Allan Gray’s Balanced Fund is the biggest in the country, with over R142 billion in assets under management as of 31 March 2018. Coronation’s Balanced Plus Fund is the 2nd biggest and has almost R88 billion in assets. Discovery Invest’s Balanced Fund is the 5th biggest out of over 170 balanced funds in the same category, and was sitting on R22 billion in assets under management as at the end of the first quarter of 2018.
All three fund management teams have expressed their views publicly on the markets recently, and this article brings together their views and outlook.
Review of the first quarter 2018
The markets haven’t been kind to investors over the first quarter of this year. Whether one looks at overseas markets or locally, negative returns were on offer across the board. The JSE ALSI gave up 4.2% in March for a total first quarter return of minus six percent (-6%). That made it the worst performing quarter since the second quarter of 2010. How difficult has it been for the portfolio teams?
Allan Gray’s Balanced Fund Manager, Andrew Lapping: "The first quarter proved to be a difficult one for absolute returns. The most significant detractors were the international investments and local equities. World markets fell 1% in dollars [and] the rand strengthened by 4% over the period. Positive contribution from fixed interest was insufficient to offset the equity declines. The relatively modest market moves over the quarter belie the volatility many experienced during the period." The Allan Gray Balanced Fund returned -3.3% over the first quarter of 2018.
Coronation’s Balanced Plus Fund Managers, Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler: "The fund had a challenging quarter, returning -3.4%, mainly due to weak equity markets. The quarter was characterised by heightened volatility in global equity markets; firstly driven by concerns around the impact of rising global bond yields and more recently due to the growing risk of a US/China trade war. Overall, the JSE had a poor quarter, with the JSE All Share Capped Index declining 6.0% (and with it dragging down its rolling 12-month returns to 9.6%). The weakness was driven by industrials (-8%) and property (-20%), with the latter being impacted by the collapse in the share prices of the Resilient group of companies, i.e. Resilient (-65%), Fortress B (-46%) and Nepi Rockcastle (-44%). This was on the back of allegations of management impropriety principally related to share price manipulation." Coronation’s Balanced Plus Fund returned -3.4% over the first quarter of 2018.
Discovery Invest’s Balanced Fund Manager, Chris Freund: "Following a protracted period of low volatility, which created a high level of complacency among investors, a spike of volatility reared its head in February. The Chicago Board Options Exchange Volatility Index (VIX) - shot up to its highest level since 2011 and, in the process, precipitated a sell-off in global equity markets. However, [the Discovery Balanced Fund’s] drawdown has been more muted than equity markets as it has benefited from its diversification, given that it has exposure to different regions and asset classes - here its material allocation to local bonds has been helpful, while its small exposure to local listed property has meant that the sector sell-off has only had a limited impact on performance." The Discovery Balanced Fund returned -1.5% over the first quarter of 2018.
The mood in South Africa has changed. Ever since the ANC electoral conference last year and the subsequent removal of President Zuma, the confidence among investors and the jubilation portrayed by the majority of South Africans has been palpable. How have these changes affected the thinking among the teams?
Allan Gray’s Balanced Fund Manager, Andrew Lapping: "We were substantial net sellers of domestic equity in late 2017 and January 2018 as many domestically orientated companies reached and exceeded our estimate of their fair value. This was particularly true of the banks we bought during the very volatile Nene-gate period, when South Africa’s future looked very grim and investors priced shares accordingly. At the time, investors over-reacted on the downside by becoming excessively cautious. We are concerned that after the great news of Cyril Ramaphosa replacing Jacob Zuma and the positive changes at Eskom and government generally, investors are over-reacting by becoming too positive on South African assets. At the moment we think investors are using assumptions that may be overly positive and therefore they are overvaluing certain assets. If the future is not as rosy as these investors expect, the returns from the assets they value highly now will be disappointing. It is far better to invest in assets where expectations are very low, that way, when things turn out to be "not that bad" investors are surprised on the upside. We look for assets where expectations are low and our normal estimates exceed those priced in by the market."
