Welcome to the first issue of Investec Asset Management’s Institutional Insights. We are excited to launch this bi-annual newsletter, which provides a platform for reflecting on markets and sharing our investment and industry insights with you.
Central bank action continued to dominate proceedings in the first half of the year, with interest rate cuts seen across the globe. The number of rate cuts – especially over the first quarter of 2015 – was truly extraordinary compared to historical precedent. Perhaps more remarkable is the fact that the likes of Switzerland, Denmark and the euro zone all ended the quarter with negative deposit rates, making it challenging to assess the long-term consequences. Central bank communication was also an important consideration in the US, as market participants searched for clues on the intentions of the Fed. It is our view that interest rates will rise in the US this year for the first time in eight years, and as a result we believe it is unlikely that the equity market will surprise on the upside.
In this issue of Institutional Insights, Nazmeera Moola, our Economist and Strategist, shares her views on the current state of the global economy. She argues that we are at a critical juncture, with concerns ranging from Greece to China. However, Nazmeera explains why in her view a bullish story for global growth is possible over the next few years.
Moving closer to home, South Africa has not been unaffected by weaker global markets, resulting in weaker commodity prices. Concerns around Europe have also led to a volatile local equity and bond market. The All Share Index remains a highly divided market, dominated by a handful of large capitalisation, highly valued industrial stocks. The local economy remains under pressure and the issues surrounding Eskom have not helped the macro environment, with risks relating to our state-owned power utility being progressively heightened. We believe, however, it is imperative to remain focused on the long term and not let the short-term headwinds of the past few months detract from our ultimate investment objectives. We adopt this mindset to ensure our clients’ assets are managed in such a way that members are able to retire with dignity. Investec Balanced, one of our flagship strategies, has since inception delivered returns in excess of 10% per annum ahead of inflation.¹
Overall, the team has a slightly more cautious positioning than in the past. In this edition, the Investec Balanced and General Equity teams have put together an insightful case study on Steinhoff, which underlines the power of earnings revisions – the cornerstone of the equity component of Investec Balanced as well as Investec General Equity.
African markets continue to be in the spotlight, particularly given the fallout from the oil price collapse of late last year. Portfolio Manager, Khaya Gobodo, provides a valuable perspective on managing risk when investing in the rest of Africa.
While there has been much focus on market-relative returns over the past few years, we believe that the recent negative returns experienced in some months during the first half of the year (three negative months by the All Share Index and five negative months by the All Bond Index) are a wake-up call. We need to remain cognisant of the importance of absolute returns and not assume that market indices will continue their positive trajectory inevitably. Portfolio Manager, Sumesh Chetty, explains why absolute returns still matter.
The SA listed property sector has been the star asset class performer over the past five years, delivering annualised returns of 20.5% and continuing to outperform all other traditional SA asset classes for the first six months of 2015. Portfolio Manager, Neil Stuart-Findlay, provides an interesting global perspective on why South African real estate has increased in prominence.
In conclusion, we are pleased to share some good news with you: Investec Asset Management recently received the top accolade at the Imbasa Yegolide Awards for Institutional Excellence by being named Overall Asset Manager of the Year. We thank you for your loyalty and support.
Enjoy the read!
1 Source: Investec Asset Management, as at 30 June 2015. Returns are calculated on a true daily time-weighted basis gross of fees.
The global economy is at an inscrutable juncture, with much to be worried about. While concerns over Greece and China mean that the bearish story is taking centre stage, it is still possible to construct a bullish story on the outlook for global growth over the next few years. The bullish story runs something like this: Expectations for global growth have been downgraded so much in the last year that growth could well surprise positively in the next 6-12 months. This has already been partly reflected in the sell-off in US and German bonds in early May.
The US economy continues to add jobs and there is growing evidence of wage pressure in a broader range of industries. Despite some recovery, the oil price is still significantly lower now than it was a year ago. This should provide a major boost to world growth in the remainder of 2015. While markets are fixated on the timing of the first hike from the US Federal Reserve, the Fed will not be raising rates aggressively – especially as inflation remains very contained.
All investments carry some risk. While equities could lose substantial value following a market downturn, even conservative investments come with inflation risk. The assessment of risk is one of the most underappreciated and misunderstood disciplines in investments. Investors tend to focus on the positive outcomes they hope to achieve in their search to identify attractive investment opportunities. This makes logical sense, because it is from positive return outcomes that we achieve our investment objectives. And while there are a multitude of different investment objectives, they all boil down to one thing: to invest so we have more tomorrow than we do today.
There are a myriad ways to identify, express and measure risk, and money managers’ approach to risk can differ markedly. We view risk predominantly as the probability of permanent capital loss. In other words, the risk of being forced to sell a share at a price below our purchase price after an appropriate holding period. We spend a significant proportion of our time evaluating this risk when considering individual investment opportunities.
Investing is not a sport. The vast majority of individuals invest for a particular level of real growth to meet financial commitments. These could include providing a deposit for a house, paying for a child’s education or being able to retire in comfort. But these financial commitments bear no relation to the short- or long-term performance of a market index. So what then is the relevance of trying to beat an index? Or even generate performance in line with an index (as most investors are so eager to do these days)?
The current environment has resulted in investors generally losing their appetite for absolute returns. We are in the seventh year of a bull market, and since the bottom in March 2009, the ALSI has delivered a staggering 239% (as at 31 May 2015). Index-relative or even index investing has rewarded investors handsomely, making it that much easier to ignore risk. The expectation of a more volatile, lower return environment over the next ten years should increase the average investor’s appreciation for absolute rather than relative returns.
