July 17, 2010
By Laura du Preez
Gavin Wood, the chief investment officer of Kagiso Asset Management
The equity market should perhaps not have reached the high it did in April, and over the quarter to the end of June it pulled back to a more realistic level, Gavin Wood says.
His sense is that investors who drove the market to its two-year peak of 29 565 in April were forgetting the unprecedented levels of fiscal and market stimulus that followed the crash in 2008 and the unparalleled levels of government debt that resulted from this stimulus, Wood says.
Both the low the market reached in March last year and the high in April this year were overdone, Wood believes. He does not expect our equity market to fall dramatically again, even as the global economy struggles to work down this debt and perhaps tips into a recession.
Wood manages the Kagiso Equity Alpha Fund, the leading domestic equity general fund over five years to the end of June, with a return of 20.28 percent a year, against the All Share index's 16.25 percent, over this period.
Wood says being a mid-sized asset manager gives Kagiso a significant advantage over larger competitors, because it has been able to invest in many exciting mid-cap shares that are too small for larger competitors.
If a fund is larger than R100 billion, it is constrained to a surprisingly small number of shares that can be sizeable holdings in its portfolio, he says, and will have difficulty out-performing its peers.
Over the past five years, Kagiso has been quite contrarian at times, Wood says, sometimes taking positions in shares or sectors of the market a little too early but still giving the Equity Alpha Fund the edge over its competitors.
For example, the fund moved out of resources shares when these shares were still doing well in early 2008. Resources shares later fell out of favour when investors realised how the credit crisis would affect China as an exporter to the developed world and hence China's demand for commodities.
Kagiso bought local financial shares when they were priced down during the credit crisis. These companies were largely unaffected by the sub-prime debt issues, and the Equity Alpha Fund benefited from their subsequent recovery.
Wood says the Equity Alpha Fund is currently quite defensively positioned. It has chosen quality companies with strong balance sheets and not too much debt. These are typically companies with strong brands and a resilient demand for their products. In tough economic times, Wood prefers companies that can set prices rather than be price-takers.
Arthur Karas, the chief investment officer of Hermes Asset Management
The global economy is in a rolling financial crisis and the end is not yet in sight, Arthur Karas says.
In the developed world, governments are struggling to cope with the debts incurred from stimulus packages after the 2008 crisis, and severe austerity measures are planned in many countries, he says. Some nations face default, he says, while those with the power to repay their debts in their own currencies may print money to get out of trouble, risking inflation.
Karas manages the Hermes Managed Fund (A), the top-performing domestic asset allocation fund in the prudential variable equity sub-category over five years to the end of June. The fund had a return of 15.88 percent a year over this five-year period
Karas says market volatility will continue as investors are swayed by data suggesting either a continued recovery or the feared double dip into another recession. The meltdown of 2008 will leave markets jittery for a long time to come, he says.
A lower growth trend from the developed world seems almost certain, he says, and there will be an increasing dependence on emerging markets, especially those in Asia, to stimulate growth.
Karas says South Africa is in a good fundamental position, with a strong national balance sheet and commodities to feed a growing developing world.
While large-cap shares are dependent on global growth, there are smaller companies with attractive growth potential and appealing valuations, he says.
Karas says Hermes has positioned the Managed Fund to benefit from the following trends:
The ongoing demand for commodities, as the global recovery appears to be on track.
Gold, which will continue to gain on the back of concerns about inflation. The United States printed US$1.3 trillion in the past year.
A recovery in the local economy.
Defensive shares that are priced attractively.
Kokkie Kooyman, of Sanlam Investment Management (SIM)
Periods of uncertainty have proved to be the best time to pick up good companies with "solid foundations and moats", Kokkie Kooyman says.
Kooyman heads SIM Global and manages two offshore funds, the Sanlam Global Best Ideas Fund and the Sanlam Global Financial Fund. SIM has a rand-denominated fund that feeds into the Best Ideas Fund.
Kooyman says the brittle economic situation makes economies more sensitive to unexpected events, such as terror attacks, volcanic eruptions, oil spills, and political uncertainty. This bad news causes exaggerated market moves.
It is not all bad news for investors, though, because you and your fund manager can use the uncertainty to obtain exposure to good companies while they are undervalued.
Kooyman says he favours under- valued small-cap shares and says the best place to find these shares is in emerging markets. Large-cap shares in emerging markets are fairly priced, he says, but it is still possible to find smaller shares that are undervalued.
In developed markets, he says, the structural fault-lines remain and the cost of using taxpayers' money to "solve" the 2008 debt crisis must still be borne.
Kooyman says Europe is in a mess, and while the right decisions about the future are being made, the economies are still deteriorating. The US seems to be improving but is living on borrowed time. Eventually, the accumulated debt will have to be repaid, he says, and, whichever way it is repaid, will take from potential consumer spending.
Kooyman says he is therefore of the view that although developed markets are also relatively cheap, the winning shares will be those in emerging markets, where labour costs are low and there is more room for growth.
Kooyman has strong views about obtaining exposure to emerging markets through companies that are global brands listed in developed markets.
As there are few of these shares, they tend to be overpriced and still have some exposure to developed markets, he says. It is better to buy a share listed on an emerging market stock exchange at a lower valuation and obtain full exposure to that emerging market, he says.
The Best Ideas Fund is 70-percent invested in emerging markets and has 40 percent in financial shares.
  
 
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