Choosing the right shares is crucial in today’s low-return environment
Many investors may be experiencing a prolonged absence of inflation-beating investing returns.
This concern is well founded, given the median three-year returns generated by the following major fund categories:
SA Equity General: 3.2%
SA Multi Asset Flexible: 3.8%
SA Multi Asset High Equity: 4.8%
SA Multi Asset Low Equity: 5.8%
Global Multi Asset Flexible: 5.4%
“The current environment provides little comfort,” says Shaun le Roux, a fund manager at PSG Asset Management. “Globally, investor confidence has been shaken by (among other concerns) risks posed by faltering trade negotiations and the uncertain impact of continued monetary policy tightening in the US. Locally, investors remain anxious about the ANC’s land expropriation policy and the dire state of national, municipal and state-owned enterprise treasuries.”
Investing can be likened to running a marathon, le Roux says. The prospect of a downhill fills you with relief but the sight of an uphill is discouraging. Lately, investors have been on a long flat. While many feel a decline is due, the macro environment is suggesting the opposite. What to do?
“Don’t look back and don’t look forward; just focus on the rhythm of your steps. This is what we do, and we find that it helps to keep our emotions in check and our ability to make rational investment decisions intact.
“We continuously look at the valuations of the securities we’ve included in our client portfolios to make sure they continue to offer compelling value (as they currently do). As present-day valuations are important drivers of longer-term returns, this makes us less concerned about the near-term trajectory of events. Undervalued inherent quality rewards the patient investor.”
Le Roux says that many of the equities PSG Asset Management’s clients currently hold are trading at low double-digit price-earnings (P/E) ratios, which the manager believes are attractive valuations. “This means that returns could be generated both from earnings growth and the expansion of P/E ratios (as markets tend to ascribe higher multiples to growing earnings).
“In addition to offering this margin of safety, all shares have been through our moat and management analyses. We believe that these companies can overcome macro challenges to protect their profitability and their ability to service debt,” he says.
Le Roux says that crowded global stocks remain expensive. As a result, opportunities need to be carefully chosen. However, he notes that there are attractive risk-reward characteristics in many local stocks (especially mid-cap industrials) and selected global opportunities. “These securities are out of favour and can be acquired at low valuations on what we consider to be low levels of earnings. The PSG Equity Fund’s P/E ratio of 12.6 compares favourably to its long-term average, and is well below that of the broader market (the FTSE/JSE All Share Index currently trades at a P/E ratio of 17.2). This is indicative of the attractiveness of the stocks we own, especially when considering the depressed levels of earnings for certain counters,” he says.
The fund’s exposure to offshore equities has increased in 2018, and is currently 30.8%. Le Roux notes that this has been due to long-term opportunities the investment team has identified in some of the less crowded market areas, such as US retail real estate, niche global retailers and Japanese financials. “The healthy discounts to intrinsic value for the stocks we own give us cause for optimism, and conviction that the fund is well positioned for an uncertain future,” he concludes.
