Value strategies deliver fantastic long-term growth
The New Year is the perfect time for local fund managers to share their views with brokers, investors and the media. They comment on important macroeconomic indicators, remind us of their fund performances over time and reiterate the competitive advantage
Greg Hopkins, Manager: PSG Global Equity Fund was on hand to share some of the difficulties in generating return in uncertain economic conditions. His first observation was that fund managers (and investors) always face uncertainty. At any point in time there are questions about GDP, interest rates and currencies. These critical macroeconomic factors form the backdrop for likely stock market performances and are beyond the control of fund managers – and even governments. On the corporate front analysts are uncertain over profits and cash flows… The way to tackle uncertainty is to instil disciplined in your share selection methodologies. “If one has a disciplined, simple and rigorous investment process you can turn uncertainty into wealth creation and wealth preservation for your clients,” said Hopkins.
What happened in 2011?
Last year was dominated by ridiculous volatility as investor sentiment pushed markets back and forth. Hopkins described the massive swings in price levels as a tussle between fear and greed. He quoted US investment guru Warren Buffett: “There is no comparison between fear and greed. Fear is instant, pervasive and intense. Greed builds up over long periods of time.” The difference in these emotions explains why markets fall out of bed so quickly – and take so long to return to previous highs! The JSE All Share index is a case in point. When fear gripped the markets (around May 2008) local shares dropped from their then record high of 33233 points to just 17814 points in six months. It took 38 months for the market to break through its previous high, mid-January 2011.
Hopkins observes that 2011 was a rather dull year, ending “flat” for most asset classes. At one stage, with the JSE All Share almost 20% in the read, it looked certain we were in bull market territory. But by 31 December 2011 the local equity market “loss” came in at a mere 0.5%... How do fund managers generate 15%-plus annual returns from this lacklustre performance? The answer lies in how they select shares and position their overall portfolios. If you analyse the JSE 2011 return you find massive divergences between the best and worst performing sectors. On the plus side the Retail sector screamed 24% higher, followed by Beverages (+20%) and Technology (+20%)… In stark contrast Construction and Materials shed 26%, with Support Services and Mining deep in the red too! But one or three-year views are not what fund management is about. The professionals are more concerned with fund returns over the five and 10-year time frames.
A five point philosophy to greater market returns
PSG Asset Management has a simple approach to picking the best available shares. And they apply the same five steps whether they are considering local or global companies. The first commonsense principle is to only buy companies that offer a discount to their intrinsic value. An important disclaimer is that this discount offers a wide margin of safety. “If you get things wrong you are going to want to get your money back,” observed Hopkins. The second principle is to be contrarian. What does this mean? In a nutshell, you have to be buying when other people are selling, and selling when other people are buying. The first two points go hand in hand. If the majority of investors are selling shares then there are bound to be forced sellers. As they become more desperate to offload their investments value opportunities will present!
Buffett, mentioned earlier, was very careful about which companies he invested in. He stuck with businesses he could understand. PSG has built this wisdom into their share selection stratagem as the third principle: Understand what you are buying. “Before purchasing a company you should complete the sentence: The beautiful thing about the business is…” said Hopkins. The fourth and fifth principles address the ongoing relevance of the investment philosophy.
You have to keep an open mind and continually challenge your thesis. Hopkins mentioned the big debate around the Euro towards the end of 2011 as a critical inflection point in global markets. If you hadn’t picked up on the signals you would have missed out on a major rally in global equities. And finally – you must acknowledge your mistakes and learn from them to ensure stronger performances in the future.
Putting the philosophy into practice
There are benefits to being a smaller fund manager and the group has taken positions in shares that its larger competitors cannot entertain. “In recent months PSG has used the opportunity to buy good quality ‘growth compounding companies’ that we hope to own for many years,” observed Hopkins. “Growth is very important – and some of these companies are at the start of a 10 to 15-year runway!” Going forward the group will continue to buy good quality businesses with great management teams and a built-in margin of safety. By applying the same strategy locally and abroad the group has produced impeccable long-term performance across its product stable.
Editor’s thoughts: There are many things to consider when investing in unit trusts. Retail investors appear to commit their capital to the “best in class” fund based on one-year performances. But the experts suggest you consider fund performances over five or even 10-years. Fees should play a part in your investment decision too. What do you consider before investing your client in a unit trust fund? Add your comment below, or send it to gareth@fanews.co.za
