You're listening to Strictly Business Podcast with Lindsay Williams.
Welcome, and today we are in conversation with Sumesh Chetty, Portfolio Manager for
the 91 Quality Capability.
Right, this is a fairly obvious statement to make, Sumesh,
but the first quarter was incredibly eventful in markets, but not quite as
eventful as April has been,
the start of the second quarter.
Given the moves we've seen in April, with significant uncertainty and that's an
understatement as a result of trump's
policies and the government of national unity's
stability coming into question both of those sort of juxtaposing in a way perhaps
the more important question is how were you
were you in your portfolio's position going in and
how are the multi-asset quality funds holding up has quality come to the fore in
other words uh thanks lindsay
great question um but describing it as as an info you know, you're probably putting
it very,
very mildly.
So we've seen probably the fastest decline in markets that we've experienced since
the COVID crisis.
You know, all other pullbacks have been far more gradual and have lasted obviously
a lot longer.
So I think, you know, given the environment we're in,
not only are you facing effectively a crisis,
When it comes to tariffs driven by President Trump,
I think there's also been a lot of hope in South Africa that has been dashed by, as
you've mentioned,
what's going on with the government of national unity.
South African investors obviously have been incredibly bullish.
But it's interesting that even though SA investors have been buying back into the
equity market, foreign investors haven't been doing that.
They've just continued to sell our market.
And it's obviously gotten worse in this period of crisis.
There was an expectation that 2025 would see much higher growth,
but we're already seeing negative revisions or downward revisions to that
growth number.
And I think also a little bit of a backdrop to this is that going into the
first quarter of 2025,
you could hardly consider markets as cheap.
So there were opportunities, but you couldn't close your eyes and just buy the
index.
And when you think about what we do, you think about our multi-asset funds, you
think about the concept of quality,
managing risk is a big part of it.
We're focusing on bottom-up opportunities.
And as a result of that combination of risk, quality and valuation, we actually
generated very strong positive returns in the first quarter.
Helped a lot by, of course, very strong returns emerging from the global
businesses that we hold in the portfolio.
So, strong quarter for us.
And it wasn't a quarter in which we had to make significant changes in our portfolios
either.
You know, equity focused, multi-asset portfolio,
the Opportunity Fund were very comfortable with the higher risk budget,
enabling us to actually maintain risk in the quarter.
But taking cognizance of the environment, obviously.
And then what we did in the cautious managed portfolio, which is the bond
focused multi-asset portfolio,
which runs at a much lower risk budget.
We did reduce our global equities slightly, and we added a bit of US
inflation-linked bonds to the portfolio.
I always say that when there's adversity, there's opportunity when it comes to
financial markets.
Have you made any material changes, given what's happened over the last few weeks
with the tariffs and all sorts of
other things as well as sideshows?
And have you found any sort of mispriced opportunities because of the irrational
behaviour or the panicky behaviour of certain
other market participants?
So we haven't made any changes yet.
We've got our eye on a couple of potential opportunities.
Nothing I'm keen to talk about yet because we haven't pulled the trigger on them.
But what's interesting is when you say mispriced opportunities,
it's not obvious yet that opportunities are necessarily mispriced.
So when you think about opportunities, you've got to balance risk and return.
You've got to be very careful of making a knee jerk.
decision, any kind of knee-jerk reaction, because investors either tend to, say,
buy the dip or sell everything.
And the biggest issue you have right now is President Trump's tariff policy is
driving uncertainty.
And when you think about the implementation of the policy or even the
lack of implementation of policy,
that reversing or pausing of his decisions, that creates a lot of
volatility and uncertainty in the market.
So you can think there's an opportunity that's mispriced.
And you could have had that thought yesterday.
But by close of business yesterday,
it's a very different environment that you would have suddenly found yourself in.
But, you know, broadly to your question, we're more likely to add risk here than
reduce risk here,
because ultimately, in order to generate appropriate returns over the long term,
you know,
you need to be taking risk when there's blood on the streets.
Yeah, it's very interesting, actually, because I saw a piece the other day which
suggested that since 1970,
every time the S&P has gone down by more than more or 17 percent, it's
83 percent of the time.
