It is quite rare for a fund manager to come right to the point in a succinct summary. But Fatima Vawda at 27four is one of those exceptions. In half a page she homed in on the top five themes driving asset-allocation decisions. None of these was an obscure academic argument; all were based on current events.
Vawda says strong US earnings are feeding through the world. As US businesses report their best quarter for almost seven years, a renewed earnings momentum for global equities is gathering. But she gives this only a moderate chance of working out. After all, US President Donald Trump isn’t keen to share prosperity with the rest of the world and even wants to close borders. So there’s a case for tilting global equity holdings in favour of the US. The 27four team is overweight on offshore equities and commodities.
Europe might not get any joy from Trump, but at least in the short term there is some euphoria over the election of Emmanuel Macron in France and a welcome pro-EU election in the Netherlands. But there will need to be evidence that earnings remain robust before there is a full-blown market rally.
Some argue that we do not need the Western countries now that we have China as a market and an investor. But 27four reminds us that nonfinancial credit in China is now 30% of GDP. There is significant risk of implosion in the Chinese economy.
Some no doubt thought that the ‘noise’ of smartphones would not affect Nokia as a basic phone maker
Another concern driving asset allocation is the deteriorating fiscal outlook in SA, also considered moderately possible. As the outlook for economic growth stays under pressure, with investment remaining subdued, it is likely to lead to deteriorating tax collections.
A more immediate concern is that the R480bn of contingent liabilities held by state-owned enterprises could end up on the sovereign balance sheet.
In spite of this, the thought leaders of 27four are neutral on SA nominal bonds and inflation-linked bonds.
Not everything can be favoured in asset allocation — it is a game of choices — and right now 27four is underweight in offshore bonds, local property and SA equity, the biggest class in all balanced funds.
Rotating out of mid-caps
The most favoured class, or maximum overweight, is offshore listed property. The team is not keen on the JSE, even though it believes SA mid caps are attractively valued. There has been strong rotation out of mid caps into the "safer" large caps. Yet these mid caps often have strong nonrand income, growing earnings and a marked discount to the large caps.
In SA it is tempting to concentrate on the top 40 shares, where the vast majority of buy-side and sell-side research is focused. Sages such as John Templeton and Benjamin Graham would have told you that you can’t make money in the long term by following the crowd. Yet just 2% of SA equity unit trust money is invested in mid-and small-cap funds, and it certainly isn’t growing, even though these sectors have outperformed large caps in the long term.
It is good to see a fund manager that does not dismiss everything in the news as "noise". Even in the lead-up to the global financial crisis, many investment houses prided themselves on ignoring the headlines — to their cost, as it turned out.
Where active managers can show skill is in working out if bad news will permanently impair a business. Some no doubt thought that the "noise" of smartphones would not affect Nokia as a basic phone maker. Just look at how it declined from its dominant position in about 2000.
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