedly this does not include today’s collapse.
Performance of fund vs sector and index in 2020
Source: FE Analytics
Despite this focus on downside protection, Pinggera fully intends to anticipate in the rebound when the market eventually steadies itself, saying that anything else is a dereliction of duty.
“If you are 100 per cent invested and you watch the market fall 30 per cent and then you watch it rally 30 per cent, the round trip is zero. You could say, ‘look, we actually did really well’,” he said.
“But without being mean, essentially what you’re saying to people is, ‘keep paying me while we hope it recovers’.
“Within the absolute return space, I think we actually have to take a slightly more proactive view, de-risk the portfolio, but again, maintain the ability to participate if and when things turn around.
“From my perspective, it is immeasurably easier to put risk on from a position of strength.”
Yet while Pinggera intends to participate in any rebound, he cautions against trying to time the market. The manager said that it will be his team’s process and mandate that drives decisions, rather than any individual trying to call the bottom.
For example, he pointed out that the performance of the fund managers that have done the best this year can be attributed more to luck than skill.
“We’ve all been talking about this sustained and extended cycle for the last five years or more,” he explained. “How many of those people talking about the end of the cycle cited coronavirus?
“Many people who were positioned cautiously at the start of the year were positioned cautiously because of trade talks and because of the US election. But what’s actually upset the apple cart is coronavirus.
“So you have got to look forward and keep mapping back and saying, ‘are we doing the right thing for our mandate?’
“Don’t forget that if you can see the problem coming, it is probably not a problem.”
The flipside to this disciplined approach is that Pinggera will, by his own admission, miss out on the greater upside that a more nuanced strategy may bring. For example, he said that even with the benefit of hindsight he would have maintained his overweight position in short-dated bonds over the past year, despite the fact their long-dated counterparts have done better.
Bond duration in fund
“The problem is, you can’t drive the car in the rear-view mirror,” he continued. “For markets to get the same return out of bonds that we’ve had over the last decade, we need to see those bond yields move to sizeable negatives.
“If you run the numbers, it’s going to be hard for the market to repeat the trick. I’m sure I won’t be alone in saying I’ve been underweight government bonds and I’ve been overweight short duration.
“But would I now completely reverse it? No, I think I would probably do the same thing again, given where yields were.
“Yeah, I think I’d do the same again.”
Data from FE Analytics shows Sanlam Multi Strategy has made 25.39 per cent since launch in January 2013, compared with gains of 15.53 per cent from its IA Targeted Absolute Return sector and 46.64 per cent from its CPI+4% benchmark.
Performance of fund vs sector and indices since launch
Source: FE Analytics
The £356m fund has ongoing charges of 0.96 per cent and is yielding 3 per cent.