FOCUS
PORTFOLIO MANAGER MONTHLY - 3 DECEMBER 2012
This one-pager describes the thinking behind selected recent management actions in
Balanced Mandates and provides context to the current positioning of your capital against
the backdrop of a global investment opportunity set. I will occasionally provide observations
about investment markets and the business of investing. It would be my pleasure to answer
questions you may have about any aspect of our investment philosophy, process and
management actions.
We don’t have titles for people here at RE:CM, but if I had to invent one I would call my
colleague Sean Neethling the ‘global head of fixed income’. Well, OK, to be honest our
Daniel Malan
fixed income research team consists of just one person, but it pays to think big. More
Investment Director
importantly, it pays to act big if you are small. But; most importantly, it just pays to
think, full stop. Just because Sean is currently on his own doesn’t mean he can’t think
for himself; in fact we have found quite the opposite. Based on our own experiences and experiments we tend to agree
strongly with Pascal who said that “All man’s miseries derive from not being able to sit in a quiet room alone” Suffice
to say that our investment team does not spend time in endless formal meetings.
Chart 1: SA Long Bond Implied Prospective Real Returns
Sean sat in a quiet room alone for long
enough to come up with chart 1. The black /
top line is the nominal (spot) yield of the SA
10 year bond from 2000 through the present
day. The orange / bottom line is his proxy
for the implied prospective (future) return
from owning the 10- year bond to maturity
at any one point in time. It is calculated
by subtracting the best estimate of future
inflation – he used the rolling 5-year average
in this case but you can also consider using
the upper end of the targeted SARB inflation
rate or the actual inflation outcome since
inflation targeting started in 2000 of 5.9% from the nominal yield.
Please compare the first two circles in chart 1 with the two respective arrows above them. The arrows represent what
happened to nominal yields from that point onwards. The conclusion is that if in 2005 and 2009 one had bought South
African long bonds when they were priced to deliver a real return of 2%, you experienced a drawdown in their capital
values – excluding income - over the following three odd years. From both starting points it is only with this latest
decline in yields in 2012 that you would be in the money. Fast-forward to today and SA long bonds are currently priced
to return a small negative real return for investors. We do not think this makes much sense at all to begin with and we
believe this scenario represents extremely poor odds to investors.
Other than a small position in the senior corporate bonds of African Bank that we acquired at between 4% and 5% real
returns to maturity for our balanced fund mandates, we do not own any long or short dated South African government
or corporate credits.
This is an opportune time to thank you for your continued patronage. Have restful and energizing breaks, be safe on
the roads and we look forward to seeing you again early in the New Year.
FOCUS - SA EQUITY
PORTFOLIO MANAGER MONTHLY - 3 DECEMBER 2012
This one-pager describes the thinking behind selected recent management actions in
South African equity mandates and provides context to the current positioning of your
capital against the backdrop of the domestic investment opportunity set. I will occasionally
provide observations about investment markets and the business of investing. It would
be my pleasure to answer questions you may have about any aspect of our investment
philosophy, process and management actions.
In 2008, at the first circle in chart 1, our equity fund mandates had only one resource business
in the top ten fund holdings, Harmony Gold. As per our promise to our clients, we only own
Daniel Malan
cheap merchandise and at the time it was our research convictions that led us to avoid the
Investment Director
likes of Sasol, Anglo American, BHP Billiton and so forth. At that time they were very large
index constituents and the pain of not owning them due to relative underperformance was
substantial; for us, our clients and in turn their clients. The reckoning came swiftly during the 2009 market selloff.
Chart 1: JSE Resources vs. JSE All Share Index
Since 2008 and in fact since late 2001 the JSE
resources sector has basically had a hiding second
to none on a relative basis. Like a lioness on a
grassy hill casually watching the passing antelope
with interest our team has also been lifting their
heads to focus on the resources sector with
increasing intensity levels. Of course as they’ve
kept grazing (share prices going down) they also
get fatter (bigger margin of safety). Having done
our homework it was apparent that only during
the past year or so has the sector begun to offer
good absolute value to valuation based investors.
As my co-manager Wilhelm Hertzog said recently
after contemplating a 30 year dataset of industry
multiples; “If you don’t buy platinum stocks now
when are you ever going to buy them?”
Interestingly, it is also during the past 12 months, depicted by the second circle in chart 1, that our clients’ equity mandates
have been repositioned to reflect a more meaningful resources exposure, with six of the top ten fund holdings now being
that of resource businesses.
The perspective that I wish to share with you is that we have patiently waited for four years for an acceptable margin of
safety in the resources sector to emerge. Now that it is apparent we have acted with conviction on our research conclusions
to reposition your funds appropriately. My point is that these fund changes do not happen overnight or in wild swings;
hence my lengthening the time frames here for your benefit and to enhance your understanding of our investment process.
The arbitrary month of November has been relatively quiet on the transactions front. Good news from our perspective is
that amidst the market index reaching new all-time highs there have been significant price declines in certain sectors of
the market. This has allowed our portfolio managers to begin acquiring stakes in a handful of new investment ideas in the
small- and mid- capitalisation ranges. We will report to you on these following the completion of our buying programs.
This is an opportune time to thank you for your continued patronage. Have restful and energizing breaks, be safe on the
roads and we look forward to seeing you again early in the New Year.