Past winners' days are over, managers say
Three leading fund managers have warned investors about the dangers of chasing yesterday's winners during presentations for a recent investment conference.
The managers - from Coronation, Ninety One (previously Investec Asset Management) and PSG - warned that many South African investors had given up on poorly performing balanced funds in favour of cash-like investments or were taking money offshore where they were now vulnerable.
The managers were addressing financial advisers through presentations made available online as part of the Investment Forum. Attendance at the event was cancelled by its organiser, the Collaborative Exchange, and sponsoring asset managers as the virus spread.
Duane Cable, portfolio manager at Ninety One, says the manager does not believe it is prudent to be heavily invested in cash through the likes of money market funds given the opportunities arising in equities and bonds to outperform these funds over the next five years.
Hiding in cash is very comfortable in this incredibly volatile time, but there are significant inflationary pressures from which cash will not protect you.
The cost of electricity has increased almost 160% since 2010, health-care costs are up almost 140%, education costs have doubled and petrol is up almost 80%, he says. Pressure on these tariffs are likely to continue for the next five years.
Over this period the average money market fund - a proxy for cash - would not have kept pace with these inflationary pressures (see graph alongside) and remaining in cash is likely to reduce your purchasing power over the medium term, Cable says.
In addition, Cable says the South African Reserve Bank is cutting interest rates reducing interest on cash balances and diminishing the prospects of earning inflation-beating returns, he says.
Shaun le Roux, portfolio manager at PSG, says these are challenging times for investors and given the poor returns they have enjoyed from local equities, it is no surprise that investors have favoured the winning asset classes of cash and offshore equities.
But a lot of the money that has gone offshore has been invested in crowded parts of the market that people are comfortable to own, particularly very highly priced US equities, he says.
The top five shares in the S&P500 now make up over 18% of the index - a higher concentration than there was during the Dotcom bubble of the early 2000s, Le Roux says.
The impact of this is that some stocks have reached valuations or prices relative to expected earnings that are very elevated.
Le Roux says some investors are beginning to realise that some of the stocks they are investing in, particularly through passive investments, may not be as bulletproof as they thought.
Another trend that could unwind is that for the past 12 years growth stocks (those with earnings rising faster than the average company) have outperformed value stocks (shares that are priced at less than the value of company) on a rolling three-year basis. In recent months that trend has accelerated, Le Roux says.
A market that is increasingly configured to chase high and rising prices has given rise to very extreme valuations in parts of the market, Le Roux says.
When this unwinds, it could have a very material impact on subsequent returns, particularly for investors who recently entered these parts of the market.
On the other hand, the cheap stocks have become cheaper over the past few years, specifically large parts of the JSE and parts of the offshore market like the UK, Japan and emerging markets, Le Roux says.
He says the US market has recently been on a price-to-earnings ratio of 30 times, which puts it firmly on track to deliver low returns in the future.
The panic that is happening around the virus is a potential catalyst for the status quo to unwind, and quality businesses now trading at below what they are worth are instead offering "fertile ground for patient investors to extract long-term returns", he says.
Le Roux says he is not suggesting the South African companies will not suffer profit declines, but companies that are resilient in the tough times ahead are now on incredibly low valuations and PSG believes starting valuations determine future returns.
Karl Leinberger, chief information officer at Coronation, says investors' large-scale moves into fixed-income funds is concerning because equities are better able to protect one from the low-road scenario many South Africans fear as they give currency and inflation protection.
Leinberger says that Coronation believes the risks in the local fixed-income market are high as the credit cycle is "stretched", with lots of credit at low interest rates, which does not make sense in a recessionary environment.
Though Coronation supports healthy diversification and offshore assets have become cheaper since the selloff, they were sold off from fully priced levels, so are not as cheap as many of the local shares, he says.
As much as the news in SA is bad and Coronation is not bullish about the long-term future of the economy, starting valuations matter most and many South African stocks are stunningly cheap, he says.
Five years ago, Coronation could only justify buying three of what it regards as the 12 best companies in SA (see list above).
Today it owns shares in nine of these 12 great businesses because they are trading at fair or cheap prices and recent results show they are resilient in a very weak economy.
"In tough times strong businesses get stronger and weak businesses get weaker. These businesses will in time prove good businesses for those prepared to invest," Leinberger says.
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