Where 17 of SA’s top investment managers would invest R10m today

For the first time, the FM has asked the smartest fund managers in SA: "If you were given R10m today, in this world of Covid-19 and immense fiscal stimulus, where would you put it?" And would that differ, if it were for a three-year period or a more long-term, 10-year timeframe?

It’s an exercise designed not just to highlight opportunities, but also to reveal the prevailing thought about how investors should respond to a local economy on a fiscal cliff and a global economy that’s awash with money.

In the short term, many believe cash is the only place to be. The team from Differential Capital, including Naeem Badat, argue that gold is the best short-term solution, as a "call option on non-normalcy", given how the global economy is as likely to collapse as it is to keep growing, thanks to a flood of central bank stimuli.

Over the longer term, all the investment managers flag some fascinating ideas, where many millions could be made.

As PSG Asset Management CEO Anet Ahern puts it: "Every decade or so you are given the opportunity to build an equity portfolio with dividend yields approaching those of cash, price:earning ratios well below long-term averages and earnings at cyclical lows. This is one of those times."

There are a couple of common picks. Hospital group Netcare is one, as are Standard Bank and MTN. As recovery prospects, SA’s leisure sector may also be undervalued.

Not that picking undervalued stocks has always been a winner.

As Duncan Artus, who takes over as chief investment officer at Allan Gray this week, puts it: "Over the very long term, value investing has outperformed growth. But this hasn’t been the case over the past decade, and the disparity between growth and value is reaching an extreme."

Over the next decade, Artus believes value investing may begin to trump "growth investing" again. If so, the days of companies such as Tesla and tech shares like Apple soaring on markets, seemingly untethered from the possibility of future profit, may be coming to an end.

Still, given how frail the SA economy is, almost all the stock picks have a strong offshore component. This is recognition that the rand is precarious, even against a vulnerable dollar.

Vestact’s Bright Khumalo is the most blunt, when he says most successful South Africans "have too many assets in rands", so he’d push for all R10m to be invested offshore in a portfolio of US stocks. "The aim is to capture decades of global growth to come, sticking to safer, larger stocks in hard currency," he says.

For some, this seems the safest bet.

RECM founder Piet Viljoen says unlike professional tennis, "investing is a loser’s game — you win by making fewer mistakes."

But others will argue that you’re missing out on huge potential returns in SA if the market turns. Siboniso Nxumalo, head of Old Mutual equities, points out that the Credit Suisse Global Investment Returns Yearbook ranks SA’s dollar-based real returns as the third-highest over 119 years of investment history.

"Buying strong SA businesses in a crisis is a great wealth-creation strategy," he says.

Almost all the stock picks have a strong offshore component, but some say this ignores possible value in SA if the economy turns

—  What it means:

Bright Khumalo, Vestact

Three and 10 years: Apple, Amazon, Google, Visa, Microsoft, Amgen, Johnson & Johnson, Stryker, Nike, Starbucks, Nvidia, Facebook, Netflix and Illumina

Vestact’s ideal client is a local entrepreneur or corporate leader. But most successful South Africans have a "home bias": they have too many assets in rands (homes, pension savings and future business earnings). If someone like this approaches us to invest R10m, we would push them to externalise the money (you can send up to R10m a year offshore).

We would steer them into a portfolio of US stocks. We like a spread of blue-chip technology firms, such as Apple, Amazon, Google, Visa and Microsoft. We also have high hopes for the health-care sector, particularly Amgen, Johnson & Johnson and Stryker. We’d add consumer stocks such as Nike and Starbucks.

To round out the portfolio of stalwarts and dividend aristocrats, we would add in high-growth names such as chip manufacturer Nvidia, Facebook, Netflix and genetic-sequencing machine maker Illumina.

The aim is to capture decades of global growth to come, sticking to safer, larger stocks, in hard currency.

Peter Armitage, Anchor Capital

Three years: Naspers, MTN, Bidcorp, British American Tobacco, PSG, Facebook, Spotify, Chegg, ShotSpotter, CarGurus

I’d start with R5m in SA income funds, where the real yield is very high, and gradually shift half to offshore equity when the rand approaches R16/$. (Obviously, we’d be invested through our Anchor BCI Flexible Income Fund and Anchor BCI Bond Fund.)

I’d put another R2m into SA equities. Some individual shares we’d buy now would be Naspers, MTN, Bidcorp and British American Tobacco. PSG is an interesting value-unlock opportunity with great underlying businesses, and its 40% discount to NAV is likely to narrow over time.

