Investment markets seem to be increasingly volatile and subject to news and events on the other side of the world. This can be put down to the speed of communication and social media, but also to the ease by which investors can buy or sell securities on any exchange in the world from the comfort of their homes.

For the speculator, rapid market moves are trading opportunities. But for the typical investor this volatility is not welcome, as it creates uncertainty and often leads to impulsive decisions, which undermine the achievement of long-term investment goals.

To solve this problem, a cornerstone of prudent investing is to ensure broad diversification in your portfolio. The reason behind this is that, consistently identifying the next asset or market sector that will perform well is nearly impossible. By creating a portfolio which holds a wide variety of shares and asset classes, the investor is likely to benefit from reduced volatility and enhanced long-term performance.

Food prices are going up worldwide. This is because large scale agriculture relies heavily on fossil fuels which are now so expensive. Much of the world’s arable land is given over to industrialised grain farming for both human requirements and animal feeds, and fertilisers, which are manufactured from natural gas, are vital to achieve high yields.  Farming is also highly mechanised and therefore food prices rise when we have high oil prices.

Our portfolios offer exposure to contrasting views on the economic outlook, opposing ideas on individual shares and different manager investment styles.

We attended an investment conference recently with presentations by over 30 top international and South African fund managers. Listening to them all, it was fascinating how many different and often opposing views they held – all with very well researched arguments.

We think these diverse opinions are a great opportunity. Our model portfolios benefit from the synthesis of these different views and investment styles, giving our clients access to an extremely wide range of securities, asset classes and sectors.

One of the key benefits of our Rutherford multi-manager funds is the extra level of diversification they provide. Investors gain access to all the usual benefits of managed funds, such as their particular asset allocation expertise, with the added layer of multiple fund managers’ views. This is important because rarely will fund managers perform equally in all market conditions. By diversifying across fund managers, exposure to the performance of a single manager is reduced.

The underlying funds that comprise our portfolios are actively monitored to ensure that they are delivering the best possible outcomes for investors in varying market conditions. Exposure to each underlying fund manager in a multi-manager portfolio is increased, reduced or removed completely depending on how each manager is performing, and how complementary he is with the other managers in the portfolio.

In constructing our multi-manager funds, identifying great managers is an essential part of the process. Just as important however, is recognizing fund managers’ varying styles or approaches to how they invest, such as value, quality or momentum. Manager diversification offers optimal exposure to those different investment styles, which provides a more consistent return experience throughout a market cycle. Simply put, your portfolio is exposed to specific areas of the market so that you don’t miss out when one style happens to be performing better than another. This approach blends fund managers together in an efficient way to benefit client portfolios.

Rutherford model portfolios are a strategic blend of world class South African and international funds designed to achieve consistent inflation beating returns at the lowest risk.

Bitcoin, blockchain, and cryptocurrencies are words that are so often used nowadays that we feel we know and understand them because they are so familiar. However, people have very different ideas about how they actually operate and the implications in our lives. Let’s have a look at the ideas and try to make some sense of it all.

Cryptocurrencies, despite the name, are not actual currencies. For thousands of years countries have issued currencies as a medium of exchange, and today we have the US Dollar and the SA Rand as examples. These are regulated and backed by the government, which means that they are legal tender and serve a vital function in the legitimate economy. In contrast, cryptos as they are commonly known, are not backed by anything and are not legal tender.

Cryptos are not currencies – try to buy a pint of milk or pay your tax with them. Cryptos are not investments – at best they are speculative, like betting on the races. Cryptos are not a store of value – how can they exist 100 years from now?

Similarly, cryptos are not investments. While some people have made fortunes by trading in various crypto instruments, most of the money has been made by the people who develop the products and run the trading platforms. We regard an investment as something which creates income streams, like property, bonds, and equities. Crypto does not do this.

Are cryptos a store of value? Over the centuries many things have been regarded as stores of value especially so-called hard assets like land, commodities, and gold. All of these are tangible assets and are rare and enduring. Cryptos are not tangible, and they are not rare because they can be created in a few hours. Nor are they enduring – think of how many digital files, photos, and music playlists you have lost in the last 10 years – now think about whether any cryptocurrency will be around in 100 years.

So, what are cryptocurrencies?  There are now more than 16,000 different cryptos, each invented by its own backers and all trying to exploit the speculative mania. More and more countries are either banning or restricting the ownership and trade in cryptos. Some analysts believe that they are a giant Ponzi scheme (https://jacobinmag.com/2022/01/cryptocurrency-scam-blockchain-bitcoin-economy-decentralization). Possibly the best view is from the Governor of the Bank of England who said “They have no intrinsic value. Buy them only if you’re prepared to lose all your money.”

