Beat inflation with equities

Long-term investments in equities were the best bet to beat rising inflation.

So advised Dave Foord, manager of the Nedgroup Investments Stable Fund, who addressed financial planners, fund managers and intermediaries at a function hosted by Nedgroup Investments in Johannesburg.

Foord said that while inflationary pressure was the biggest enemy of investors, equities remained an important asset class to protect investors’ capital.

“Except for some periods in the 1970s, the local equity market gave returns in excess of CPI plus 4% over rolling five year periods,” he said.

Herman Steyn and Rashaad Tayob, managers of the Nedgroup Investments Flexible Income Fund, which invests in a wide range of fixed income instruments, said that they saw very little value in bonds at the moment and that the fund’s exposure would be limited in the foreseeable future. “ A high inflation environment is bad for bonds.”

Omri Thomas and Tim Allsop, managers of the Nedgroup Investments Rainmaker Fund, said that to protect the fund against a worst-case scenario they would be investing in companies that would do well even in the face of real problems in the economy.

“We favour Sasol as a defence against a weakening rand and the global energy crisis; Shoprite and Spar for their defensive qualities in an inflationary environment; Remgro, Richemont and SAB as non-commodity rand hedges; and Reunert, Altron, Barlows and PPC as beneficiaries of South Africa’s planned fixed investment expenditure.”

Thomas pointed out that despite the strong commodity prices and outlook for solid earnings growth, resources stocks looked “fully priced”. He said that credit retail stocks, property and the insurance sector were under pressure and should be avoided.

“We are especially upbeat about the prospects of Remgro, which, at 10,3% of the total, is our single biggest holding in the Rainmaker Fund portfolio. It is currently trading at a discount to NAV, is a 50% rand hedge share and the company will probably declare a special dividend of R2,5bn with the unbundling of its assets in BAT.”

Nic Andrew, Head of Nedgroup Investments, said history taught that economic upheavals and volatility in markets were nothing new; the last thing investors should do is to let their emotions about these events dictate their investment decisions.

He quoted Warren Buffet who had said that to invest successfully over a life-time did not require a stratospheric IQ, unusual business insight or insider information. What was needed, rather, was a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.

For investors to successfully navigate through the current rough terrain Andrew advised:

• Invest with trusted financial services companies and fund managers with proven track records through all market cycles;
• Stick to investment goals; and
• Heed the advice of a trusted financial advisor.