Another R3m would go to offshore equity (and increasing), with a bias towards tech. Some individual shares we’d buy today would be Facebook, Spotify and Chegg. Two smaller US companies we like, with a more speculative bent, are ShotSpotter and CarGurus.

Ten years: SA and offshore equities, bonds, property opportunities

We’d break it up, with R1.5m going to active SA equity, including the shares mentioned above — but without MTN, which is more of a short-term value-unlock opportunity.

Another R1.5m would go to SA bonds, and R1m to offshore funds and specific property opportunities.

Finally, we’d push R6m of the allocation into offshore equities, again with a strong bias towards the tech sector, and largely in the shares mentioned in the three-year time horizon.

Karl Leinberger, Coronation

Three years: cash

For a short time horizon, especially if the investor’s tolerance for losses is low, there is little choice outside of cash.

The risk of capital losses in both global and local bond markets is too high to justify an allocation. Equally, the risk of losses in global equities is high for a three-year period, given the breathtaking rally in recent months, which has erased the Covid-19 losses.

Though the base is lower in SA equities, the risk is probably also too high, given the challenging economic outlook. It means there is little option outside of cash-type assets, diversified across currencies.

Ten years: Heineken, Airbus, Alphabet, Visa and Tencent

For the long term, a R10m lump sum puts you into the high net wealth space, where the risk budget is dramatically different to that of retirement capital.

The right answer is a diversified portfolio of equities. The past decade has been tough for stock-pickers, with mega-caps vastly outperforming their underlying markets. But the next decade should be more rewarding for good stock-pickers and investors should do well with a good manager, even if the broad indices don’t deliver fantastic returns.

The five shares I would happily own for the next decade would be Heineken, Airbus, Alphabet, Visa and Tencent.

Naeem Badat and the Differential Capital team

Three years: gold

World markets are emerging from an unprecedented crisis, and gold is an attractive option in an uncertain environment.

If colossal stimulus from global central banks leads to inflation, then gold and gold stocks should perform well, as the asset tends to hold its value in real terms over time.

On the flip side, if the stimulus proves ineffective in staving off economic collapse and we witness large insolvencies globally, gold is likely to benefit from its "safe haven" status.

Unless the world returns to the long-term trend of growth and inflation, gold is an attractive proposition. It’s a call option on non-normalcy for highly abnormal times.

Ten years: Microsoft, IBM and Citrix Systems

"Whoever leads in AI [artificial intelligence] will rule the world," said Russian President Vladimir Putin in 2017.

Disruption of traditional business models will continue over the next decade. The question is not whether Big Tech will win, but when.

Nick Bostrom, in his book Superintelligence, says: "Machine intelligence is the last invention that humanity will ever need to make."

Though his view of AI is dystopian, astute investors should not fail to act on such a paradigm shift. Companies that serve the AI and big data industry will emerge as winners.

Delphine Govender, Perpetua Investment Managers

We’ve made various assumptions, including that the R10m is discretionary savings, and the investor is a South African with a medium-to high-risk appetite, whose goals aren’t specific to retirement.

Three years: Banks, Massmart, Woolworths, Tesco, Samsung, Tsogo Gaming, Libstar

This is our rebound/recovery portfolio. We see value in assets that are meaningfully mispriced because the market is overly pessimistic about their next two years of earnings.

• R3m into offshore and SA banks: Wells Fargo, Bank of Ireland and SA banks;
• R2m into a basket of recovery plays in consumer demand, such as British American Tobacco, Vivo Energy (African oil demand) and Tsogo Gaming;
• R2m in retail — turnaround and omnichannel: Massmart, Woolworths, Bed Bath & Beyond, Tesco;
• R2m in neglected global tech: Micron, Samsung; and
• R1m in food producers (benefiting from cyclical and structural shifts): Oceana, Libstar.

Ten years: Libstar, Tesco, Tinkoff Bank, SME impact fund, Mr Price, AdvTech

We’d call this the “value-based world in 2030 portfolio”. Here, we’re looking for a combination of unrecognised growth stocks that can grow their market share and assets that are set to benefit from structural market shifts but are not highly popular right now — a tricky requirement.

