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Don’t lose your head

Mar 11 2016 06:30
Leon Kok

(iStock)

In recent months we have been lambasted with negative news, and yes, it has been rooted in Nenegate; less-than-desirable political and economic management in SA; plunging global oil and commodity markets along with Chinese deflationary fears; and weakened emerging-market economies.   

No doubt, it could get worse this year and in 2017.

But the situation could change for the better too. Institutional comment is not overly subdued, and most leading fund managers continue to seek the best investment opportunities available to deliver pleasing long-term returns on your capital.

Says Allan Gray chairman Ian Liddle: “We cannot throw our hands in the air and use a black swan as an excuse.”  

He is absolutely right. And for the average domestic investor, one of the best places to be is a highly reputable well-managed domestic balanced fund. These hold close to 40% of the domestic unit trust industry’s total assets under management, though they’re divided into high-, medium- and low-equity sectors.

They’re mostly exposed to all sectors of the market (shares, bonds and property) and are actively managed.

Naturally, there’s no guarantee that the fund of your choice will ride out every unexpected event. But they will allow you to see out more black swans than not, and deliver pleasing returns over the long term.

The annualised nominal returns of the industry’s biggest balanced funds has been between 14% and 16% over five years and between 12% and 15% over 10 years. Largest of these funds are Allan Gray, with R111bn under management; Coronation Balanced Plus, with R86bn; and Old Mutual Balanced, with R16bn.

True, you can also sit on cash, but it’s not always king and you can lose out on significant opportunity costs. And if inflation is high, cash loses real purchasing power.

In Allan Gray’s case, Liddle points out that it seeks to buy shares offering the best relative value, while maintaining a diversified portfolio. “We thoroughly research companies to assess their intrinsic value from a long-term perspective.

“The long-term perspective enables us to buy shares from sellers who overreact to short-term difficulties or undervalue long-term potential. We invest in a selection of shares across all sectors of the stock market and across the range of large-, mid- and small-cap shares.”

Looking to developed markets, there are probably more grounds for optimism than many investors realise. The past two decades have shown a great propensity for unexpected swings both up and down. Better profit margins could be one driver, energised by a combination of higher productivity growth and slow wage growth. As it is, there is little evidence of rising cost efficiencies or declining pricing power.

Moreover, higher profits will make corporate buyers more willing to spend. Additionally, low interest rates mean that plenty of liquidity is available to fuel a market lift.

Besides, technology is evolving at an unprecedented rate and new business models leveraging increased connectivity are already changing the business landscape enormously. The revenue and market capitalisation of firms such as Amazon, Google, Facebook, Alibaba and Tencent, for instance, rank among the largest in the world.

Much the same with pharmaceuticals where companies continue to gain insight into disease processes and develop a variety of new treatments to improve mortality.

Roche, for one, has one of the largest diagnostic divisions in the sector, allowing it to utilise biomarker techniques to develop targeted treatments for individual patients. Such an approach is in its infancy in the field of immuno-oncology but could eventually lead to good, cost-effective treatments – and increased demand – over the longer term.

At the other end is the increasing focus on “self-help” as companies seek to restructure by reducing costs and strengthening balance sheets to weather the uncertain demand and pricing environment. For example, BHP Billiton, Anglo American and Royal Dutch Shell have committed to substantial cost reductions and lower capital spending in the face of sharp declines in commodity prices and revenues. This has already been reflected in their latest market valuations.

Further declines in oil will no doubt drive greater volatility in global markets in the short term, but we’ve also arguably seen the worst of the bear market. Significant, for instance, was the boost global markets received from the upturn in crude oil late last month as the market focused on an upcoming meeting of major oil producers aimed at stabilising volatile petroleum markets.

The outlook for emerging markets, meanwhile, is also looking better. In fact, they’re currently far better positioned than in recent years to withstand lower growth.

That said, overall growth for 2016 is expected to be 4.9% compared with 4.4% last year. Granted, Brazil and Russia are still in negative territory, but, they’re set to improve from -3.2% to 1.6% in Brazil’s case and from -3.5% to -1.5% in Russia’s case.

* Leon Kok is an independent writer on public policy and investment markets. 

For more insight from some of South Africa’s top fund managers, see the 17 March issue of finweek. Buy and download the magazine here.

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