Sanlam Four braces for ‘binary events’ of US election and potential rate hike

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Sanlam Four fund manager Mike Pinggera believes this is not the year for a high conviction in markets.

The fund manager halved the long equity option on its £112m Multi-Strategy fund in the summer, increasing real asset exposure ahead of short-term uncertainties.

Pinggera says: “We entered this year with a market where we could see higher interest rates, we had the Brexit vote coming and the US election afterwards so it seemed to me this was not a year where I wanted to express high convinction views, which is unusual for a fund manager.

“This market really seems to be a market that could do very well but could be vulnerable to any changes.”

At the start of the year Pinggera had 30 per cent in long equities options, a type of equity derivative.

He says he was hoping for more clarity as the months progressed, but this has not materialised. As a result he has reduced the equity options to 15.7 per cent.

However, he says he wants to maintain the equity option on the fund, which currently sits with the growth part of the portfolio. He says this balance with income-focused assets makes the fund behave as a convertible, because at the moment “there is a real lack of visibility as to where market is going”.

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Pinggera says: “I came out of Brexit quite well, and thought I was in the right place so continued the theme of having safe and income producing assets alongside optionality to the upside.”

Before joining Sanlam Four, Pinggera, who manages the fund with Johan Badenhorst, was head of multi-asset at Insight Investment Management and prior to that he headed the multi-asset solution team at Credit Suisse for 20 years.

He joined the Sanlam Four in January 2013, when the Multi-Strategy fund was launched.

The focus of the fund is to deliver equity-like returns with lower volatility. Its aim is to outperform the Consumer Price Index by 4 per cent a year over five-year periods with a target of generating positive absolute returns on a rolling three-year basis.

He says: “My stance for this year was having liquid and income producing assets. I have government, corporate bonds and real assets like infrastructure, property and renewable energy and that part of the portfolio provides a stability in income.”

Throughout the year, infrastructure and renewable energy exposures have remained steady at 9 per cent and 7.3 in the fund respectively, while he slightly increased government and short dated corporate bonds from 10 per cent and 28 per cent, to 12 and 36 per cent respectively.

After the EU vote, Pinggera also added a property position, currently at 3 per cent.

Pinggera says: “We saw the big sell-off post-Brexit but I like real assets so I took advantage of some of the weakness to start to build a position in property. The property exposure now is in student accommodation, buildings in the private rental sector and a bit in large cap properties in land securities.”

The fund manager says real assets can guarantee him long-term protection.

He says: “The real challenge for investors at the moment is anything with a short-term view has just not been rewarded so you need to think longer term. Those real assets I like are linked to inflation, which is important. I won’t buy a 30-year government bond with a 1.30 per cent yield as it is now.

“I think about things like fundamental pillars of the economy so I look at infrastructure, housing and renewable energy. I’ve tried to think about things that will be around in 20 years time and may be more in demand.”

On emerging markets, which have recently bounced back and gained more popularity in multi-asset funds, Pinggera has a short position, but he is sceptical on the outlook for the asset class.

He says: “I had a position in emerging markets in the past, and since we launched the fund I was short on the region more often than I’ve been long. However, two months ago I just felt the emerging market relative underperformance had gone on for so long that I wanted to take the position off for the time being so I bought back some short positions.

“We believe the US elections and the likely rate increase will have an impact on emerging markets. These are classic examples of what could be binary events: they could be really good or really horrible. So on that particular trade I just sit on the sidelines.”

Overall, Pinggera says he is watching the market rather than acting, especially given the unprecedented strong monetary policy intervention by central banks globally.

He says: “We live in an uncertain world so I am cautious. We got a lot of hurdles coming, which we know about, like the US elections and the ongoing question mark on interest rates, although they should move in December.

“Central banks need to keep their powder dry but it’d be far healthier to have rates higher even if that would create some turbulence for investors.”