The Year that was
So we arrive at the anniversary of the month in which everything seemed to change! A year ago, SA had announced its first COVID-19 cases, and by all accounts was gearing up to a response as it came to terms with a rapid spreading pandemic. Who knew what to expect?! In early March, a mate and I modelled our own forecasts and were struck by the sheer speed of spread. To my mind, that has been the real concern around COVID-19. The speed accounts for the bulk of the risk. Relatively, the severity was never exceptional, but the stress load due to rapid case count increase would strain healthcare resources. The maths was overwhelming and I in turn was very nervous. This is how we handled this last year for our clients, and our business.
To understand our response, we need to reflect on some of the core values and principles I have aimed to build into F&A and the continuation of these values into personal strategies.
It is my view that humans are more risk averse than greedy, and so while we exhibit greed quite naturally, we will quickly bench it in order to protect against threat. For this reason, humans crave consistency. Predictability creates order, which removes chaos and makes us feel more organised, more at peace, more in control and less threatened. It is further my view, that for a strategy to reach completion, individuals and teams need to be able to hold on to it the entire way. We could build out the most efficient strategy but if it bucks people off, we never get to the end of the ride. And so in this search for efficiency, we have to recognise the very real balance that must exist between optimising for and making a plan habitable, and better yet, enjoyable. One of the strongest tools I believe exists within this framework is a strategy that is flexible and adaptable. Being able to adjust for changes, without stopping the ride and while still moving towards the destination, allows for consistency and removes the big opportunities for failure. In short, a strategy that is more like the tortoise, is far likelier to reach the finish line, than one that is like the hare - even as attractive as the hare is. A huge part of translating these principles into strategies is in managing risk. Most often the boring stuff, void of sexiness and flash.
CLIENT RISKS
Client portfolios and strategies were already built with large risk management mechanisms, and so when markets pulled back massively last Feb and March, our portfolios pulled back on aggregate, less. This is important although somewhat difficult to notice. From an optimisation perspective, this is often where the victory exists, in losing less. From a human perspective, any loss is deemed failure and so it was important we manage our clients through this difficult period.
Remember, at this time last year, markets we experiencing history making declines, the speed of which had never been seen. It was more than reasonable to expect panic. To address this wild uncertainty, we aimed to ramp up communications. At the same time as we were increasing communications, our partnering specialists were in turn, optimising portfolios, adjusting and tweaking to accommodate never before seen events. PortfolioMetrix and the 200+ specialists we plug into your solutions were working with purpose to make sure that they managed your risk at this time as well as they could. You will recall we executed a remarkable 4 rebalances of your portfolios last year. Some of your friends and family may not have had their portfolios updated even once.
We immediately ran personal client calls, reminding each of our clients that although unpredictable and scary, markets have behaved wildly before and that further to that, the strategies we already have in place are built to accommodate these events.
We increased mailers and thought pieces. Running commentary on our research on both the pandemic, as well as markets and how we planned to navigate the coming period.
We took additional meetings where clients were concerned, or where their lives were busy changing. Our aim within these meetings being this marriage of optimising while creating certainty. This client facing work took us the remainder of the calendar year to complete as life continued to be unpredictable, and change. Almost every strategy was tweaked in some way shape or form, while not losing focus on the end goal of finishing the ride.
Amazingly, and in unprecedented fashion, markets rapidly recovered over the coming months. Economies lag markets, and so impact is still being felt by our clients even up to today, but portfolios had bounced and that helped in relieving pressure and fear. We are happy to share that our portfolios finished the calendar year with positive returns. Not everyone managing wealth can say this. Our strategy of risk management and losing less, paying off under incredible circumstance.
From a numbers perspective, we had a 99% success ratio. Unfortunately, we did have a couple of clients that made some calls which in fact increased their risk, and even against our counsel, the changes ran at their instruction. This has proven costly for them. Sadly, I am not sure what we could have done differently.
BUSINESS RISKS
The greatest risk that exists for any business is to lose clients. We knew that losing clients would be devastating to our long-term vision this business still holds. I covered above how we addressed this concern through improved communication, contact and realignment of strategies as life happened to each of our clients. We aim to be there for our clients at all times, especially at the most nerve-wracking and I hope we achieved that over the past year. To complicate matters, my Dad’s retirement also served up the chance of creating uncertainty and discomfort.
To de-risk our business, we made the early call to terminate our lease at our previous offices in Jan Hofmeyr Road. This was communicated at the time and gave the business some cash flow room to maintain salaries if we, like so many other businesses, took impact. Fortunately, the impact was nowhere near the horror stories we have all heard over the past year and we in fact recovered quite quickly. We saw out the remainder of the year working remotely and have in the last 2 weeks returned to an office.
Our new office is a part of the Regus global operation and gives us dedicated working space at the Pharos building next to Westville Mall, as well as access to their 3000 lounges around the globe, meaning we can plug and play pretty much anywhere. It is a far more contemporary space, quite beautiful in fact, with our offices being our dedicated workspace, and then separately, a lounge, meeting room and board room, all available to see clients in. Happily, we are in walking distance of 3 lovely coffee shops and will probably take meetings there too! I found it particularly necessary to move back to an office that is away from home - my head needs this distinction otherwise I find there to be too much overlap. I want to be a husband and dad at home, and similarly, I want to be a professional away from home. I prefer the environments to be protected against each, it creates better balance for me.
While I was at the time uncomfortable about announcing my Dad’s retirement during a pandemic, I was comforted by the fact that the handover wasn’t unexpected. We had taken joint meetings with all clients for years and everyone had a sense of what would one day come. In fact, several clients chose to work with us as we had a continuity plan in place, something very few teams have. When the time was right, we were prudent and consistent in our approach to carefully communicating the ballies retirement and happily, the response was overwhelmingly positive.
GOING FORWARDS
This business remains exceptionally well placed to continue its commitment to providing unbiased, world class solutions. While change is inevitable, it is my view that the market will over the coming years move more towards our model than away from it and I take confidence in the fact that I am having several conversations with exceptional individuals that are wanting, in some shape or form, to align with us.
If we can maintain our principle of removing greed, and managing risk, well then we shouldn’t lose very much. And with a good dash of smart work, we could make even more of a difference. Please hold us to it!
February 2021 Update
This month's piece is compiled by Russell Brown, Investment Analyst, PortfolioMetrix.
Local Update
South African Property had a spectacular month returning 8.6% followed by SA equity which posted a very respectable return of 5.3%. The JSE was primarily driven by sharp gains in resource counters, these were supported by impressive financial results and the tailwinds of global commodity prices. The rand was essentially flat over the month, ending at R15.07/$. Although this hides a significant strengthening (and subsequent weakening) to R14.44/$ in the middle of the month. The SA 10-year bond yield increased from around 8.75% to 9.10%. Domestic bonds continue to provide attractive real yields, which are particularly appealing to foreign investors in a low global yield environment.
Global Update
January was a mixed month. It started well on optimism over vaccine rollouts, fiscal easing, and the potential for further monetary easing. But markets then reversed as concerns emerged over delays to vaccine rollouts in mainland Europe as well as new strains of COVID-19 becoming more prevalent. January also saw a strange (and legally questionable) battle occur between hedge funds and retail investors (organised via a Reddit social media channel). This massively inflated the share prices of some fundamentally unsound companies (notably GameStop) as the retail investor army bought up stock in large numbers, pressuring hedge funds to take losses on their ‘short’ trades. Follow this link for more detail on events which transpired in the month.