Coronation’s Balanced Plus Fund Managers, Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler: "Locally, the good news post the ANC’s elective conference in December has continued. Cyril Ramaphosa was sworn in as state president in February, followed shortly thereafter by a major cabinet reshuffle in which he made some credible appointments in certain key ministries. This decisiveness, together with a sound 2018/19 Budget, was rewarded when Moody’s raised the outlook for South African sovereign debt from negative to stable and maintained the country’s sovereign rating at Baa3, which keeps it in the Citi World Government Bond Index. GDP data for the last quarter of 2017 beat expectations at 3.1% quarter-on-quarter versus the market expectation of 1.8%. Improving inflation expectations gave the South African Reserve Bank room to cut the repo rate by 25 basis points to 6.5% and opened the door to further rate cuts later in the year. Further, the newly appointed mining minister, Gwede Mantashe, announced that he would revise the mining charter, a move welcomed by the mining industry. Although we have yet to see all this good news translate into improved corporate earnings, we are confident that the economy is once again headed in the right direction. Ramaphosa’s election has brought much hope and optimism to the country."
Discovery Invest’s Balanced Fund Manager, Chris Freund: "Given domestic growth is forecast to improve in 2018, inflation is expected to remain within the South African Reserve Bank’s (SARB) target band of 3-6% and optimism around new ANC leadership is elevated for now, South Africa could be poised to benefit from an improving investment environment for equities. However, we believe the optimism expressed by the market should be tempered. Policy changes are typically slow to implement, while the expected improvement in the business and consumer environment could be protracted. Therefore, we believe it is critical to remain consistent to our bottom-up fundamental investment process which drives our investment decisions on the back of company-specific reasons."
There has been much debate about whether the recent plunge in equities globally is the start of a bear market. The volatility that has entered into the markets once again is worrying for many. What are the teams’ thoughts on global markets?
Allan Gray’s Balanced Fund Manager, Andrew Lapping: "Some investors were lulled into a false sense of security by the orderly uptrend of world markets from January 2016 to January 2018, a period over which the MSCI World Index rose 50%. The strong markets over the past two (in fact 10) years have made us increasingly nervous; we far prefer volatile and falling markets over calm and strongly rising ones. Don’t get me wrong, we don’t want our clients to lose money over any period, but the good thing about volatility and down markets is that they create opportunities for outsize returns. When markets fall, value investors are able to buy companies that have been sold down to below their fair value - a very exciting prospect."
Coronation’s Balanced Plus Fund Managers, Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler: "We continue to avoid owning global bonds given our expectation that bond yields will move higher. The global economy is experiencing a synchronised recovery with signs of inflation returning. This, coupled with central bank policy rates that we believe are still too low for a non-crisis global economy, and US President Donald Trump’s tax package - which will provide further economic stimulus - makes it appear almost inevitable that interest rates will eventually have to rise to more normal levels. Naturally, this will have knock-on implications for the pricing of all risk assets and we would temper expectations around equity market returns relative to the strong gains we have experienced in recent years."
Discovery Invest’s Balanced Fund Manager, Chris Freund: "Going forward, we do not hold the view that we are faced with the advent of a bear market in the short term. We believe the current momentum is in favour of a continuation in the improvement of global growth dynamics as underlying global economic fundamentals remain strong - global growth has accelerated, is synchronised and self-sustaining in our view. Although we believe we are in a mature stage of the business cycle, some countries have not achieved growth for sustained periods, thus suggesting further upside. But, we believe a modicum of caution is warranted. In our view, the recent market fall is not enough to mitigate valuation risk given that equity markets remain at lofty levels. However, we do not believe that valuations alone will trigger a bear market (another catalyst is required, such as a global recession). Current late cycle economic indicators are generally not ’hot enough’ for us to shun risk assets, but we do agree that we need to closely monitor the situation. In our view, strong earnings growth has driven markets in recent times. Typically, corporate profit margins usually begin to fall before recessions strike, and, at this point, there is generally no real anxiety yet about the quality of corporate balance sheets. [The] recent set back could be a healthy correction from an overbought market."
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: firstname.lastname@example.org
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.