ALUWANI’s domestic equities investment and portfolio construction process is
benchmark cognisant and aims to generate risk-adjusted returns over any client chosen benchmark index
over time. We do not only focus on chasing returns, but we are equally aware of the risks we are taking in
pursuit of such returns, i.e. benchmark relative risk. Being benchmark cognisant also means that our process
is scalable as we can leverage our stock selection views and construct portfolios that aim to exceed client
It is therefore important as investment professionals to understand the characteristics of each benchmark that we are being measured on, equally so for the end client to do likewise, especially since of late these varying indices have experienced material performance divergence.
3. Equity risk premium is the compensation required by equity investors not to be invested in risk-free yielding assets, such as guaranteed government bonds. Textbook and conventional thinking suggests that a measure of this risk premium is the difference in earnings from equities vs bonds and over the long term this has been calculated at around 4,5% extra earnings (premium) equity investors would need to earn in addition to bond yields, to be indifferent between the two asset classes. From the chart below, the few odd times such conventional thinking held true was during the global financial crisis where such differential was approximately 7%, i.e. equity investors being more than adequately rewarded for investing in equities vs bonds. Since then, this conventional relationship has been inverted, and upon closer inspection, the sad reality is that the domestic equities market has not generated enough earnings despite positive returns, and that is largely due to price expansion (in the hope of earnings to come, but still remaining elusive).
Perhaps it is now opportune for investors to approach the South African domestic listed equities more from a stock selection point of view as opposed to it being an asset class, with an absolute return and volatility targets as desired outcomes. Even though at ALUWANI our process is benchmark cognisant, we appreciate and accept that none of our benchmarks are ‘perfect’. For investors, over and above taking risk by investing in equities (without the appropriate reward, as shown above), why take additional risk by selecting one benchmark vs another especially since the differences can be this stark?