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Finding active value in difficult markets


28 Oct 2017

Finding active value in difficult markets

Sven Ruppelt, Senior Portfolio Manager, Sasfin Wealth

Extended periods of underperformance of an asset class are normal. It may however be difficult for a stock broker, a fund manager and even an individual investor to accept that one’s asset class of choice is in fact ‘bottom of the class’. Personally, I believe that periods of underperformance are healthy for every industry. We all know that equity investment returns are cyclical but it is not fun to realise one has been in the ‘wrong place’ for almost three years. We as industry specialists are forced to face reality and reassess our approach to managing client assets.

Finding the new in the old

Examples of a new approach are the plethora of products which provide a capital guarantee and the massive inflows into more balanced collective investment mandates. This illustrates my point that the volatile area of direct equity is currently a lower priority on investors’ radars than in previous years. Why, in fact risk capital if an investor can get a guaranteed return of between 8 and 10%? Portfolio managers have new options in other products such as income funds and these certainly provide balance to investment portfolios. But is it now time to totally abandon the SA equity ship and focus only on guaranteed returns?

I can recall a similar period between 1999 and 2003 when South African equity investors were literally dragged from one crisis to another. No sooner had we started to recover from the emerging market crisis inspired by Mexico, Argentina and Russia, we witnessed the bursting of the IT bubble in 2000. There was no respite when the horrors of terrorisms were so explosively shown to us on CNN with the destruction of the World Trade Centre in September 2001. The rand also experienced massive volatility in this time losing well over 30% in a short period of time. At the point of maximum capitulation, in May 2003, the world equity markets bottomed and we experienced a China-inspired asset equity boom when annual returns of 30% were commonplace.

Observing through the lens of rationality

So am I suggesting that we all need to be contrarian investors? After all, a wise sage of the investment world suggested that an investor should be greedy when others are fearful…

Not entirely, as in the previous period we were subjected to world events as outsiders looking in. the South African economy remained well run despite the turmoil in the rest if the world. Our markets were punished despite the good shape we were in. Many of our current issues may seem to be entirely self-inflicted and our private sector is almost in a siege mentality. However it is well worth remembering that thanks to a strong dollar the commodity cycle is at a low and this contributes to making life difficult for economies that are so resource-orientated. Brazil and Russia have been through testing times themselves. It is not an excuse but worth bearing in mind that with stronger commodity prices South Africa would be in a far better place. A strong recovery in commodity prices, however unlikely , will certainly provide our economy with a much welcome boost.

It is always worth remembering is that these very difficult times bring the best out of people and businesses. Weaker businesses disappear or are bought out and stronger ones gain market share.  Charles Darwin was quoted as stating that it is not the strongest or most intelligent of the species that survives but the one most responsive to change. Seemingly this applies in the business world too. These periods also inspire investment professional to go back to basics. They start questioning and retesting their investment processes even down to their sector and stock selections

Making the tough choices

Based on the above, you might be wondering where some of my personal equity exposure is going? Well, in my personal capacity, I am buying the very companies that earn their income from the asset management industry.  Being in the industry myself I can acknowledge how many of the listed companies have invested in quality staff and increased the range of offerings as well as increasing their offshore exposure. The industry has been through difficult times before and has come out of the cycle in better shape.

When I see strong cash flows, sound business strategies, high levels of annuity income, highly incentivised staff and well researched investment processes I cannot help myself and I find myself buying into the companies. Should you take the time to cast your eye over the sector, you will notice that there are a number of interesting businesses in the sector.

Amongst them you will surely find at least one survivor of the fittest?

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