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Local shares: What you need to know before you throw in the towel

Jun 19 2018 11:48
Schalk Louw

Although it may feel like the year has barely begun, the reality is that the 2018 halfway mark will officially arrive at the end of the month. 

This fact also leaves a bitter taste in South African investors’ mouths, because as at the end of May 2018, following several tough years on the market, we have experienced negative growth totalling 4.4% (FTSE/JSE All Share Index, or Alsi) for the past five months. 

This brings us to a measly average of 5.5% growth per year for the past three years – a growth percentage that couldn’t even keep up with something like the money market. 

I don’t even want to consider what this growth percentage (or lack thereof) would have been without Naspers* (which makes up nearly 20% of the Alsi), which grew by 70% over the past three-year period, all by itself. 

An investor phoned me this week, on the verge of selling all his local shares and seeking refuge in the money market until the dust settles.

His decision, of course, is understandably driven by a range of emotions. 

He has been feeling uncomfortable with the Alsi’s poor growth over the past three years and, as he put it, it is starting to “eat away at his nerves”. 

Without making any recommendations, I asked him what he would do if he was currently fully invested in the money market. 

Would he remain invested there, given the current market conditions? Without taking too much time, he answered, “No,” and stated that he probably would have started buying shares right about now. 

So I answered him with a question: “Why would you sell now, if you would have bought, had you been invested in cash this very moment?”

I want to make it very clear that I’m not saying that all the uneasiness has now left the market and that investors should take all their cash and invest it in local shares. 

What I am saying is that these dips in the market are as natural as the rises are. 

When we look at the five largest balanced funds (SA Multi-Asset High Equity unit trust sector), it definitely seems as though these fund managers agree. 

According to the Association for Savings and Investment South Africa (Asisa), SA Multi Asset High Equity unit trusts are allowed to invest in shares, bonds, money-market or property shares both locally and internationally. 

Their mandates stipulate that they can invest up to a maximum of 75% of the particular fund in shares (both locally and internationally), and it is for exactly this reason why I look to these funds for confirmation. 

Together, these five funds have more than R330bn under management and we can comfortably assume that when they make a move from one asset class to another, even the tiniest percentage can mean a substantial amount in rand value. 

More importantly, we can rest assured that when they make such a move, a ton of homework backs their decision to do so. 

The next question when looking at the movements within these funds is what their views on local share are. Despite the fact that National Treasury increased the limits that may be invested offshore from the previous maximum of 35% to 40% (including African exposure) in February, collective investments, long-term insurers and investment managers have subsequently made very few changes. 

It’s important to note that Regulation 28 of the Pension Funds Act was also revised in line with this, increasing its offshore investment allowance from 25% to 30%. 

Why is this relevant? Because if local investment giants felt so uncomfortable with local shares, they would have had ample opportunity to increase their international shareholding in exchange for local shares. 

This didn’t happen within the top five largest balanced funds. 

According to the data at our disposal, the total weight allocated to shares stayed pretty much the same at 66.4% for the 12 months ended 31 December 2017, from 66.1% in December 2016. 

The local share component also remained stable at 43.9% compared to the prior period’s 43.5%. Since then (and up to 30 April 2018), the offshore share component has increased from 22.5% to 23.8%, but we can clearly see that nobody has yet thrown in the towel when it comes to local shares. 

The average weight allocated to local shares within these funds rose to 44.4% in the meantime (until 30 April 2018).

I’ll keep my advice short and sweet: equity is an asset class that should be held over the long term and should be judged accordingly. It can experience short-term negative fluctuations. 

The experts, however, are slowly but surely increasing their exposure to shares, which means that they are identifying relative value. 

Schalk Louw is a portfolio manager at PSG Wealth. 

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 21 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

investment  |  portfolio  |  shares
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