• R3m in food: omnichannel producers likely to significantly increase their market share, such as Tesco and those moving into private-label brands, including Libstar and Turkish food company Ülker;
• R3m into an SA SME venture capital impact fund: this would focus on growth businesses in areas of the economy that have experienced underinvestment;
• R2m in digital banking, for example Tinkoff Bank;
• R1m into Mr Price, the company that puts the value in value; and
• R1m into education company AdvTech, capturing the trend towards private education at school and tertiary level.

Duncan Artus, Allan Gray

Obviously, for both the long and short term, a diversified portfolio of undervalued assets is the way to go. But having said that, here are some ideas for the R10m.

Three years: BAT, SA government inflation-linked bonds, MSCI World Value ETF

• R5m in British American Tobacco, which is attractive on a p:e ratio of 7.5 and an 8.6% dividend yield. It also trades at a wide discount to other consumer staples;
• R3m in SA government inflation-linked bonds (the I2025). Trading on a real yield above 3%, they provide a guaranteed real return over the short term and protect against inflation; and
• R2m in the MSCI World Value ETF. Over the very long term, value investing has outperformed growth. But this hasn’t been the case over the past decade, and the disparity between growth and value is reaching an extreme.

Ten years: MSCI World Value ETF, Sibanye-Stillwater, short position on the Global Bond ETF, City Lodge, Sun International, Tsogo Sun

• R4m in the MSCI World Value ETF: right now, everyone is positioned for growth, not value — especially tech stocks such as Facebook, Apple, Amazon and Google. It would take only a portion of the money to move to value and produce significant outperformance;
• R2m in Sibanye-Stillwater: it’s the world’s largest platinum producer, with 15% of earnings before interest, tax, depreciation and amortisation coming from gold, which isn’t taken into account by the market. And it provides a hedge against the potential consequences of the significant money created by central banks;
• R2m short position on the Global Bond ETF: global sovereign bond yields are at record lows and expensive, while providing return-free risk. At some stage over the next decade, there could be a huge sell-off in global bonds as interest rates rise; and
• R2m in depressed local hospitality and leisure shares, such as City Lodge Hotels, Tsogo Sun and Sun International. They are trading well below replacement cost and people are going to start travelling again someday. There is significant long-term potential.

Anet Ahern, PSG Asset Management

Three years: government bonds and inflation-linked bonds

Here, you’re probably looking for the best real return with relatively low volatility. At current yields of about 9.5% and with inflation at 3%-4%, two-thirds of R10m should be invested in longer-dated government bonds. I’d hedge that by putting a third into inflation-linked bonds, just in case inflation rises again in the next few years.

Ten years: equities

Here, the focus would be on equities, tilted towards SA.

My offshore holding of R1m each would be in Berkshire Hathaway and brewer AB InBev. Berkshire has an excellent underlying portfolio at a discount of 25% to NAV (versus 16% long term), with a strong track record. AB InBev provides emerging and developed market growth from a low base.

I’d have a further R2m in SA inflation-linked bonds as they offer a great yield, and inflation is likely to rise as the economy recovers.

The other R6m would be in SA shares: R2m in resources, split between AngloGold Ashanti, Northam Platinum and Glencore (further rand hedges); and R4m split equally between the JSE, Shoprite, Remgro and Discovery.

The JSE should benefit from increased trading volumes and rising share prices, while Shoprite and Remgro will benefit from a recovery in consumer spending and economic growth.

Siboniso Nxumalo, Old Mutual Equities

Three years: no choice

Over the short term, the price you pay is critical. Over the longer term, the strength of the business model matters more. Great businesses, which can grow at a rapid rate while compounding a solid return on invested capital, make the best long-term investments.

SA has a history of political crises that tends to create lacklustre economic outcomes and currency volatility. We swing from epic optimism to deep pessimism. Yet investing in SA equities is highly profitable. The Credit Suisse Global Investment Returns Yearbook ranks SA’s dollar real returns as the third-highest in 119 years globally. Buying strong SA businesses in a crisis is a great wealth-creation strategy.

Ten years: TFG, Standard Bank and Netcare

We see great value in cyclical companies at multidecade lows. I would split R10m three ways:

• R3.3m to The Foschini Group (TFG): its competition is closing down, landlords have lost power and TFG has built a sustainable advantage in its supply chain;
• R3.3m to Standard Bank: it’s a strong corporate and investment banking franchise, plus its high-return presence on the African continent make it a great business; and
• The balance to Netcare: the hospital group has simplified its balance sheet and exited less profitable regions. Yet the market is pricing something temporary — depressed hospital occupancy due to Covid-19 — as permanent, which makes it attractive.

