Industrial evolution aids canny investors – STANLIB

Domestic industrials may have shed 7% in value over the first quarter, but the net effect of recent selling pressure has been to highlight the defensive and value opportunities now open to well-informed investors.

The positive perspective comes from Theo Botha (pictured right), newly appointed head of industrial sector research at STANLIB, South Africa’s leading asset management company.

He acknowledges some areas of vulnerability and the need for deep fundamental research to identify winning companies, but believes the category is becoming proof that diversity represents strength.

STANLIB’s industrials analysts follow 50-60 counters, though the STANLIB Industrial Fund typically contains less than 20 shares as it prefers to take strong positions in areas of opportunity.

Botha notes: “The sector is continiously evolving; with some vibrant newcomers and strong management teams graduating from the AltX. Evolution adds to diversity and creates opportunity, as long as you keep good data on the industries, managers and business models. You find the good industries and back the best management teams.

“There is no need for indiscriminate flight at times of pressure. The category’s built-in variety enables the well-informed investor to adopt quite robust defensive strategies or seek value at the right time.”

Unit trust investors appear to share STANLIB’s faith in the ability of good companies to ride out sector pressure. Despite heavy losses by some retail and financial counters in a volatile first quarter, there was no flight of investors from the STANLIB Industrial Fund.

The spread of sub-sectors within the category includes industrial companies, consumer goods, healthcare, consumer services, telecoms, financials and general industrials.

“Breadth creates options,” says Botha. “If you’re concerned about the rand, internationally diversified groups like Richemont provide an avenue. You don’t need to be over-exposed to consumer distress in fashion or automotive retailing. You can be defensive and opt for food companies or retailers focused on staple foods.

“Inflation may hurt consumers, but some companies have a good record for successfully passing on inflation and managing their inventories.

“Pharmaceuticals offer another defensive play while construction continues to offer long-term growth prospects thanks to major investment in strategic infrastructure that will take years to roll out.”

Botha, an industrials specialist since 1992, manages the STANLIB industrial unit trust and a major industrials mandate with a value of more than R5.5 billion.

“In macro, top-down terms, industrials and financials may not have been the place to be in the first quarter,” he notes. “But if you exploited the defensive and long-term growth possibilities, the situation was manageable. We saw no sign of panic and emphasis soon shifted to a new search for value – a signal that local investors have confidence in the ability of well-managed companies to bounce back.”