David Bacher: Why September was a horror show for equity, bond investors

The month of September was a shocker for investment markets, with global bonds rising at the fastest pace in memory, the oil price rising to 25% above the level of just three months ago, plus Nasdaq and S&P posting their worst month since December 2022’s smack. WTF happened? In our monthly catchup, Corion’s David Bacher shares his insights on the latest moves – and provides an insider’s view into the latest developments within South Africa’s money management industry. – Alec Hogg

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Edited transcript of the interview with David Bacher, author of The Corion report:

Alec Hogg: Monthly discussions about the Corian report have got a legion of fans that are growing more and more. And well, after the last month, who better than guiding us through the insanity that seems to have grabbed hold of investment markets around the world than Corian’s author of the report, co-founder of the company, David Bacher. I actually wanted to chat to you today about World Cup cricket – before we start on the markets, can the Proteas win the World Cup?

David Bacher: I’d like to think so. I mean, we do have the players to go far. I would say we certainly aren’t favourites for a reason. The perennial lack of all-rounders in the team, I think, could come back to haunt us. By no means probably the family expert in this matter, but from a personal view, I think probably our lack of depth in all-rounders in a game that has become very much dependent on going hard, going fast, scoring quick and having depth at the end is probably SA’s Achilles heel.

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Alec Hogg: Thanks for giving us that. I won’t put any money. In fact, I don’t bet at all anymore. I haven’t done for many years, but if I was a betting man, after hearing that, all right, David, the markets in September were just like insane. What is your big takeaway?

David Bacher: It was a very tough month for investors as stock markets worldwide slumped. Global equities ended down approximately 4%, and global bonds didn’t do much better. So, it was difficult for most asset classes, and the primary culprits for these poor returns were undoubtedly the significant rising bond yields. Oil rose very quickly, and you had a slew of global central bank meetings, which generally underline the prospects of higher interest rates for longer. So, against that backdrop, asset classes were under pressure.

Alec Hogg: Well, let’s look at those bond yields, and maybe you can give us a little more detail on that. In the United States, up by 0.5 per cent. That doesn’t sound much, but it is a lot when discussing 10-year investments.

David Bacher: It certainly is, and it was a very steep rise in the context of history and how far it’s come from. So, you must remember that the US tenure is widely considered the risk-free rate, the rate at which all asset classes are valued. So, if you look at equities, you use the risk-free rate as your discount rate for valuing shares. And how do you value shares? You discount all these future cash flows to today’s present value. So when the risk-free rate moves, it has a material impact on all asset classes, not just equities but also bonds and other asset classes. A lot of investment professionals out there, I think, would have been going back to the drawing board and trying to work out what it means for their positions.

Alec Hogg: And the impact on oil prices, why would that have been, had this knock-on effect?

David Bacher: Well, I think oil is so interconnected with the economy, you could argue maybe less so than five or 10 years ago with the move to cleaner energy, but that still doesn’t mean that it’s not materially an influential factor. There are two reasons why it’s such an important factor. Firstly, it’s an inflationary effect. What you’ll find likely is increasing global petrol prices and transportation costs. And that has not only inflationary pressures but also impacts the consumer. So, there’ll be a knock-on consequence for consumer spending. And that’s not good for companies that are chasing, in a tough environment, every man’s leftovers, dollars and rands.

Alec Hogg: The news coming out of the Federal Reserve from Jay Powell also seemed to give the market a bit of a jolt.

David Bacher: It was a very hawkish statement, and many people were starting to think that, including myself, and I think in the previous show I said, are we near the top of the interest rates cycle? We still are, but it will take longer for it to start coming down. So, rising interest rates are not a good backdrop for a global economy or asset classes.

Alec Hogg: If you look back through history when interest rates start falling, you should be really filling up on shares because equities do well in falling interest rate cycles. Of course, the opposite also occurs. And the consequence of this was very interesting for the year as a whole. I like how you’ve contrasted what’s gone on in China, down 4.4%, with what’s happened in the United States—exponential companies or fangs, which are up by more than 60%.

David Bacher: Correct. In the graph you’re showing, we label it Chinese Dragon Flaws and US Tech Source. The Chinese Dragon, there’s an ETF out there called the Golden Dragon China Index, which tracks large Chinese shares and some mid-caps, also quite IT focused, probably a bit more diversified than the FAANG. That is negative minus four. Then you look at the FAANG, the big FAANG plus index, the magnificent seven, so to speak, up 63% year to date. So, without that exposure, and thankfully for many investors, it is quite a large part of most indexes of people’s savings. It’s been a very tough environment. Emerging markets have been under pressure. Broad equity markets have been under pressure. In fact, the Russell 3000, which is a broader mid and small-cap representation of the market, is actually negative for the month, despite the S&P being significantly positive—largely due to those seven shares.

