Global fund managers have confidence in equities

Global equities are still showing relative value and offer far better prospects than bonds for long term investors.

This is the view of Jan van Staden, CEO of Barnard Jacobs Mellet Private Client Services, after meeting with several fund managers during his recent overseas visit which included attending the Berkshire Hathaway annual general meeting.

BJM Private Client Services offers South African investors an opportunity to invest in Berkshire Hathaway as part of their range of offshore products and van Staden attended the event on behalf of BJM investors to ensure that the fundamentals of the fund were still positive.

Van Staden says that fund managers in the US are of the view that equities are still preferable to bonds and that corporate profits remain high. Even the legendary Warren Buffett, in his address during the AGM, stated that although the fund is holding high levels of cash, this should not be seen as a negative view on the markets but rather due to his particular investment style and need for a strong balance sheet. "Buffett stated that he would rather hold equities for the next ten years than buy the 10 year long bond at current yields. This is in line with our current investment strategy" says van Staden.

Van Staden says that after attending the AGM, he remains confident that Berkshire Hathaway offers South African investors an excellent long term investment opportunity. "The fund has intrinsic value and is currently trading at a discount. It is also an opportunity to buy into the investment philosophy of a legendary investor".
 
Van Staden says that the high levels of cash held by the fund are a function of the Buffett style of investing which invests in cash generative companies. Currently the investments generate around $10bn a year of cash which adds to the stock pile. Although Berkshire Hathaway has made a few large acquisitions recently including PacifiCorp form Scottish Power for $5.1bn, there is still a lot of cash left over, around $46bn, for a really big acquisition.  "Buffett made it clear however that he will wait for the right acquisition and only buy into a company that meets his investment criteria".

Van Staden says that although the latest quarterly results showed record cash flows, it is important to remember that as a large portion of the funds business is in underwriting, cash flow is dictated by hurricane season. As the last quarter saw no major catastrophes, there has been a healthy build up of cash reserves. The cash strong balance sheet will help protect the underwriting investments in the case of any major claims. "The US has already seen one town flattened by a hurricane during our visit. As the storm season is starting it is important for the fund to be cash flush which creates stability. You need a strong balance sheet to write this kind of business" says van Staden.

Van Staden says that there was a concern raised during the AGM that the high levels of private equity may be creating a bubble in the equity market. "Buffet made a very valid point that private equity, rather than contributing to a bubble, actually supports a longer term bull market as it takes stock out of the market and limits supply".

However van Staden says the one concern is that some of its businesses are aligned to the housing market, ranging from actual construction to mortgages. These businesses could see a slow down due to the depressed situation of the housing sector. "We have met other fund managers during our visit which have argued that as unemployment rates remain low, there is a support for the consumer, so while we may see a slow down it may not be as drastic as first feared," says van Staden.

While Berkshire Hathaway remains a sound investment, it should form part of a well diversified offshore strategy which also includes exposure to other regions and currencies. Now is a good time for South Africans to diversify offshore as part of a healthy portfolio diversification especially in light of the weaker dollar which is currently offering support to the rand, says van Staden.