While growth and value investment styles are widely known in the world of equity investments, earnings revisions may be less familiar to the investing public. But what are earnings revisions and how can this style factor be turned into a rewarding investment strategy? Earnings revisions occur when investment analysts’ expectations of a company’s future profits change. This then leads them to adjust their earnings estimates upwards or downwards. Share prices continuously react to changes in the fundamental prospects for companies, which are partly reflected in changes to future earnings expectations.
We strongly believe that behavioural biases cause investors to over- or underreact to data, as sentiment and emotion cloud their judgment. Some investors tend to cling to their original earnings forecasts even though new information has come to light. When a company is doing better or worse relative to current expectations of profitability, investors typically need time to understand why this has occurred. They are therefore slow to react to information while they reframe their views on the company. These behavioural biases provide opportunities for astute active managers to generate excess returns.
The introduction of real estate investment trust (REIT) legislation in 2013 brought the SA listed property market in line with global best practice, especially in terms of tax transparency. The investor-friendly nature of the new structure prompted most listed property companies to convert to REITs over the past two years.
Even though foreign investors in our REITs are subject to a withholding tax, they have increased their shareholding in many of the larger domestic property counters in recent times. This trend has certainly been aided by companies’ new REIT status as they now qualify for inclusion in a broader range of global real estate and equity indices. We believe there is scope for foreign ownership to grow further, given that it only represents approximately 10% of the sector. By comparison, that is only about a quarter of what offshore investors own in the broader SA equity market. In our view, increased foreign interest in the SA listed property market should continue to help grow this domestic asset class over time.
As long-term investors, we are deeply aware of our broader responsibility to society. First and foremost, we are working towards a better future for our clients, as custodians of their investments. We also seek to make a positive impact by focusing on initiatives that support local communities and their environment, thereby contributing to the success of future generations.
More than a decade ago, Investec Asset Management and other corporate sponsors provided the means to build the JL Zwane community centre in Gugulethu, a township in Cape Town. Today, this modern facility serves the needs of an entire community, providing a wide range of services including education, adult literacy and HIV/Aids counselling and care.
Investec Asset Management remains committed to JL Zwane, having partnered with Living Maths to provide extra maths lessons to more than 140 learners every year, as well as providing ongoing financial support to the centre to facilitate its programmes. The latter is administered with the assistance of the University of Stellenbosch.
This year, Investec Asset Management announced a three-year partnership with sports and education charity songo.info. The programme equips vulnerable young people through sport and education to lead productive lives. It provides a safe and fun environment for children to play and develop away from township streets. A dedicated educator assists children with their homework and school assignments in the clubhouse before they go out to cycle, while a tutor provides further support during the four weeks before exams.
The charity was founded by multiple world mountain biking champion Christoph Sauser, along with local community leader Songo Fipaza. Sauser made Cape Epic history by becoming the first man to win this event five times when he and teammate Jaroslav Kulhavy powered to victory.
Investec Asset Management has been a proud supporter of Tusk since 2010, a charity established in response to the urgent need to halt the decline in Africa’s natural heritage. Tusk’s more than 50 field projects across 18 countries aim not only to protect endangered species, but also to promote sustainable development and education among the rural communities who live alongside wildlife. The Duke of Cambridge has been the Royal Patron of Tusk since 2005 and has been a powerful advocate for Tusk’s work to support conservation, education and community development across Africa ever since.
Investec Asset Management partnered with Tusk to create the Tusk Conservation Awards in 2013. These awards recognise outstanding achievements by extraordinary people towards conservation in Africa, highlighting inspirational conservation work ranging from the protection of endangered species and threatened habitat to the promotion of environmental education and the development of community-driven conservation.
In the depths of eastern Congo lies Virunga National Park, home to the planet’s last remaining mountain gorillas. A small and embattled team protect this UNESCO world heritage site from armed militia, poachers and the dark forces struggling to control Congo’s rich natural resources.
A powerful combination of investigative journalism and nature documentary, VIRUNGA is the incredible true story of a group of courageous people risking their lives to build a better future in a part of Africa the world has forgotten – a gripping exposé of the realities of life in the Congo. Investec Asset Management was proud to support the London, Sydney and Cape Town premieres of this important Oscar-nominated film.
More recently, Investec Asset Management contributed towards the collaring of Virunga’s last elephants. Over the last decade, the park has lost 90% of its elephants to war and poaching. The last 200 are a crucial population. The collars allow the tracking of ten Virunga elephant families for three years, using ten professionally fitted collars to provide satellite-linked monitoring 24/7. The funding also ensured the deployment of specially trained rangers to provide the elephants with around-the-clock security.
The Enlighten Education Trust was founded in 2002 to encourage and support the transformation of education and the schools and communities of Overstrand in the Western Cape. The Enlighten Education Trust responds to the needs identified by schools and communities, which typically range from curriculum and teaching to parental and community participation.
In June 2015, Investec Asset Management’s SA Institutional team, supported the community initiatives of the Enlighten Education Trust by participating in team-build activities, which involved donating books to the mobile library, painting outdoor playground equipment and planting trees at the Masibulele Early Childhood Development Centre, situated in the Zwelihle township, outside Hermanus. In addition, the team also delivered food and supplies to the Izibusiso Foster Home in the Zwelihle township. Our team also spent time with the children and we planted a tree in their garden. It was an enriching experience and we trust the tree will remind the “Izi” children of the special day we shared.