Specialist financial publishing and information group Citywire hosted a dozen offshore managers at a meeting with South African multimanagers.
In some cases, these were first-time exposures to the South African market, making the meetings relatively fresh. And after the rigours of the 2022 bear market, some of the visitors were among the walking wounded.
Guy Barnard presented for Janus Henderson on their Horizon Global Property Equities Fund. It is focused on listed real estate investment trusts (Reits) and the presentation was a crash course in just how much property investment was reset by the pandemic.
This observation was reinforced by the point that subsector selection was significantly more important than country allocation in driving performance. Speciality subsectors, for example, constitute about half of the US Reit universe.
The four core factors driving property prosperity are digitisation, demographics, sustainability and convenience lifestyle.
The digitisation cluster is driving strong demand for data centres and cell towers. Demographics is driving life science lab spaces, student accommodation and post-retirement housing. Sustainability issues are driving high-quality modern office space, industrial/logistics and solar income. Convenience lifestyle is driving industrial/logistics, necessity retailers and blended urban living.
Where there might be concerns about gearing in the sector, these largely apply to private commercial property, as the gearing level of Reits is in much better shape.
BlackRock seems wary of the media, so I will touch on their presentation in the broadest possible terms. It came from their systematic investing team, which is industry-speak for super-bright maths whiz-kids.
This division has $135bn in assets under management, and the amount of money, computing resources and brainpower being thrown at systematic investing is awe-inspiring. Anyone eyeing a career in the markets should be thinking BSc rather than BCom.
This was an interesting lead-in to a presentation on “secular growth in times of distortion and doubt” by Ian Barnes and Neil Kansari of Sands Capital, a US-based owner-managed company with a leaning towards quality and growth.
After highlighting the horrors characterising 2022, they pointed out that no active manager can manage issues such as the future level and direction of interest rates or valuations, or when the market will bottom. As long-term investors, they know business results tend to drive stock prices over the long term, and they believe the secular trends and fundamentals underpinning their businesses remain intact.
To back their case, they put up a slide demonstrating that from 2002 to 2022, all returns in the MSCI all country world index were supplied by earnings growth, and net zero by ratings (p:e levels) changes. They tend to invest in low- and no-debt companies. The observation was that ChatGPT is a kind of “iPhone moment” for artificial intelligence (AI), suggesting a vast growth story in its applications.
Jupiter is typically known as a UK value asset manager, but here the systematic equities team were presenting for themselves and their partnership with Old Mutual Global Equity Fund. They pointed out that different styles can produce vastly different outcomes.
Their fund process entails investing in a universe of index stocks with sector and industry bets of just 5% over or under benchmark and similarly stocks just 0.5%, which nevertheless leads to an active risk component of 3%-4%, suggesting meaningful diversification from the index.
They even create sentiment indicators by using natural language processing on management earnings calls
They claim the whole process should be considered AI, and they work through 40-million daily data points across 7,000 companies. They even create sentiment indicators by using natural language processing on management earnings calls.
Such funds could only feasibly come into being in recent years, and they make for a fascinating unfolding story. So far, the Morningstar five-star rating and performance results suggest success.
Dinnertime gave me a chance to speak to Simon Raubenheimer of Contrarius (previously a 17-year veteran of Allan Gray, including co-manager stints for the Allan Gray Equity and Allan Gray Balanced funds). Contrarius was founded by Stephen Mildenhall (the former chief investment officer of Allan Gray who left South Africa after a close shave with Brett Kebble’s assassins), and since its inception in the depths of the 2008 global financial crisis, the Contrarius Global Equity Fund has outperformed the MSCI world index. Contrarius is decentralised, with offices in Jersey, Australia and Bermuda.
Culturally, the business has echoes of Allan Gray, with a simple product set (the Global Equity Fund and Contrarius Global Balanced Fund). Each has a rand-denominated feeder fund. Their analysts tend to be generalists, to allow for comparison and mobility across sectors.
The funds had a rough time in the pandemic as they were in economically sensitive stocks, but they recovered all of their lost ground, and then some, through a combination of recovery stocks (such as energy) and being positioned correctly before the 2022 sell-off.
Contrarius has a bottom-up valuation philosophy but is reluctant to be described as a value or deep-value manager (actually, most managers are wary of allowing themselves to be labelled by style these days, and that’s sensible since the benefits of style are largely fizzling out).
There is no overlap between the top 10 holdings in the Contrarius portfolio and those of the MSCI world value index, but they do match two of the top 10 shares in the MSCI world growth index — Amazon and Tesla. This flags these funds as potentially useful portfolio diversifiers.
Contrarius is aggressive in sector allocations. Exposure to communication services (particularly streaming businesses) is 23% vs 7% for MSCI world. The largest holding, however, is not the cliché Netflix but Paramount, and the third largest is Warner Brothers. Revenues from old cable operations are in decline and acquiring new customers is expensive, but Paramount and Warner trade on low free cash flow multiples and have huge content inventories.
Contrarius has 30% exposure to energy, mostly through oil drillers. Production development could increase hugely over the next few years and still be well below the prior peak. They clearly think a carbon bridge will lead to the just transition.
Their exposure to consumer discretionary is three times that of MSCI world and exposure to infotech and financials is negligible. Many traditional value managers seem to like banks, but with only 3% exposure Contrarius clearly doesn’t. It prefers capital-light businesses. The trouble with the banking business model is that high leverage can wipe out the equity portion of a bank overnight.
The funds had a rough time in the pandemic as they were in economically sensitive stocks, but they recovered all of their lost ground, and then some
The Contrarius view on banks chimes strongly with another presenter, Redwheel, which put out a note on banks after the conference. It said there might be a degree of bullishness about global banks because of rising interest rates pushing up long-term interest earnings. But it observed that banks already have a high capital intensity, and even small changes in nonperforming loans can rapidly wipe out equity.
Readers should remember that capital adequacy in South Africa tends to be much higher than in most OECD countries. A rise in nonperforming loans of just 1.3% was all it took during the global financial crisis to turn Royal Bank of Scotland into a basket case.
Redwheel also noted that nonperforming loans as a proportion of loans are at record lows, which seems at odds with a rising interest rate environment. And they said Washington Mutual took two weeks to lose $17bn in deposits in 2008, while Silicon Valley Bank lost 2½ times that in a single day this year.
Technology has enabled potentially unstable depositor behaviour in a social media-driven world, and Redwheel’s conclusion is that it prefers to buy banks only after they’ve been through a rough patch in nonperforming loans.
Redwheel operates on a multiboutique model, and it was interesting to note the choice of James Johnson from their emerging-market boutique as key speaker. They are bullish on emerging markets over developed markets for a number of reasons.
Looking at recent monetary policy, developed markets looked like emerging markets, and vice versa. Emerging-market central banks raised rates well before their developed counterparts, and Redwheel expects the real GDP growth differential to accelerate between emerging and developed markets. A pivot from the zero-Covid policy in China, global disinflation, and US dollar stabilisation or depreciation are key tailwinds for emerging markets in 2023.
Johnson felt the main play is one of global capex recovery after many years of structural disinvestment. Capex growth is likely to trend higher as investor priorities shift towards more spending on defence, renewable energy and reshoring as opposed to asset-light innovation and technology. Emerging-market valuations remain attractive vs history and developed markets.
He observed that the push to move heavy industry and heavy-duty transport sectors to net-zero carbon emissions by 2050 will probably cost $50-trillion. Nearly 800Mt of copper will be needed in 20 years, while the world currently produces 20Mt. No surprise, then, that Redwheel is long-term pro-resources.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.