On Black Monday, 19 October 1987, the US stock market dropped over 22% in a single day. Less than one month later, Investec Asset Management launched the Investec Equity Fund. The following decades saw the fall of the Berlin wall, the end of apartheid, the Gulf war, 9/11, the Iraq war, and both the entry and the beginning of the exit of the United Kingdom from the European Union. We endured the Mexican, Russian, South-East Asian and Great Financial crises. We saw prime interest rates here in South Africa reach a high of 25.5% and a low of 8.5%. Through it all, we remained resolute, firm in our belief that disciplined investment in equity delivers results for patient investors.
As human beings, we are influenced by our emotions, and look to the most recent history as evidence. At this point in time, with global and local events surprising almost everyone on the downside and forcing everyone to focus on yesterday instead of tomorrow, it is worthwhile reflecting on three key insights:
Over the near term, returns from equities can vary significantly. Figure 1 illustrates how over any twelve-month period over the last fifteen years, the average fund invested on the domestic equity market returned anything between 62% and -32%. History has shown that with increased time, the return profile becomes more stable, with the range falling to 47% to 0% p.a. over three years, and to 34% to 3% p.a. over five years. Impatience costs money – patience delivers rewards.
Figure 1: Minimum and maximum returns over different periods
ASISA General Equity sector, 15 years as at 31 March 2017
Source: Morningstar to 31 March 2017. ASISA General Equity sector, performance figures above are based on a lump sum investment, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, fees are not applicable to market indices, where funds have an international allocation this is subject to dividend withholding tax, in South African rand.
While it is important to have a clearly defined investment philosophy that guides decision-making, implementing this philosophy should be driven by a process that is well-defined and that should not waiver when uncertainty increases. Within the Investec Equity Fund, we have developed a disciplined investment process driven by objective screening, experienced fundamental research and a clear sector perspective which cuts through inefficiencies. This systematic process helps us to avoid behavioural biases and enables us to deliver repeatable and dependable returns over the long term. We believe this strong, focused process is key in generating consistent returns for investors through time. This is equally true for investors in our Fund, as we demonstrate later.
While equity investment markets will be impacted by political events, the outcome of these events is highly unpredictable and often binary in terms of the market impact. Trying to position a portfolio perfectly in order to benefit from a specific outcome relies on a significant amount of luck. We are not in the business of relying on luck, and hence adopt a balanced approach, demonstrated by a diverse portfolio without overexposure to any one macroeconomic risk, share, sector or industry.
The Investec Equity Fund employs a general market approach, with little to no style bias, intending to provide a core solution for South African equity market investors. In essence, we select companies that are receiving positive earnings revisions and which are offering reasonable value.
The Investec Equity Fund was awarded a special Raging Bull Award for the top-performing domestic equity fund over the past 21 years. This was an acknowledgement of the Fund’s excellent track record over a long and difficult period of time, in which it not only comprehensively outperformed the FTSE/JSE All Share Index but achieved this with less ‘heart failure’ risk – lower annualised volatility than the JSE average. Although 2017 has proved challenging, the Fund’s performance has held up well, as evidenced in Figure 2.
Figure 2: Since inception performance, R100 000 initial investment
Annualised returns (%)
|1 year||3 years p.a.||6 years p.a.||10 years p.a.||Since inception p.a.|
|Investec Equity A||-0.4||8.5||13.8||9.4||16.7|
|(ASISA) South African EQ General||1.2||4.2||9.6||8.0||15.0|
Source: Morningstar, dates to 31.03.17, performance figures above are based on a lump sum investment, NAV-NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested. Market indices are gross of fees. Benchmark: 87.5% FTSE/JSE All Share Index (ALSI) + 12.5% MSCI AC World NR (ACWI) (ALSI pre 15/07/2016). A Inc ZAR class unit inception date: 02.04.00. Annualised performance is the average return per year over the period. Highest and lowest returns achieved during 12-month rolling periods since inception: 30.04.06: 65.8% and 28.02.09: -34.8%. The total expensive ratio of the Fund is: 2.02%.
It is understandable that recent developments in the domestic political landscape have heightened uncertainty, making investors feel compelled to react. We, however, remain focused on selecting companies where earnings expectations are being revised higher and which are trading at reasonable value. In this uncertain environment, we believe it is important to construct a portfolio of high conviction ideas that is balanced in diversity and does not rely on a specific political view or event to unfold for the Fund to do well.
By way of example, key investment ideas in the portfolio have very little to do with ‘South Africa Inc.’, and they should benefit from a better global environment. Mondi and Sappi are leveraged to improving paper and packaging commodity prices. Both are undertaking cost-cutting initiatives, while Mondi has also made small acquisitions – all of which are earnings-accretive. Richemont’s affluent consumers are benefiting from rising equity markets, while Chinese consumer discretionary spend is particularly robust, underpinned by an economy supported by accommodative government policy. Also, we continue to own British American Tobacco, which balances our exposure to more cyclical global companies. The company is receiving positive earnings revisions due to the benefits from internal efficiency projects and growth in ‘next generation’ e-cigarettes. On the domestic front, defensive food producers, such as Tiger Brands which has been able to growth earnings well ahead of market expectations, have been a key contributor to our returns over the last year.
While we remain vigilant to increased domestic political uncertainty, selective opportunities remain. We will continue to capture these opportunities for our investors by following a clear and consistent investment philosophy and process.
All information is as at 31.03.17 unless stated otherwise. All information provided is product related, and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long-term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing, up to 10% of fund net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the Manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. The full details and basis of the award, affirmed on 25.01.17, are available on request. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). Issued by Investec Asset Management, May 2017.