Time to do things differently?

If you believe some of the commentary on financial markets, the world is not what it used to be. The main source of the interest is two of the world’s oldest civilisations – Greece and China. The Greeks are struggling to pay their debts and have been negotiating with their creditors. The Greek government went back to the people of Greece to ask what they wanted. They resoundingly rejected the proposals made by the country’s creditors. But in spite of this, the Greek government has had to accept terms that many are saying are more severe than those rejected in the referendum. So now Greece’s membership of the European Monetary Union seems secure – but at what price? What will be the consequences of reaching an agreement to bail out the Greek economy?

While this has been the European story, in China the stock market has been in free fall. At some point, 1400 individual stocks (about half the number of stocks listed) had trading suspended as they reached the maximum share price fall allowed in one day. Since then the government has imposed restrictions on selling. If you own more than 5% of a company’s stock, or you are a director or an executive, you are now prohibited from selling any shares – Wow! This comes on the back of the People’s Bank of China cutting its one-year benchmark lending rate by 0.25% to 4.85%. It also lowered its reserve requirement for banks with lending to farmers and small business by 0.5%. Both moves are part of China’s more accommodative monetary policy, which the government says is designed to stabilize growth. Yes, the world is worried about a slowdown in Chinese growth.

Back home, we continue facing the prospect of load shedding. Eskom applied for an additional increase, which the National Energy Regulator turned down. So the chances are we will be facing a few more evenings with the candles burning brightly. Needless to say, the power situation is not conducive to strong GDP growth.

And how has that played out on our market? In one word: VOLATILITY. Since the beginning of May until 10 July 2015, the FTSE/JSE All Share Index lost around 5.5%. There were 29 down days and 18 up days. But of the down days, there were 10 days when the index lost more than 1% in a day and only three days when the market was up more than 1%. Have a look at the short-term fluctuation of the index in chart 1.

So how does one deal with these difficult days? Is it time to do things differently? We don’t think so.

Simply put, now (as always) is the time when discipline and a long-term view comes into play. We put a great deal of emphasis on our fundamental research process at Sanlam Investment Management (SIM). Understanding what drives profits in each of the companies we analyse allows us to take a view that is unfettered by much of the noise provided by daily news flow. We look at the ability of companies to perform over the passage of time.

So despite the volatility over the short term, the FTSE/JSE All Share Index is up 2% over a one-year period, 29% over a two-year period and 57% over a three-year period (see chart 2). The uncertainty in times like these, in fact, creates the opportunities that those with a long-term view relish because it’s when the foundation is set for future returns.

Using our process, the SIM General Equity Fund has managed to be a top quartile performer over three, five, seven and 10 years until 31 May 2015. Over all of these periods the fund outperformed the FTSE/JSE All Share Index (on a total return basis). This is what we focus on, because by being patient and taking that long-term view, we believe our clients will enjoy real wealth creation.

It is tempting to want to chase the shorter-term momentum in the market, but trying to catch up to the market is not what we advocate. For us, the wise choice is to stay disciplined and to look beyond the short-term turmoil when making decisions. As Charlie Munger says, “You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.”