Patrice Rassou, Ashburton Investments

Three years: Home Depot

This is a play on the “work from home” trend, as the company has just had its largest quarterly sales growth on record, up 25% in the US, with excellent gross margins at 34%.

Consumers are spending more time at home, and focusing on enhancing that space, as the steep rise in DIY sales illustrates. This is so pronounced that Home Depot extended its opening time by two hours. The company’s high return on invested capital, more than 41%, illustrates the shareholder value.

Ten years: Alibaba

My longer-term pick is a play on the Chinese consumer, through the dominant player in Chinese e-commerce: Alibaba, the Amazon of Asia.

Not only does Alibaba have the ability to use its online platform to monetise online advertising, it has also invested in new ventures.

Like Amazon, with its purchase of Whole Foods, Alibaba has entered the food retail market via its Hema stores, where consumers can use their phones to shop, and it’s expanding its e-commerce footprint in Southeast Asia.

Cloud computing is another vector of growth, as the Chinese market is less than 15% of that of the US. The listing of Alibaba’s associate Ant, which controls half of all third-party payments in China and owns the world’s largest money market fund, will further unlock value.

Andrew Joannou, Ninety One

Three years: Sylvania Platinum

I’m a small-cap stock picker and assume the R10m is in addition to my normal savings. While diversification is generally great, occasionally there’s an investment that deserves all your capital. Sylvania Platinum is such a company.

First, you can buy the shares on the London Stock Exchange for an enterprise value to earnings before interest, tax, depreciation and amortisation ratio of less than 2 — which is incredibly cheap, even for a commodity business.

Second, Sylvania produces platinum group metals by processing chrome dumps. This makes it a low-cost operator, generating a pre-cash operating margin of almost 70%.

Third, Sylvania has a strong balance sheet, with net cash of $56m — more than 25% of its market capitalisation.

Last, the business is starting to pay its cash flow out as a dividend.

It’s a small business, but it’s not common to find a cheap share with a strong balance sheet and decent prospects.

Ten years: Sylvania Platinum, gold, SA inflation-linked bonds and value-oriented mutual funds

I would divide the money evenly between Sylvania Platinum, physical gold, which could do well for an extended period given the world’s current monetary and fiscal policy, 10-year SA inflation-linked bonds, with an attractive real yield of 5%, and value-oriented mutual funds (their day in the sun is coming).

Jean Pierre Verster, Protea Capital Management

Three years: cash, in a fixed deposit

Putting money away for less than three years is more saving than investing. The bad news for savers is that interest rates globally are at all-time lows.

This has forced savers to consider either investing in higher-risk, higher-yielding fixed-income instruments, or accepting the risk of some fluctuation in their capital value, by buying equities.

While this has the potential to deliver a higher return, it can also deliver a negative return. So, a fixed deposit at a regulated bank would be the most prudent option.

Ten years: a long-short fund

The dilemma is that SA’s equity market seems unattractive, given the poor outlook for most domestic companies, and global equity markets are generally expensive.

Shares of high-quality global companies with good growth prospects are particularly dear.

So, I would put my money in a tax-efficient collective investment scheme, managed by a fund manager with a track record of creating value, that has the flexibility to invest worldwide but also the ability to sell short. This allows it to take advantage of both undervalued and overvalued securities. This is where most of my personal wealth is invested.

David Shapiro, Sasfin

Three years: cloud computing, e-commerce, e-learning, gaming, robotics

The prevailing view is that a vaccine for Covid-19 will return the world to normal. We’ll rid ourselves of masks, sanitisers and fear, and unleash a tirade of spending on Louis Vuitton bags and Callaway golf clubs. Investors will swap Apple and Amazon for Citibank and Chevron.

But it won’t happen quite like that. Yes, we can expect a rotation from the “stay-at-home” winners to “stay-away” losers, but it will be short-lived. Mindsets have evolved.

So in the next three years, cloud, big data, e-commerce, e-learning, streaming, gaming, automation and robotics will intensify their reach, offering investors above-average growth.

Ten years: 5G companies, renewable energy

Though 5G will be introduced commercially within the next few months, the benefits of this revolutionary technology will unfold only in the next five years. It will pioneer applications such as autonomous driving, telesurgery, the Internet of Things and other applications. Infrastructure businesses associated with 5G will also profit.

