Pro Pick:

Pos­si­ble down­grade: Where to for growth in­vestors?

Finweek English Edition - - CONTENTS - ed­i­to­rial@fin­week.co.za Craig Gra­didge is a co-founder of Gra­didge-Mahura In­vest­ments.

the one is­sue that has cap­tured the imag­i­na­tion of re­tail in­vestors in the past three months has been the pos­si­bil­ity of the coun­try’s sovereign credit rat­ing be­ing down­graded to junk sta­tus. This has been the one is­sue that has dom­i­nated dis­cus­sions we have had with clients since Nenegate in De­cem­ber and the sub­se­quent re­ac­tion from mar­kets in re­sponse to this. As with ev­ery­thing else, the ini­tial shock has passed and peo­ple have had a chance to think less emo­tion­ally about the is­sue.

Un­cer­tainty about the fu­ture

There are mixed views in the mar­ket, with some com­men­ta­tors sug­gest­ing that finance min­is­ter Pravin Gord­han is do­ing the right things and mak­ing the right noises to pre­vent the coun­try’s down­grad­ing. Oth­ers, like Pro­fes­sor Car­los Braga, pro­fes­sor of In­ter­na­tional Po­lit­i­cal Econ­omy at IMD Busi­ness School in Switzer­land, be­lieves that the down­grade to junk sta­tus is a sure bet, and his only forecast for 2016. The pro­fes­sor spoke re­cently at the an­nual In­vest­ment Fo­rum held in Cape Town and Sun City.

The chal­lenge for an in­vestor want­ing to com­mit fresh cap­i­tal at this stage is that a wrong call can re­sult in heavy losses that will take a long time to be re­cov­ered. It seems that as­set man­agers also dif­fer sig­nif­i­cantly in terms of their read­ing of the situation. In the multi-as­set high-eq­uity cat­e­gory, the large fund man­agers have sig­nif­i­cantly dif­fer­ent port­fo­lio po­si­tions com­pared to each other, fur­ther con­fus­ing in­vestors.

Where can you put your money?

Corona­tion has a high ex­po­sure to growth as­sets (eq­ui­ties and listed prop­erty), for ex­am­ple, while Pru­den­tial has a big bond ex­po­sure. Fo­ord, on the other hand, has a large cash po­si­tion with al­most no bond or prop­erty ex­po­sure. So much for the ar­gu­ment that ac­tive man­age­ment is the place for in­vestors to be right now.

We think that in­vestors have to find that space where cap­i­tal is not too ex­posed in the short term if the man­ager gets his calls wrong, but there must be suf­fi­cient scope for him to de­liver in­fla­tion-beat­ing re­turns in the medium to long term. We be­lieve that the multi-as­set medium-eq­uity cat­e­gory is a good place to look right now. Funds in this cat­e­gory can have a max­i­mum eq­uity ex­po­sure of 60%, listed prop­erty ex­po­sure of 25%, and off­shore ex­po­sure of 25%. In this cat­e­gory, our pref­er­ence would be the Fo­ord Con­ser­va­tive Fund (see ta­ble).

One as­pect of this fund’s port­fo­lio po­si­tion­ing that at­tracts us is the high cash weight­ing, which should pro­tect cap­i­tal in the event of an­other mar­ket sur­prise be­fore the credit rat­ing de­ci­sion. The max­i­mum off­shore ex­po­sure is also re­as­sur­ing given that prospects for re­turn from lo­cal as­sets have de­te­ri­o­rated some­what given the eco­nomic outlook.

There is suf­fi­cient eq­uity ex­po­sure in the event that we some­how avoid a down­grade, and mar­kets start run­ning again. Fi­nally, the low ex­po­sure to bonds and listed prop­erty is also at­trac­tive given that we are en­ter­ing a ris­ing in­ter­est rate en­vi­ron­ment, and the po­ten­tial for these as­sets to be sold off sig­nif­i­cantly in the event of a down­grade. For­eign­ers still own around 30% of gov­ern­ment bonds, up from 22% in 2010.

The his­tor­i­cal per­for­mance of the fund is shown in the graph. While the fund has a short track record, the man­ager has a long and en­vi­able track record in manag­ing multi-as­set funds.

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