Alec Hogg: These difficult times that we’ve seen with high-interest rates, is that a bit like COVID, which accelerated the already established trends? And when we look at what happened in the online world, for instance, webinars suddenly came to the fore, and so on, there were many consequences. Is this perhaps something similar that’s going on in investment markets? It’s tough times. So people are getting more focused on what they can see will be the winners of the future.

David Bacher: I think what at Corion concerns us is that when you have interest rates going so quickly and so quickly escalating, it invariably leads to a surprise. When a company is potentially highly leveraged, having a much higher cost base, or the consumer is under pressure, when you have interest rates rising so quickly, the probability of there being a surprise coming from left field or some danger is escalated. And I think what this environment highlights to us is maybe, you know, be a little bit more cautious going forward, knowing that you don’t know exactly where the surprise comes from. If you go back to March earlier this year, you saw the three regional banks in the US under pressure and really folding because of a sharp increase in interest rates. Now you’re having it again. What’s next to fall? We don’t really know, but it’s potentially not the time to take them too much risk.

David Bacher: To some extent, the performance of boutique firms is to be expected. South Africa has some strong large asset management houses, but smaller firms with more flexibility and fewer assets under management have a competitive edge in a market where large caps haven’t been the sole performers. This is healthy for a more competitive asset management industry in South Africa.

Alec Hogg: Fairtree keeps coming up. Who are they?

David Bacher: Fairtree has been among the most successful asset management firms in South Africa over the last decade, growing significantly in terms of assets under management. They operate as a collection of different investment professionals under one brand, providing compliance, operations, and research support. They’ve been particularly successful in sector timing, leading to competitive performance and asset growth.

Alec Hogg: So, it’s a boutique of boutiques, then?

David Bacher: Correct, although what is considered a boutique can change as firms grow. At Corian, we’re looking at who might be the next Fairtree in the coming years, much like Investec, Coronation, and Alan Gray were in the past.

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Alec Hogg: And PSG, which continues to perform well. In terms of high-equity funds, it’s the boutiques that are dominating the best-performing funds list.

David Bacher: Yes, and it’s not surprising. The best-performing funds have generally been exposed to the ‘magnificent seven,’ the heavyweight shares in the NASDAQ and S&P. If you missed those and were positioned more defensively, performance would have struggled.

Alec Hogg: The best performer had a 36% return over the past year, while the average for the sector was 13%, and the worst performer returned 4%. So, even if an investor is in the worst fund in the high equity sector, they’re still ahead.

David Bacher: Exactly; the performance numbers are reported daily, while flow numbers have a month’s lag due to industry reporting standards. So, while we can quickly report on performance, inflow and outflow data are only available on the second business day of each month.

Alec Hogg: The biggest inflows in the past year went to M&G SA Equity Fund. Tell us a bit about this one.

David Bacher: M&G is part of a global franchise. While I can’t speak on their behalf, it appears that their asset growth is likely due to institutional and asset allocation decisions rather than retail investors. They’re probably increasing their focus on South Africa, anticipating a rebound in the market.

Alec Hogg: R4 billion rand invested with the company – who’s M&G?

David Bacher: M&G is a large global insurance company that was previously known as Prudential. They later rebranded as Prudential M&G after M&G acquired a stake, eventually dropping the Prudential name altogether. So the fund you’re seeing now, the Equity Only Fund, is essentially the old Prudential brand rebranded as M&G.

Alec Hogg: The Fussell C.I. Growth Fund is a completely new name to me. Yet it has seen a two billion rand inflow over the past month, making it the biggest this year. What’s going on there?

David Bacher: To be honest, the Fussell C.I. Growth Fund is also new to me. My strong hunch is that it might be a collection of financial advisors’ portfolios managed by CER. This would mean a financial advisor has structured a collective investment scheme and pooled client assets into this portfolio.

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Alec Hogg: Bob Fussell is one of the financial advisor names that pop up. It sounds like you’re on the money. Let’s close off with Outflows.

David Bacher: The larger outflows typically come from bigger asset managers, especially in a South African saving industry under pressure. That said, I believe there’s a growing comfort with boutique investment houses among financial advisors and retail investors, which is a good sign for the industry.

Alec Hogg: Old Mutual used to dominate the asset management industry, but we’re seeing a decline in their investor fund. Is this indicative of Old Mutual losing its former glory?

David Bacher: Old Mutual won’t likely dominate the asset management industry as it did in the past. The landscape has changed for the better with the emergence of new talent from other firms like Alan Gray, Coronation, and Investec. Old Mutual has also adapted its business model, opting to partner with and back other investment houses rather than solely manage assets itself.