Outside of 5G, the most telling investment theme will be the pressure on businesses that don’t adhere to ethical conduct or demonstrate support for climate change. Companies that distribute solar and wind power will trade at significant premiums to traditional energy providers.

Shmuel Simpson and Steven Hurwitz 36ONE Asset Management

Three years: Twitter

Bill Gurley, one of the most successful venture capitalists around, said: “Twitter is the most amazing learning network ever built. In any given field, 50%-80% of the top experts are on Twitter and they’re sharing ideas.”

In recent years, the social media company has focused on improving the safety of the platform. The company was undermonetising as it invested in the user experience, which is essential for both users and advertisers. In the past quarter, there was a sharp acceleration in the number of users. There are multiple avenues for Twitter to generate additional revenue streams, such as subscriptions and data monetisation. With an improved board — former Google CFO Patrick Pichette was named chair in June — we believe it will continue to develop into one of the greatest mass communication platforms.

Ten years: Visa

When thinking about businesses to hold for 10 years, you need to find companies with strong moats that are unlikely to be defeated by competition.

Visa operates in a duopoly and provides the payment rails for card transactions, connecting millions of consumers and merchants.

The tiny fee the company charges on each transaction means it is unattractive for new entrants without scale to enter the market.

Both Visa and Mastercard benefit from the trend of people moving away from cash as a payment mechanism.

Piet Viljoen, RECM

Three and 10 years: equities, bonds, precious metals, cash

Our goal with investing is to preserve wealth in real terms — and preferably in real dollar terms. The timeframe doesn’t matter; I’d take the same decisions for a three-year horizon as I would for a 10-year one.

Consider the analogy of tennis. Pro tennis is a winner’s game, where you win by playing the best shots. But investing is a loser’s game: you win by making fewer mistakes.

The tool to making fewer mistakes is diversification. Our mistakes generally boil down to transacting too often and at the wrong time. So, to limit mistakes, we need to embrace boredom.

Volatility also tends to scare you out of the market at exactly the wrong time. So, a portfolio of assets that are negatively correlated will be less volatile, offering fewer opportunities for mistakes.

Of course, it’s still impossible to forecast the future, so a diversified portfolio will always contain some assets that are growing — no forecasts needed.

My strategy is to split the R10m into four equal parts:

• Equities (invest in a broad global index, or specific stocks);
• High-quality bonds;
• Precious metals; and
• Cash, held in undervalued currencies.

It’s boring but effective.

Patrice Moyal, Visio Capital

Three and 10 years:

• Tencent/Prosus — China’s social media in one package;
• Alibaba — Asia’s online commerce engine;
• Microsoft — cloud and all of our daily computer apps;
• Amazon — the “everything store”;
• Nestlé — leader in coffee and other branded foods, with a 20% stake in L’Oréal;
• BHP — No 1 diversified minerals;
• Chubb — global reinsurer;
• Samsung — world’s No 2 semiconductor producer and leader in mobile;
• Taiwan Semiconductor Manufacturing Co — world’s No 1 semiconductor producer;
• Ping An — China’s leading life assurer and wealth manager;
• Yum China — China’s top fast-food player, with KFC, Pizza Hut and more;
• Iberdrola — world leader in renewable energy;
• Estée Lauder — global health and beauty company;
• Mondi — international recyclable packaging; and
• Gold — a counter to the cheapening of currencies through excessive quantitative easing and a hedge against rising inflation.

Herman van Velze, Stanlib

Three years: MTN and Netcare

For a three-year horizon, you need shares with a strong asset base, a proven business model and the ability to bounce back when the environment normalises.

Hospital group Netcare — well capitalised and ready for business after Covid-19 — ticks these boxes.

SA’s population suffers from the same ailments today as before the coronavirus, and we’re seeing pent-up demand for elective surgery.

MTN is also a leading player in Africa. What we’ve learnt in recent months is that communication is a necessity. Improving growth prospects and margins that benefit from growing market penetration, as well as some fintech initiatives, provide a strong growth platform.

Ten years: Dis-Chem

Over a longer time horizon, a company needs to show a profitable business model that is gaining traction, and has the ability to grow beyond its current base with sufficient funding capacity.

One of my favourites is Dis-Chem, which has a unique business model in a market dominated by only two players. Dis-Chem wants to expand from 170 to more than 300 stores over the next decade. Typically, new stores reach a mature trading density and level of sustainable profitability within three years, which demonstrates the success of its model.