How self-help entered the SA equity debate

The best way to improve portfolio exposure to South African shares is to choose companies with a self-help ideology. In practice, this means finding those companies whose goods and services are so in demand locally that they can literally price their way out of trouble.

A client-focused Allan Gray Investment Update, hosted in Pretoria recently, delved into how the firm’s balanced fund portfolio managers were positioning for market uncertainty. “The South Africa Inc shares have done quite well relative to our balanced fund benchmarks; and our decision to have more cash relative to long term bonds has been the right decision over the latest period,” said Siphesihle Zwane, a portfolio manager at the firm. He also lamented that 2024 was promising to be “more uncertain than usual”. 

The presentation was full of analogies and stories as Zwane tried to win over an audience that was, on this writer’s observation, mostly made up of individuals nearing or already in retirement. Early on, Zwane described a fund manager’s approach to investing as doing the best one can with the hand of cards you are dealt. Keeping with this theme, he then unpacked the luck versus skill concept using various games. Ordered from luck to skill, he offered up roulette; poker; checkers and chess. “There is a big element of luck in gambling; but if you take a game of chess, you will find that a grandmaster never loses to an amateur player,” he said. 

Skill trumps luck, most of the time

The lesson here was that by focussing on process you can ensure that skill trumps luck in most aspects of asset class allocation and share picking. “It is important to protect capital, and to allow enough time for the investment process and skill to shine through,” Zwane said. At a stock picking level, this process involves a thorough analysis of company balance sheets and income statements and an interrogation of earnings prospects and competitive dynamics. For Allan Gray, this means getting out into the real world and ‘kicking the tyres’ of the firms they are considering investing in. 

The final stand-out explainer, for this writer anyway, was a pictorial showing the intersection of process and outcome. A good process that delivers a good result was labelled ‘a good investment’ whereas a good process that delivered poor outcomes was dismissed as bad luck or a bad break. The former was illustrated by Allan Gray’s analysis of South African banking shares following historic market shocks. They used the post 2008-9 Global Financial Crisis (GFC) data to consider how local banks might respond post-pandemic, and generated sound returns from positioning accordingly. In the latter case, the careful pre-pandemic investment that led the group into hospitality shares backfired. 

Bad processes can have similar extreme outcomes. “If you happened to be reading a newspaper five or 10-years ago and heard about this bitcoin thing, and put all your money into it, you could have done incredibly well … we call that dumb luck,” opined Zwane. “If you had bought one of those other coins that no longer exist, or have trended to zero … well, that is what we call poetic justice”. Sticking with games theme, the portfolio manager then reflected on three possible hands that might affect financial markets over the coming year including an adverse election result; high, sticky global inflation; and the weak South African macro picture. 

Election, inflation and SA macro uncertainties

Asset managers are keeping a close eye on 2024 election results in South Africa, the UK, the US and dozens of other countries. The portfolio manager noted that the sheer scale of election activity heightened geopolitical risks, and that sensible election outcomes were important for long-term social and economic stability. There is, however, very little that financial institutions can do about inflation. According to Allan Gray, there are at least five Ds driving costs globally including demographics; decarbonisation; deglobalisation; debt; and defence spending. “High inflation means higher interest rates, and that has impacts on asset prices as well,” Zwane said. 

The big question for FAnews readers who advise clients on their savings and investment is how to position for an uncertain world. The Holy Grail is a portfolio that beats its benchmark regardless of the curveballs posed by crazy election results, higher-for-longer inflation, or an ailing domestic economy. Allan Gray favours a diversified portfolio currently split to offshore (35%); SA foreign-earnings shares (25%); SA self-help shares (11%); SA deep value shares (6%); SA cash (11%); SA bonds (6%); and precious metals (3%). And thus, we have a nice 11% link back to our opening line comment re self-help SA equities. 

SA equities with foreign earnings include the likes of AB InBev and British American Tobacco. “The nice thing about these companies is that in periods of high inflation, they are able to pick up prices quite well; they have strong pricing power; low costs relative to revenues; and big margins,” Zwane said, before transitioning to the long-awaited self-help definition. “Self-help shares are not dependent on the South African macro to do well; they can outperform the economy by management actions or things that are actively doing,” he said. Woolworths is a good example of this. 

USD400 million cash back

For a much-needed laugh, the presenter illustrated the daily torment endured by local adherents to the value investing methodology. For USD2 billion, you can buy the Waldorf Astoria in New York; for the same money, you could buy all the listed shares in City Lodge Holdings; Sun International; Southern Sun; and Tsogo Sun … and you would still have USD400 million change to splurge on a jet or yacht or whatever. “Yes, there can be short-term nervousness around certain industries; but we have the benefit of an investment process that can wait things out longer than most would,” Zwane said. 

This writer’s parting comment is to leave the clever asset allocation and share picking to the pros. These are the guys who can rationalise the hair-trigger decision between favouring SA cash or SA bonds, and clearly explain their preference. In this case, Allan Gray reckons SA cash offers the better risk-adjusted return over the short-term. Besides, having readily available cash enables them to snap up equity opportunities as and when they present. The parting lesson: just as time-in-the-market makes sense in the retirement savings context, it is the best way for an asset manager to allow its investment process to shine. 

Writer’s thoughts: It was refreshing to take a break from the technical adviser-focused presentations I usually attend, and sit through a client-focussed asset management presentation. Do you join your clients at asset manager updates, and do you occasionally find these events more insightful than the adviser-focused roadshows? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za