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Following a focused investment strategy in 2017

The fact that the FTSE/JSE All Share Index (Alsi) barely delivered any returns in the last two years shows us that, when it comes to managing a personal share portfolio, it’s often wise to stick to specific themes.      

The easiest way to do this is to manage your share portfolio in the same way you would put together a puzzle. If you assemble a 1 000-piece puzzle by simply forcing pieces together, irrespective of whether they fit where you place them, you may end up with something that might make Picasso proud, but would definitely be considered a failed attempt when you consider the true purpose of a puzzle.  

The same principle applies to constructing your personal share portfolio. You can identify a few shares that you like and randomly buy them as you please, and in the process run the risk of ending up with a diversified portfolio that is completely unfocused.  

When I talk about investing in themes, I’m referring to two things: Analysing your current environment and the focused purchases that will benefit from it. 

Let’s use 2017 as an example. The year started with a strengthening in the rand. Although we ended 2016 with local inflation levels at 6.8%, which is much higher than the 4% to 6% range the Reserve Bank is targeting, it appeared as though inflation reached its peak and was ready to start its decline. In the meantime, GDP figures showed that the economy had contracted by 0.3% in the fourth quarter of 2016. This meant that on an economic level, we simply didn’t grow fast enough and with inflation (along with further strengthening in the rand) now becoming less of a problem on a monthly basis, the probability of a drop in local interest rates is becoming more likely. A thematic investor would use this opportunity to structure their portfolio accordingly.   

Companies that should benefit from this environment are institutions:

  • Whose income is not fully dependent on exports; 
  • Whose income grows while experiencing a decrease in expenses as interest rates decrease; 
  • That adjust prices upwards as inflation rises, but keep prices unchanged when it falls; and/or 
  • Whose production depends on imports (i.e. lower input costs).  

Certain sectors stand out when taking the above into consideration: 

  • The banking sector, which came under severe pressure in 2015 (down by 13%), has since made a strong comeback thanks to the strengthening of the rand. Before new rumours about the axing of finance minister Pravin Gordhan started swirling on 27 March, hurting bank stocks, the index was up by 27% since the end of 2015.  
  • Food inflation lost some speed along with overall inflation as from the end of last year, in part thanks to the strengthening of the rand. Food producers’ input costs should also decline, which will have a positive effect on the profit margins of companies like Pioneer Foods, Tiger Brands and Zeder.  
  • With the expectation that interest rates will drop, the interest rate relief should also benefit the retail sector. When we take a look at companies like Truworths, Massmart and TFG, it becomes clear that they have already started to respond positively. 
  • The building and construction sector should also benefit from companies and individuals who will have more disposable income once interest rates start to decline. 

By looking at the companies listed on the Alsi that have performed the best so far this year, you will see that investors who focused on the abovementioned themes have had a very good year so far. Of the top 20 shares that delivered the best returns for 2017, most companies could be found in the banking sector, building and construction sector, retail sector and food producing sector, boasting an average return of 34% for 2017. 

I doubt that these themes will change in the short term and I do believe that the most relative value can still be found in these sectors. In short, my message this week is that although diversification lowers your investment risk, it doesn’t mean that your portfolio composition necessarily has to end there. 

Schalk Louw  is a portfolio manager at PSG Wealth. 

This article originally appeared in the 6 April edition of finweek. Buy and download the magazine here.

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