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This article, written by Prinesha Naidoo, originally appeared on www.moneyweb.co.za.

 

Investec Asset Management’s stock picks

By Prinesha Naidoo

After several commentators blamed poor investment returns in 2016 on politically-fuelled volatility – from Brexit, to the US presidential election outcome and uncertainty in South Africa – Investec Asset Management says volatility has yet to play out across financial markets.

“Despite the fact that we like to talk about lots of volatility, it actually hasn’t happened yet. Equity volatility is at low points in the last 20 years, political volatility has not manifested itself yet and therefore you have to be careful about how you construct portfolios and how you build them,” said Rob Forsyth, a fund manager at Investec Asset Management.

Presenting to a packed auditorium during the asset manager’s annual Taking Stock event, he said its approach to portfolio construction – especially during periods devoid of growth – centres around picking quality companies, with hard to replicate competitive advantages, that continually invest in research and development.

“We love the fact that if you’ve got companies with high barriers to entry that invest for the future, they can perpetuate that,” he said.

As at January 31, the 10 equity holdings of Investec Asset Management’s Opportunity and Global Franchise Funds were as follows:

Holdings as at 31/01/17 % of fund
British American Tobacco 5.1%
Sasol 4.2%
Assore 3.5%
Richemont 2.8%
Aspen Pharmacare 2.1%
RMB 2.1%
Sanlam 1.9%
Mediclinic 1.9%
Steinhoff 1.8%
Tiger Brands 1.4%
Total 26.9%

Source: Investec Asset Management

Holdings as at 31/01/17% of fund
Johnson & Johnson 6.0%
Microsoft 5.4%
Visa 5.4%
Nestle 5.2%
Roche Holdings 4.7%
Imperial Brands 4.7%
Reckitt Benckiser 4.4%
Moody’s 4.3%
Philip Morris International 3.9%
Verisign 3.6%
Total 47.6%

Source: Investec Asset Management

According to Forsyth, the 32 companies held in Investec Asset Management’s Global Franchise Fund account for 12% of the cumulative Research & Development (R&D) expenditure of all companies.

“We are actually getting 4x our buck in terms of expenditure that these companies are paying for future development, for future growth. [It is] very difficult to compete against companies that are spending that kind of money,” he said.

On the domestic front he said Richemont, a cyclical business, is a far better investment than resource companies due to its strong balance sheet, improving returns on tangible capital and its potential to grow its 2% share of the $270 billion global jewellery market.

“When we build and construct a portfolio, we don’t want everything to be going fantastically well at the same time because it means you’ve got unintended risk in a portfolio, it means you’re taking a one directional bet. Essentially, what we’re trying to do is build out diversified risk,” he said.

Meanwhile Jeremy Gardiner, a director at Investec Asset Management, said 2017 is shaping up to be a better year for investors.

“You’ve got a synchronised global recovery, you’ve got the US, China, Japan and the EU all improving. That’s great news for us because it’s going to drive emerging markets… 70% of how you feel depends on whether emerging markets are in favour or not, only 30% is politics,” he said.

“The economic outlook is positive; politics tarnishes it considerably. Economically, we’re in a very different space to this time last year and that’s why last year when you saw the finance minister being pushed sideways, we collapsed. There was nothing to bring us back. This time, if it happens I suspect that we may actually start recovering within a week simply because the fundamentals are 70% of where the rand goes,” he said.

He went on to add that the rand is likely to strengthen or weaken by one or two rand against the US dollar in 2017 depending on political interference. Even with political interference, he said the rand is likely to recover quicker than it did at this time last year due to stronger fundamentals.

He also said that now may be a good time to take money offshore not only due to rand or emerging market strength but because the pound will be on the back foot while Brexit negotiations continue and as major upcoming elections in Germany, France and the Netherlands may weigh on the euro.

In addition, a recovery in commodity prices, a stabilising debt-to-GDP ratio, improved CEO confidence and the breaking of the drought, slowing inflation and the potential for rate cuts bode well for South Africa.

“We should avoid junk status, assuming the politicians behave,” he said.

Still the ANC succession debate and a possible cabinet reshuffle, to fill vacant positions, may add some uncertainty.

 

Important Information

With regard to the Investec funds in the article, please refer to their respective minimum disclosure documents in order to obtain all the necessary information pertaining to those funds. Collective Investment scheme funds are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Funds are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of charges, fees and adviser fees is available on request from the manager. Additional adviser fees may be paid and if so, are subject to the relevant FAIS disclosure requirements.

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