Page 35 - Waterfall_Issue 4_2022

experiences or services at the same outperformed inflation comfortably
cost. Examples include free shuttle for a few years, but this is very A crucial investment lesson all
services no longer being offered, longer unlikely to happen going forward. investors need to learn is that inflation
lead times for deliveries, and take- Investors should therefore ensure moves by stealth and lulls you into a
away restaurants no longer offering their investment portfolios are false sense of security. Therefore, the
condiment sachets. Both shrink- and correctly positioned to deliver on their important first step investors need
skimpflation are less likely to be needs and objectives at appropriate to take is to recognise the potential
measured through official inflation levels of risk. Locally, due to a steep impact of the various ‘faces’ that
figures, again highlighting what an yield curve and the (excessive) risk inflation presents to us. Then, take
intricate concept inflation actually is. premium investors attach to our action, and review your portfolio
sovereign bonds, there are still selected composition so that you benefit
Locally, investors have been spoilt opportunities to secure real returns from the opportunity this brings to
by several years of inflation- from fixed interest investments, invest in specific market areas.
beating returns (achieved at very a little further along the curve.
little risk) in money markets and
cash investments. But due to the However, when it comes to beating
steep rate cuts in 2020, those real inflation over longer time frames,
returns have long since turned investments in growth assets (notably
negative, even when considering equities) need to be considered, even
the recent interest rate hike. if they do bring more risk. Typically,
long-duration assets (that take a
The dangers for investors at this time long time to ‘repay’ their capital
is twofold: firstly, thinking that past outlay through income) suffer once
strategies will result in successes the higher discount rates associated
even though the environment has with higher inflation are applied.
changed to a significant extent; This means we currently consider
and secondly, underestimating the large tracts of popular, highly valued
long-run costs of not outperforming stocks to be vulnerable to the
inflation by a substantial margin. impact of inflation and a potential
Apply the wrong strategy, and you rerating in the market. On the other
face a very tough obstacle to long- hand, low duration assets could
term real returns. Underestimate the potentially benefit – but these
consequences if inflation is sustained are typically the stocks that
in the long-term, and you face a many investors have shunned
slow erosion of your long-term real over the past few years. These
wealth. Either way, the implication would include stocks that have
is clear – misjudge the importance suffered from the economic
of inflation at your own peril. cycle but have the potential
for good cash flow and
What is most often missed about dividends in the longer term.
inflation, however, is that it also
changes the returns investors While many investors still
can expect to receive from the tend to shy away from the
various assets in their portfolios. local equity market, it is
While the impact on fixed interest always helpful to remember
investments may be obvious, that investing is not an ‘all or
inflation also changes which equities nothing’ game. Often, the
will do well and which will lag. addition of carefully selected
risk assets can enhance
Within the fixed income space, overall investment outcomes
conservative investments while keeping overall portfolio
risk within acceptable levels.

Anet Ahern, CEO at PSG Asset Management

Waterfall Issue 4 2022 33