BEWARE THE BULL MARKET – 5 Ways To Protect Your Investments in 2021

Global financial markets have rebounded strongly from March 2020’s low, but Sygnia’s Head of Investments Iain Anderson warns investors to start preparing for the bull’s stamina to wane.

Global financial markets have rebounded strongly from March 2020’s low, but Sygnia’s Head of Investments Iain Anderson warns investors to start preparing for the bull’s stamina to wane.

Vaccinations are rolling out, the world is (slowly) reopening and financial markets appear to have not only survived the Covid-induced onslaught far but have bounced back with bull-like strength.

At the time of writing the dominant global indices had recovered in record time from the March 2020 low, with the S&P 500 surging more than 90%, the Dow Jones Industrial average jumping by around 88% and the Nasdaq rebounding by an impressive 112%.

So investors can now breathe out, relax and stop worrying about losing their nest eggs, right?

Nope, sorry. I take no relish in being a naysayer, but the fact is that now is the time to be hyper vigilant of your investments and, if needed, make important changes – and quick.

The reason I’m issuing such a strong warning is because I believe South African investors have been lulled into a false sense of complacency, partly due to having enjoyed excellent returns since the since the turn of the century. Even taking into account the market crash of 2008, growth over this period has been outstanding.

Over the last five years, however, markets have delivered much lower returns, and, despite recent volleys, analysts expect this scenario to continue into the foreseeable future.

The underlying reason for this is that there is far too much debt in the world. Every single financial crisis we’ve seen since the 2008 crash has resulted in the accumulation of even more debt in order to plug leaks and buoy economies.

The Covid-19 pandemic is the latest and most extreme example, with global debt capital markets topping USD$10 trillion for the first time.

While the short-term economic boost has done much to soften the blow to markets around the globe, boosting economies by borrowing more is simply not sustainable.

Think of it this way: if you own two houses and three cars and are suddenly unable to service your home and car payments, you’re not going to get out of that debt by taking out more loans to cover monthly payments. If you’re not earning more to service the increased debt, payments will pile up and compound interest will eventually catch up with you.

This is, admittedly, a rudimentary analogy of the global debt situation, but the same outcome applies: something’s gotta give.

Just ask Japan, which struggles with a current debt ratio of 256% of GDP due to two lost decades of low growth, low inflation and low interest rates. For years, Japan has been neither bankrupt nor able to escape from this mountain of debt, leaving the country’s economy in a limbo situation that has come to be known as ‘Japanification’.

Fears that many more economies will fall victim to Japanification due to rising debt levels in 2020/2021 are very real, with the International Monetary Fund (IMF) warning in April that “[global] debt is getting closer to levels that were previously considered dangerous”.

The IMF warned that debts may, at some point, need to be rolled over at higher interest rates and that “this risk is especially relevant for emerging market and developing economies where debt ratios are already high”.

At Sygnia, we’ve long been tracking rising debt levels and adjusting our thematic investment strategies accordingly, even more so in the past year with the Covid-19 pandemic accelerating debts to risky highs.

But more to the point: what can you, the investor, do to ride out what is likely to be a low-return, volatile market over the coming years?

1. Reduce Investment Fees

First, and most importantly, scrutinise your investment fees.

If you’re earning compounded returns of around 25% per annum, fees tend to make up a relatively small portion of the gain received during the year and are not something that investors focus on too much. When returns are lower, however, the impact of fees is much more pronounced.

If, for example, you are only earning returns of 6% a year and your investment fees are 2%, a third of your growth is being paid away. This can have a big impact in the long run.

All else being equal, a 1% per annum saving on fees could enable you to retire three years earlier, or be enough additional capital to provide you with an income for an additional ten years longer in retirement.

While it’s difficult to say categorically what fee is too high, any fund with a total expense ratio of over 1.0% would make me uncomfortable. Even 1% is high; you can get away with significantly lower cost levels.

Fortunately, a growing number of low-cost passive options are available in the unit trust space and the Exchange Traded Fund (ETF) space that make reducing fees relatively easy.

2: Consider Passive Products

One of the surest ways of reducing costs is to invest in passive products that track a market index, as these will always be lower cost than actively managed funds.

Look first at what you can do with passive investments and only then consider paying up for active management. There will always be exceptionally bright portfolio managers who can add value over and above what a passive investment can give you, even after their fees have been paid, but finding them and monitoring them requires significant time, effort and resources. And even then, there is a lot of sense in mixing active managers with passive investments.

3: Invest Thematically

The next adjustment is to recognise that global thematic investing offers growth opportunities. Thematic investing focuses on the identification of long-term trends expected to cause structural, once-off shifts that will change the way the world works, for example investment opportunities presented by the Fourth Industrial Revolution and health innovation.

Blending thematic investment opportunities and low-cost passive investment strategies within an overall investment portfolio is an excellent way for South African investors to manage the low-growth environment.

4: Take control of your finances

If you hold investments in unit trusts, consider cutting out the middleman – the Linked Investment Service Provider (LISP). While convenient, these platforms charge a fee of around 0.5% per annum.

Where possible, skip the LISP and invest directly with the asset management company unless your selected LISP platform does not charge a fee. 

5: Question Company Funds

If you are in formal employment, you are probably a member of a retirement fund sponsored by your employer or an umbrella fund selected by your employer. This does not, however, mean employees don’t have a say in what fund(s) are invested in.

You are within your rights to ask theHR department for all the investment strategies available, as well as a breakdown of the management fees.

And if your company’s retirement fund does not include index tracking (or passive investments), write to the principal officer and ask that the trustees make such funds available. National Treasury’s 2019 Default Regulations state that index-tracking investments must be considered by trustees because passive investments can reduce management fees by more than a half – from an average of 0.90% to as little as 0.40% per annum.

As I said at the outset: this is no time for investors to be complacent. Be proactive and take charge of your investments now to make the turbulent ride we expect ahead far less bumpy, and far less painful.