Mid-year IFA business and investment update
An erratic start to the year and defiant markets have given investors a lot to think about. In the local investment update Leonard Krüger makes the case against financial herding, while emphasising the importance of growth to an economy before Nazia Suleman introduces the Allan Gray Umbrella Retirement Fund. Matthew Spencer from Orbis gives us the global perspective that shows that old paradigms on managing downside risk are breaking down in a world of expensive financial assets.
Leonard Krüger
Leonard Krüger cautions against following the herd and looks at the state of the local economy.
Buying the market and following trends is comfortable, but the best investment ideas are often found where others fear to tread. Therefore, unless you are happy to invest in an index, it is a good idea to seek out an asset manager who guards against ‘herding’, and an independent financial adviser who can help you stick to your objectives when you are being tempted by the crowd.
In the wake of the news of our credit rating downgrades, business confidence was severely shaken, unsettling investors. Poor sentiment is a problem, but an even worse problem is the lack of growth and the rate of the increase in debt and debt servicing costs. This is what concerns the ratings agencies, and this is what could lead to a downgrade of even our local currency debt ratings, which could cause a mass exodus of foreign investors. This kind of herding has the potential to derail our fragile economy.
Risks are elevated in the current environment. This means you should think about how much risk you are prepared to take on. Think about your risk capacity, i.e. how much risk you can afford to take and your risk appetite, i.e. how much risk you are willing to accept in pursuit of superior returns. Your answers should inform your investment decisions.
The net equity exposure of our flagship unit trusts matches our risk appetite in those unit trusts and the asset allocation is managed accordingly.
News about private hospital operator Life Healthcare’s international investments has created negative sentiment about the company and the share price has dropped and investors have exited. This provides a great example of herding at individual stock level. We see situations like this as the perfect opportunity to add to our position at discounted prices.
There has been a lot of press coverage on Net1, the parent company of the current social grants payment provider Cash Paymaster Services (CPS). Leonard gives a quick summary of events, noting that Net1 announced that Serge Belamant would retire as chief executive officer (CEO) and director of the company at the end of May and Herman Kotzé, currently the company’s chief financial officer, had been appointed as CEO effective June 1, 2017.
We integrate Environmental, Social, Governance (ESG) and sustainability issues into all stages of our investment process. As long-term investors we think very carefully about the sustainability of the business models of companies before investing in them and work hard to improve the governance of companies once we are invested. Our analysts and portfolio managers formally engage with company representatives throughout the year. We also provide voting recommendations for general meetings of companies which have a material weight in client portfolios and for smaller companies in which our clients collectively have significant holdings. We publish our voting recommendations, together with the outcome of the shareholders’ vote on each relevant resolution, quarterly on our website.
The FTSE/JSE All Share Index has largely moved sideways over the course of the year. PE ratios are high and one has to look hard for pockets of value. If you strip out Naspers and SAB Miller, the market has not moved much. Given the current environment, we are pleased that our flagship unit trusts have managed to outperform their benchmarks and inflation over the latest 3-year period.
Matthew Spencer
Matthew Spencer talks about the global context and explains why the old 60% equity and 40% bond portfolio is no longer enough to minimise risk.
South Africa represents a tiny fraction of the investable opportunities out there. It represents approximately only 6% of emerging markets and when it comes to world markets it is less than 1%.
Orbis is focused on building a portfolio of a 100 or so companies which it feels will deliver higher returns than world markets, without greater risk of loss. To do this, they need a robust stock picking capability that can efficiently cover the World’s markets.
As global markets enter the ninth year of the bull market that started with 2009 lows, the investing environment has become more challenging. Investors appear complacent. Financial assets are currently looking expensive, particularly in developed markets. The good news is that even in expensive markets you can find cheap stocks – you just need to look harder for longer, and we are not just restricted to developed markets. Emerging markets appear more attractively valued, and we have found increasing opportunities in these regions.
History tells us that when asset prices are high, ‘defensive’ stocks are the place to be. While this has been a good call in the past, this time it is these defensive names that have driven the market upwards. In a market environment like this it is particularly important to position our portfolios to limit the risk of a permanent capital loss. To achieve this, we look at every company we own in meticulous detail, to understand its intrinsic value and assess the potential risk and reward. We aim to create a portfolio of a well-diversified group of companies that have been thoroughly analysed and all have one thing in common: the price we have paid for their earnings and assets is well below what we think they are actually worth.
Orbis has looked across the large and complex US healthcare system and a company that they particularly like is AbbVie, one of the world’s largest biopharmaceutical companies. We believe that AbbVie is trading on a deep discount to our assessment of intrinsic value. Orbis is very excited about the company’s research and development pipeline and feels the market is missing this potential as they focus on important patents coming to an end.
We began researching MercadoLibre in 2013 and have held the shares since 2015, building out our position during the long depression when most foreign investors shied away from Brazilian or Argentinian markets. We believe the management team is truly excellent, as are the future prospects for the business as it continues to take share of a rapidly growing market.
Sixty percent equities and forty percent bonds has become such a standard for “moderate risk” that any other allocation raises eyebrows. However, in the current market environment Orbis doesn’t think it’s going to work, which is why the Orbis Global Balanced Fund is positioned quite differently.
Nazia Suleman
Nazia Suleman introduces the Allan Gray Umbrella Retirement Fund and explains why we think it will help your business and your clients.
Although there are some funds that offer super-efficient administration and simple products that sell themselves, mostly, umbrella funds today have a reputation for high costs, poor transparency and complexity. Therein lies the opportunity…
Retirement reform is coming, and with it the potential to severely impact retail advisory businesses. Rather than resting on your laurels and waiting for legislated reform to force change, now is the time to start planning for a future that could look very different. While corporate retirement schemes have traditionally been the territory of occupational pension funds and asset consultants, advising on umbrella funds opens up doors for you as an independent financial adviser looking to build long-term client relationships. Getting involved in the umbrella industry presents an opportunity to expand your client base.
There are four common types of fees that apply in retirement funds, but it is important to look at the total fee over a period of time when comparing different providers to ensure a proper understanding. This is because providers often discount easily comparable fees, for example administration, and make up their lost revenue where it is less easy to compare, for example with fees on risk or investment products.
Over the last four years, the market share of commercial umbrella funds has increased by 70%, at the expense of standalone employer funds. While the large life companies have benefited from the move into umbrella funds from standalone employer funds, cost and complexity have dogged the industry. We think this is an industry that could do with more competition and we are excited to introduce our offering – an umbrella fund done the Allan Gray way: simple, transparent and cost-effective.