It is always dangerous to count out a fund manager based on recent performance. The most dramatic recoveries from the dead were probably Allan Gray and Foord after their dismal underperformance in the tech and small-cap bubble years of 1997 and 1998.
Until about 18 months ago, PSG seemed to be out for the count, sticking to underperformers such as AB InBev, Remgro and Glencore. Even Discovery, PSG’s largest holding, had a share price going nowhere, despite the strength of its brand and its pipeline of innovations.
But that has turned quite sharply over the past 18 months, with the PSG Equity Fund up 49.4% over the past year — more than double the all share index — and the Balanced Fund up 41.9%, well above its benchmark of inflation plus 5% (9.9%).
But it is important not to get carried away. Over three years both funds are still well below their peer groups. PSG Equity looks dismal, at 2.4% a year, and Balanced not much better at 4.8%.
Many financial planners and fund selectors still see them as good diversifiers, and PSG funds were certainly worth holding over the past year. But was this a freak? Even a broken watch can tell the time precisely twice a day.
PSG head of research Kevin Cousins has been here before. He was part of the BoE Equity fund management team, alongside its lead fund manager, Chris Logan, in its hero-to-zero days around 2000. For him the secret sauce for PSG is that peers are still overinvested in long-duration assets, which PSG is avoiding. He describes a long-duration asset as one that will take many years to earn back capital. The 10-year US treasury, with a negligible yield of 1.5%, falls firmly into this camp. So too does the S&P 500 index of the US large caps, which has an earnings yield of 3.8% — so it will take 26 years to double your money, and that’s before tax. He says US technology shares and some consumer and other growth stocks all count as long-duration assets.
PSG favours unloved sectors such as energy, mining and financials, as well as emerging markets
Unpopular but attractive
PSG is now favouring short-duration assets — in other words, low p:e shares which are expected to provide investors with substantial returns on capital over the next few years.
These fall in unloved sectors such as energy, mining and financials, and unloved regions such as emerging markets, Japan and the UK.
Cousins believes the current asset bubble can partly be explained by the huge amount of liquidity pumped into the system, which means that the real US federal funds rate is now –5%, which was last seen in 1975.
There has been substantial underinvestment in commodity supply, such as mines, which, as PSG points out, cannot be remedied easily or quickly. As it is, reinvestment into mines is slowing down as fund managers and banks introduce environmental, social and governance (ESG) filters into their investment processes.
PSG has no doubt that we have hit an inflection point after the 40-year decline in inflation and interest rates (both short and long term). Talking to his own book, Cousins says this is no time to invest with a closet index tracker that will maintain large positions in the "bubble" asset classes and shares.
He also urges investors not to take a simplistic approach to ESG, which might lead to avoiding an attractive sector such as energy or mining altogether.
High inflation and a weaker dollar have been beneficial for commodities in the past. But perhaps, ironically, even though mining and energy are out of fashion, they are already in a bubble of a kind, though perhaps not reaching the insane valuations of a Tesla.
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