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High equity valuations require sober analysis

23 September 2014 Nick Battersby, PPS
Nick Battersby, PPS Investments CEO.

Nick Battersby, PPS Investments CEO.

With the JSE All Share Index (ALSI) having reached its record high on 29 July 2014, before easing off slightly and enjoying a price/earnings ratio above 17.5 times, PPS Investments CEO Nick Battersby says that from this level it’s a sobering reality - given there have been few times in the last 20 years when the market has been at that level, that there appears to be little upside to this market.

He says that the multi-manager is currently at the lowest band of its domestic equity exposure across all its funds, and approaching the highest level it can in terms of international equities.

“PPS Investments have placed an increasing proportion of our offshore assets with active offshore managers. We are prepared to incur somewhat higher costs with such quality managers in pursuit of excess returns as opposed to relying solely on passive funds as we have been comfortable to do at times previously,” adds Battersby.

This view is in line with most fund managers – in fact almost 100 percent of fund managers describe local equities as “overpriced” according to the most recent Merrill Lynch fund manager survey.

In the current environment where the domestic market is regarded as over-priced and even offshore markets are not cheap, Battersby believes an effective solution for investors is the multi-manager solution. “Multi-managers monitor the performance of available specialist asset managers on a continuous basis. In addition, we spend considerable energy understanding the qualitative differences between these asset managers before determining which mandates from which single asset managers to combine, to benefit a portfolio from an overall perspective given expected investment conditions.”

A multi-managed unit trust is made up of a complementary mix of single asset managers. This offers two distinct advantages, firstly, it results in moderated levels of risk. By combining various asset managers, an investor stands to benefit from diversification not only across asset classes but also across different investment processes and views. Such a strategy allows, for example, a manager who performs best in a climbing market to be complemented by a manager who is defensively positioned to offer better protection when markets fall. It also removes the reliance on any single asset manager to achieve an investor’s objectives on its own.

“Secondly, a multi-managed unit trust has the potential to offer more consistent performance. Any single asset manager will typically experience downswings in performance when market conditions don’t favour their particular approach. By combining different asset managers with different investment tactics, these downswings in performance can be smoothed out,” points out Battersby.

In an environment where it is highly unlikely that the next number of years will be similar to what the local market experienced in the recent past - South African equities are now overvalued and interest rates are likely to increase further - outsourcing your investment decisions to a multi-manager makes more sense than ever.

Battersby says that by far the bulk of new capital is invested in balanced or multi-asset funds, indicating that investors realise this. “Investing with a well-respected multi-manager, your research is done for you – and will likely be executed more comprehensively than you may be able to.”

PPS Investments’ client base has a few characteristics that make it unusual: approximately 90 percent of its clients are professionals, adds Battersby. “They don’t have much time for their own investing, but they are above-average educated. They tend to be long-term investors to whom regular communication is paramount. Because they trust our professionalism, they are less prone to reacting to short-term market conditions than broad market clients appear to be.”

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