We argue that cryptocurrencies are best left to the speculators. So, how will this new technology affect our everyday lives? This is where it becomes more interesting.

The technology behind cryptos is blockchain, which is a distributed and secured database or ledger which creates a transparent and secure record of transactions. Blockchain has potentially disruptive applications in many areas including insurance and banking.

Governments are coming to recognise the potential benefits of developing their own digital currencies. Fifty-six central banks including the US Fed and the SA Reserve bank, are now researching or developing some form of digital currency. These are called Central Bank Digital Currencies (CBDCs). In essence, a digital US$ will work in tandem with the traditional US$ and, at least initially will not replace it.

CBDC’s could drastically reduce transaction costs and enable central banks to fine-tune monetary policies

The cost of financial transactions, especially for low-income earners is extremely high. A worker in South Africa who wishes to send R100 to his family in Malawi will see at least R25 disappear in costs. Government grants and pensions also cost enormous sums to distribute to their ultimate beneficiaries. Digital currencies offer the potential to drastically reduce these costs by creating a direct link between the central bank and the citizens without having to go through layers of intermediaries. In addition, economists and central bankers can coordinate monetary policy and welfare benefits in real-time, instantly funneling money into the pockets of those who need it.

CBDCs offer the potential to eventually abolish cash and reduce money laundering and large-scale criminal activities. In the developing world, many people do not have bank accounts. Now digital currencies will allow everyone with a cell phone to have easy access to banking.

But digital currencies also have a serious downside because they provide a feast of data for technocrats and surveillance-happy police. The risks that come with putting this kind of power in the hands of an authoritarian state bent on social control—or perhaps any state—seem to outweigh the benefits. But it’s happening all the same.

China’s digital currency, the digital yuan (eCNY) is still in its testing phase and already has more than 250 million users who transact on the central bank’s official app. At the Winter Olympics, it was opened to international users for the first time. Nigeria was one of the first countries in the world to launch its digital currency, the eNaira which went live in October 2021.

CBDCs will have international implications on the financial system and could upend the US Dollar’s dominant status as a reserve currency

For the last 80 years, the US$ has been the world’s reserve currency. This may change in the next few years as CBDCs will allow settlement of transactions in their own currencies, which opens the prospect of there being several reserve currencies that are acceptable for international transactions. It is likely that the first two rivals to the US$ in this arena will be the Euro and the Yuan.

Change is coming, and developing countries like South Africa will not want to be left behind, because the advantages of CBDCs are so compelling. The difficulty will be managing the loss of personal privacy in such an environment.

Following the unsettled Covid years everyone was looking forward to 2022 being a more normal year. It has not panned out that way. Inflation has surged, particularly in the developed world, which is forcing central banks to reverse the policies of the last decade and to tighten monetary policy. Interest rates are going up, and stimulus policies are being reversed – the days of easy money are over.

Two of the factors fuelling inflation are rising commodity prices and supply chain disruptions. Let’s have a look at what is going on.

Commodity prices have surged over the last couple of months

The world still runs on oil, which is vital for nearly all modern activities. Over the last two decades environmental concerns have focussed on reducing the use of fossil fuels. This has meant that investment in new oil wells or coal mines has not been a priority. However, the global population has continued to grow and to become more prosperous, leading to the demand for energy to increase steadily. We are now in the position where demand for energy is outstripping supply, and the natural consequence is higher energy prices.

Food prices are going up worldwide. This is because large scale agriculture relies heavily on fossil fuels which are now so expensive. Much of the world’s arable land is given over to industrialised grain farming for both human requirements and animal feeds, and fertilisers, which are manufactured from natural gas, are vital to achieve high yields.  Farming is also highly mechanised and therefore food prices rise when we have high oil prices.

Fertiliser and diesel are the biggest input costs for modern farmers

Metals and minerals such as iron ore, nickel and copper are vital to all economies, and demand is steadily increasing as emerging economies become more prosperous, and developed countries need to maintain and upgrade existing infrastructure. Many of us are not aware that the transition to a greener economy is also very metals intensive and this has created surging demand for minerals needed to feed new solar and wind power installations, lithium-ion batteries for electric vehicles and grid-scale utility storage.

The war in Ukraine has amplified already surging commodity prices because both Russia and Ukraine are key commodity exporters. Russia is a major producer of oil, coal and fertilisers and is the world’s largest exporter of natural gas, nickel, and wheat, while Ukraine is the largest exporter of sunflower seed oil. These commodities saw particularly steep increases following the start of the war in Ukraine.

