With a synchronised fall in all the major SA investment indices, it is easy to get disillusioned. Experts at asset allocation have not been able to preserve capital whether they put clients in property, domestic equity, sovereign bonds or inflation-linked bonds.
It must be particularly hard for Errol Shear, one of the pioneers of absolute investing. Shear ran absolute return funds at Stanlib and Absa Asset Management for 15 years, and joined Sasfin a few years ago.
At the virtual Meet the Managers conference in August, he set out the stall for the PPS Defensive Fund, which he runs on behalf of the Professional Provident Society. Absolute returns might be superficially similar to stable funds, but absolute managers need to feel real pain if they lose even R1 of client cash. Though I believe Shear is not a Catholic, he takes part in self-flagellating ultramarathons to cleanse himself of the guilt he feels losing client money.
But he hasn’t had to be that hard on himself. A Shear-managed absolute return strategy has been available to the public since 2006, and has achieved inflation plus 4.5% a year. Granted, its target of inflation plus 4% has been tough to beat over the past five years, but the fund has been a percent or two ahead of the consumer price index consistently.
Shear argues that it is important not to confuse a sick economy with a bad investment outlook. Interest-bearing assets still offer good returns, even if inflation-beating returns won’t be achieved any longer by sitting in cash.
He argues that real bond yields look "adequate" at 7%. Some of us would call that tempting. Real yields on inflation linkers of 4.7% make these assets a key part of the mix in a defensive fund.
Shear says there is no benefit to switching to the large developed market bonds. He calls US treasuries a "return-free risk", while German bonds have negative real yields.
Equities do not look cheap at a 19 p:e, but that is skewed by the dominance of Naspers, Richemont and the gold shares on the all share index. Domestic shares are on multiples of barely six times earnings.
PPS Defensive has little in property right now (1.3%) and just a cautious allocation to offshore (12.1%) focused on foreign equity. Local equity is around 18.7% and its largest allocation is to local inflation linkers, at 24.1%.
It still has 5.8% in the local money market but the rest is in bonds, almost evenly split between fixed (19.2%) and floating (18.7%).
Meanwhile, it can’t have been easy presenting on the PSG Equity Fund at Meet the Managers.
It has lost clients about 20% over the past year. Yet it still has a strong franchise among financial advisers and more than R40bn under management. Mikhail Motala picked the short straw and had to plead the case.
He says most investors are positioned in the expectation that the recent past will repeat itself: they’ve stuffed portfolios with shares such as Naspers and Richemont. Yet Motala says the last decade’s winners rarely repeat their success. Of 2010’s 10 largest shares, only Microsoft and Apple remain. There were three giant Chinese companies in the 2010 top 10: Industrial & Commercial Bank of China, China Construction Bank and PetroChina. No Alibaba or Tencent.
Motala says PSG likes mispriced quality shares. Certainly its large holdings such as AB InBev, Shoprite and Discovery are sound businesses which the market has neglected.
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