We're going on a bear hunt

Michael Rosen’s award-winning children’s book We’re Going on a Bear Hunt tells the story of five children who venture out to hunt a bear. In this article, investment executive LINDA EEDES tells the story of Foord’s fund managers venturing out to hunt a bear market.

Rosen’s five hunters face several obstacles along the way, such as thick oozy mud, a dark forest and a whirling snowstorm. After careful consideration of each obstacle, they declare in unison: “We can’t go over it. We can’t go under it. Oh no! We’ve got to go through it!”

Like the children in the story, long-term investors must occasionally ‘go through’ bear markets. They must navigate their way through various obstacles such as rising interest rates, rising inflation and impending recession in the journey towards long-term investment success.

In June, the US stock market officially crossed into bear market territory — marked by the S&P 500 falling more than 20% from its year-end record high. Stock markets around the world, including in South Africa, are also materially down. Even traditionally safer asset classes, such as government bonds, are in negative territory this year.

Foord has been anticipating this bear-market environment for some time. Unsurprisingly, all of Foord’s multi-asset investment strategies, including the Foord Flexible, Foord Balanced, Foord Conservative, Foord International and Nedgroup Stable Funds are near the top of their respective peer groups this year.

Bear markets may be unsettling, but they are part and parcel of every market cycle. If navigated successfully, bear markets provide investors with the opportunity for far better prospective returns by being able to buy quality businesses at lower prices. It’s also comforting to remember that bear markets have always come to an end. Permanent capital losses — where assets are permanently written down such as with insolvencies or credit defaults — scare us much more than bear markets. 

A major part of Foord’s investment success lies in astute asset allocation. We invest using a top-down process that starts with understanding where we are in the current interest rate cycle. This helps us understand exactly where we should be invested in terms of asset classes, geographies and sectors.

We also always keep our eyes on the primary objective: to produce inflation-beating returns over the medium to long term. We reduce risk of loss by diversifying between different assets with different performance drivers. We have the full toolkit to do this in our flagship Foord Flexible Fund of Funds. Bottom-up stock selection rounds out the investment process.

The positioning of the Foord Flexible Fund is instructive of Foord’s prevailing investment strategy. More than half of the fund is invested outside of South Africa, which protects investors against currency risk and the structural headwinds that weigh on the prospects of many local companies. Even within South Africa, we prefer businesses that are more global in nature.

To diversify risk, the fund does not have more than 25% in any one single geography. European stocks are also in bear market territory, having fallen 20% this year. Our global stocks have exposure in that region to mostly defensive consumer staples companies, which have pricing power and can pass inflation on to consumers.

Given that we expect interest rates to continue to rise, we prefer businesses that don’t have excessive debt on their balance sheets. We are cautious about having too much exposure to US stocks, where share prices are still trading too far above what we believe the underlying businesses to be worth. In the technology sector, we prefer to invest in Asian communication services and technology companies that are very attractively priced due to what should prove to be transitory concerns.

The fund also has some exposure to gold, precious metals streamers, lithium and copper producers, as well as to agricultural stocks with pricing power — all should fare well in an inflationary environment. Outside of equities, we have some exposure to near-term SA government bonds, which offer an attractive yield with low risk. We have recently added shorter maturity US Treasury bonds to the portfolio, given the now more compelling yields.

The story I mentioned earlier ends with the children finally coming face to face with a bear in a cave. They panic, run all the way home, jump into their beds and declare: “We’re not going on a bear hunt again!” Fortunately for our investors, our investment team is made of stronger stuff. As a result, we remain comfortable that we are well-equipped to protect and grow your savings capital in absolute terms over time, irrespective of the prevailing bear market conditions.