The commodity boom is likely to be with us for some time because it takes years for the exploration and development of mines and oil and gas fields

Many industry experts point out that the easiest and highest grade deposits have already been exploited, so new mineral deposits and oil wells will be harder to reach and much more expensive to extract. If this plays out it would inevitably lead to higher commodity prices in the longer term.

South Africa benefits from higher commodity prices because we export large quantities of minerals and agricultural products. This is behind the record trade surpluses we have enjoyed recently. Higher company revenue has resulted in increased taxes for SARS and allowed the Treasury to reduce SA’s debt burden this year. A sustained commodity boom would be very beneficial for the SA economy.

Covid 19 shutdowns played havoc with global supply chains

Another factor driving inflation is that the supply of products from cars to computer chips has become less reliable and more expensive due to changes in the functioning of global supply chains.

Covid 19 shutdowns played havoc with global supply chains. It was hoped that this would be a short-lived phenomenon, however with the chaos at ports showing no signs of abating and prices for a vast array of goods still rising, the world is absorbing the troubling realization that time alone will not solve the great supply chain disruption.

The USA and European countries were shocked during Covid to discover how much of their manufacturing base had been outsourced to cheaper jurisdictions such as China. They are now scrambling to on-shore these essential industries, and the Ukraine/Russia conflict only adds urgency to the task. Since sophisticated products require components and processes from around the world, this is not something that can be done either quickly or smoothly.

It is likely to take many months, and perhaps years, before the chaos subsides. Cheap and reliable shipping may no longer be taken as a given, forcing manufacturers to move production closer to customers. After decades of reliance on lean warehouses and systems that monitor inventory and summon goods as needed, manufacturers may revert to a more prudent focus on holding extra capacity.

Global markets have enjoyed a long period of increasing globalisation, low inflation and very low interest rates (at least in developed countries). These trends are now rapidly reversing as countries seek to bring manufacturing back home. Inflation is way above central bank targets and raising interest rates to curb this inflation may soon tip the US and Europe into recession. 2022 looks set to be as volatile as the Covid years.

Inflation Can Destroy Your Savings

Over the past few years, it seemed that inflation had been tamed throughout the world. Now it is back in the news and back in our lives. Experts are divided on whether the recent surge in prices is a temporary phenomenon or the start of a longer-term trend of structurally higher inflation.

We have a look at these arguments because understanding the effects of inflation on your investments is vital to preserving and growing your wealth in real terms. The South African inflation rate is now 4,9%, in line with long-term trends, while in the United States inflation surged to 6,2% last month – the highest in 30 years.

The developed world’s enormous monetary stimulus packages in response to the pandemic more than made up for the incomes lost to widespread shutdowns, without making up for the supply that those incomes had been producing. The result is higher inflation.

Initially, it was expected that the rise in inflation was the result of strong growth in the global economy recovering from the Covid shocks of the past 18 months, and would be short-lived. Now the US Federal Reserve believes that inflation will be transitory and should start to fall in the New Year, but it will remain higher than it has been in the recent past.

Energy prices have surged over the past 6 months, partly due to the global recovery, but also due to other factors including problems in transitioning to greener alternatives. Oil, coal, and natural gas still provide the base-load power essential for electricity grid stability and their prices have more than doubled in 2021, further increasing inflationary pressures.

Savers and investors feel the effects of inflation in several ways, but primarily through the erosion of spending power – if your lifestyle costs R100 today and costs R150 in 10 years’ time, you want your investments to keep up so that you can still afford the lifestyle you desire.

Nowadays, nearly everywhere in the world, government debt is enormous. The interest on this debt needs to be paid, and naturally the lower the interest rate, the lower the cost of repayment. We can understand then, why governments want ultra-low interest rates and are even happier if those rates are below inflation – negative real rates.

Low-interest rates with high inflation are known as financial repression and destroy savings.

Investors on the other hand want interest rates above inflation otherwise their investments cannot keep up with the rising cost of living.

Most developed countries now have negative real interest rates of 3% pa, which means that for every year you leave your money in the bank you would lose 3% of your spending power. Here in South Africa interest rates for a bank deposit are around 4% and inflation is now 5%, which locks in a loss of spending power of 1% every year, before taxes. So, the lesson is that cash in the bank alone is not a viable long-term solution for most investors.

Investing a portion of your portfolio in equities is an inflation-beating strategy over the long term.

While the stock market is volatile, the JSE has returned more than 12% pa for the past 120 years, which is on average 7% higher than the inflation rate. Having a portion of equities in your portfolio is an essential strategy to maintaining the purchasing power of your portfolio over time.

Speak to your financial advisor about how to balance your risk profile and the realities of long-term investing.