Manager Outlooks

Today we spent the morning listening to four successful asset managers (and it was interesting to hear each of their thoughts) discuss how they are positioning their portfolios to best deliver excellent risk adjusted returns.

I will take a look at some of the more insightful comments made. While I will mention some of the ideas in their portfolios it is important to remember that each investor’s individual circumstances are crucial when assessing whether an investment is appropriate or not. Also, the managers stressed the importance of a portfolio approach, i.e. sometimes the best ideas (at the time) aren’t the ones that generate the returns. Importantly, investors need to construct their portfolio as a portfolio of assets, rather than a haphazard collection of ‘good ideas’ without regard to sector, size, and cycle constraints and dynamics.

• Commodities are important – but those commodities that are consumed have an advantage over those that are merely used or stored. In this regard, companies producing/mining commodities like sugar, wheat, paper, and even oil and coal have an advantage over those mining resources like copper, iron ore, gold, etc. If there is a global slowdown consumers will still need to eat and fuel their vehicles and other machinery, but can stop building and other industrial activities which would affect the demand for most hard resources.

• Developed market (US) growth is precariously positioned – oil is a major input into the global economy (particularly developed economies) and it literally does grease the wheels of growth! All developed economies have evolved to be heavily reliant on oil, and emerging countries are generally increasing their reliance on so called black gold. It is interesting to note that a 150% increase in the oil price over a rolling 2 year period has always been followed by a recession in the US. We have just passed this mark recently, so we will see if the trend continues.

Source: Atlantic Asset Management

• A large increase in the oil price is disinflationary – contrary to popular belief. Over the short term there will be inflationary pressures from a large increase in the oil price as it has first and second round effects on the inflation numbers, but over time any major move in the oil price will slow the economy down (and potentially even into recession) which is typically followed by lowering inflation (chart below). In the chart we have tracked the change in oil price against future inflation over time.

• Yield is important when investing – as it provides a valuation framework with which you can compare asset values against each other. Across the entire spectrum of assets (equity, property, pref shares, nominal bonds, inflation linked bonds, cash, etc) the most certain variable when investing is typically the yield at which you buy the asset. There will be more risk on the yield of some assets than others, but these are compensated by a higher expected return over time.

• Prospects are an important consideration when investing – as investors need to be confident that they will receive their yield. While it is more difficult at assessing the future prospects than past events, growth (for equity and property) and sustainability of yield (for all income producing assets) is important over the long run. Good quality institutions will typically perform better than poor quality institutions over time, but one needs to ensure that one doesn’t overpay for any asset. To quote Adrian Saville, “the surest way to turn a good company into a bad investment is to overpay for it.”

Ultimately there were many other pearls of wisdom that came about from our discussions with the different managers this morning. After a day like today we come back to the office and attempt to distil all the ideas to help us refine and mould our investment views.

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Take care,

Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966

Thu, 03 Mar 2011

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