JSE still providing good opportunities

PSG Equity Fund, fund manager Shaun le Roux.

There are still good opportunities on the JSE to buy reasonable- to high-quality businesses at attractive valuations. Investors should not feel compelled to own a stock just because it is a large component of the FTSE/JSE All Share Index (ALSI) if one can find other stocks with better risk-reward characteristics.

Commenting in the latest quarterly commentary for the PSG Equity Fund, fund manager Shaun le Roux is of the opinion that there are much better opportunities than many of the expensive large caps that dominate the index.

The holdings of the PSG Equity Fund currently differ materially from the large constituents of its benchmark, the ALSI. The fund nevertheless expects that the five-year returns from the stocks they own will comfortably exceed its hurdle rates.

Opportunities can be found in three broad areas:

• Large cap JSE stocks where expectations are very low and likely to be exceeded. These include Steinhoff, Glencore, Old Mutual, Anglo and Imperial.
• Mid- to small-cap JSE stocks where the quality is not reflected in the valuation. These include Capitec, Adcorp, Tsogo, Super Group and AVI.
• Mispriced quality global stocks that include IBM, Markel, JP Morgan and Brookfield.

“Because we tend to invest in unloved and generally mispriced businesses, our portfolios are almost always cheaper than the market. At the end of September, the average price-earnings (PE) ratio of the PSG Equity Fund was 12.6 times versus the ALSI’s PE of 17.1 times.

“Given the elevated market levels, we think it is especially appropriate in today’s environment to carefully consider the risks before committing capital to a new idea.

“We therefore have found ourselves consciously walking away from mean-reversion opportunities where we couldn’t eliminate the possibility of capital loss. We are also avoiding overpriced stocks in some of the more popular sectors of the market,” le Roux said.