It recovers within the first year, not recovers everything, but starts to recover
and move on from there.
So you're clearly betting on that happening again.
Oh, well, not betting on happening again yet.
There will be a recovery.
Markets over long periods of time go up.
But remember, there are also periods where you have strong sideways markets or
volatile, sorry, sideways markets.
So you think about the period after the tech bubble until just after the global
financial crisis.
You know, the S&P went almost nowhere.
And if you think about the length of...
the crisis that followed the tech bubble or the downdraft in markets that followed
the tech bubble that was that was close to two
years you know and on the other side it was skewing perceptions is something like
the covert crisis where the s p
500 was peaked to trough went down in i think just over a month but when you think
back on covert you actually think that it was
that was far far longer but but you are right on average those markets will go up
over time we're just saying be careful
because the risk represents the opportunity, but you've got to make sure
that the valuation underpin is there as well.
Okay.
Investors during these times, of course, they want a safe haven.
They want a harbour where they can park their ship right out the storm and off
they go again into the sunset at some other time.
Can multi-asset funds provide a solution to this?
Or do investors just need to seek out cash, fixed income, or even gold, even
though it's run so hard?
Yeah.
So that's...
that's not as easy a question to answer i mean clearly multi-asset is probably the
best proposition for investors
so gold's been absolutely exceptional recently you've got gold above 3 100
announced right now so
we wouldn't buy it today and if you think about fixed income you know yields and
fixed income are going up even
in the us so they're not behaving the way you would expect them to
in a crisis and we'd want to see much higher yields from here before we got
interested in in fixed income cash
cash always provides stability in a portfolio and you know you hear the saying
that cash is king and in these environments of course cash is king
but it's always easier to get into cash than to time your exit from cash you're
making a massive tactical
allocation decision so when we think about any kind of safe harbor portfolio we'd
always advocate
multi-asset.
And we'd say that you actually want a strong focus on quality and you want a
strong focus on valuations.
Quality gives you balance sheet and pricing power, very powerful in an
uncertain environment.
And the focus on valuations gives you an additional level of protection against
those unexpected shocks.
And if you think about the environment we're in right now, I mean, Wednesday
morning, yesterday, 9th of April,
our sense was that the market was going to drift lower.
And last night.
President Trump completely changed direction, saying this was his plan all
along.
And now the U.S.
market was up about 10% after being down 19% peak to trough.
And what ultimately scares us and what brings us back, I shouldn't say scares,
but concerns us,
and what brings us back to the concept of quality and multi-asset, we've moved from
a world where the U.S.
was imposing tariffs on everyone, basically a trade war with everyone.
And that has now morphed into effectively a trade war with just China.
And this potentially could deteriorate further.
The risk is potentially someone wakes up and says, hey, you know what,
we should start taxing services from the US or the US starts imposing capital
controls on other nations.
So you've got to be very careful about the short-termism that arises from making a
decision around, hey,
I need to hold gold or I need to cash, I need to go to cash.
The only certainty today is that risk is higher than three months ago, risk is
higher than a year ago, growth is going to slow,
but you still need an appropriate balance of exposures.
Can you imagine if services, US services, were thrown into the ring?
Goodness me.
It doesn't bear thinking about.
Quality is interesting, because when I think of quality, I think of it being able
to navigate the choppy waters,
another marine reference there.
Has it behaved as you would have expected it to, given the recent few weeks?
of extraordinary times.
Exactly as we expected it to.
In fact, I'd say we got a lot of flack for quality last year when there was a very
narrow
market with businesses like Magnificent Seven, Tesla, Alphabet,
NVIDIA running hard.
And there was this concept of, well, quality doesn't work, even though you were
generating these very steady, consistent returns.
And that steadiness has can continue to emerge within the portfolios.
We're still doing everything that we've done in the past and we've promised to
investors.
But what's happening is the environment is changing around you.
And that's when I think the real appreciation for quality comes to the
fore.
Sumesh, thank you very much for your time as always.
Sumesh Chetty is a portfolio manager for the 91 Quality Capability.
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