The worst could be over
Are things going to get worse before they get better or are rays of hope starting to shine through? Old Mutual Investment Group’s Tracy Brodziak provides some insights.
the financial services sector, like much of the rest of the economy, has been hit by uncertainty, volatility, political risk, potential sovereign downgrades and Brexit. But are conditions likely to get worse or is there light at the end of the tunnel? FundFocus spoke to Old Mutual Investment Group’s Tracy Brodziak about these and related issues. She heads up the investment house’s equity research division and is co-portfolio manager with Neelash Hansjee of the Old Mutual Financial Services Fund.
The daughter of a helicopter pilot, Brodziak was born in Zimbabwe, grew up in Argentina and the Middle East, returned to South Africa where she graduated with a business science degree at UCT, and qualified as a chartered accountant and CFA Charterholder. She joined Old Mutual in 2001.
How is your fund faring?
It’s been pretty good over three years but the one-year figure has taken strain. Several issues hit us in the past 12 months. Most prominent were our large bank exposure during the Nenegate crisis a year ago, and being badly positioned when Brexit happened. We didn’t anticipate the Brexit outcome, nor its impact on the pound.
What kind of figures have you delivered in this period?
An annualised 11.6% over three years and a negative 4.4% over one year. The 10-year figure is an annualised 12.1%.
Does this present opportunity for prospective investors?
Caution still needs to be exercised. But bear in mind that the recommended minimum investment period for the fund is five years and the investor needs to be tolerant of market volatility.
More recently it’s been a tale of two cities for performance within subsectors. The only two sectors with positive quarterly returns were banks, which regained lost ground to deliver a return of 10%, and non-life insurance with a 2.5% return over the quarter. The other sectors have all had negative returns, ranging from -1.5% for life insurance to -6.2% for general financials.
Did any lessons emanate from the past year?
Yes, I believe there was much to be learnt. Following Nenegate, Neelash did considerable research into what happened to other countries in similar situations such as Russia, Brazil and Turkey. And based on that, we decided to add to our bank position.
Amidst the difficulties, the banks all delivered satisfactory first-half results, which supported a rally in the sector off very low valuations. Another feature that makes banks attractive is that they’re very cheap and have good dividend yields. That gives us a safety net, and they (the banks) will be wellpositioned once the economy lifts off. As we see it, we’re being paid to hold them.
What is your view going forward?
Several things are happening now that are positive for the economy. We’ve seen an improvement in the current account of the balance of payments; the rand has pulled back; and we believe that interest rates have peaked and will start falling sometime next year. All that will be positive for growth going forward.
And what if the dreadful state of politics remains in play for another year or two?
My honest answer is that I don’t know. Recent events have demonstrated the strength of South African institutions bolstered by the backlash of civil society. However, the political environment is likely to stay uncertain and this is likely to play out in volatility in the bond and currency market. The macro-environment does seem to be stabilising but this may be countered by tax increases and the effects of potential sovereign Head of equity research at Old Mutual Investment Group downgrade next year, so I don’t expect that we’ll immediately go from here to 3% GDP growth.
What are your stock preferences?
Broadly, we prefer banks to life companies and insurers. Until the beginning of the year FNB was our preferred bank, and we still like it because of good management and it’s boasting the highest return on equity in the sector. But on a relative basis it looks very stretched, and so we down-weighted it and up-weighted the other banks. Within those, we took a big position in Barclays earlier this year.
Detractors of your recent overall performance have included Old Mutual, Investec and Reinet Investments. Tell us about Old Mutual.
Yes, the share price declined considerably along with other London-listed stocks. It’s being impacted by both a depreciating pound and a strengthening rand. But it’s really a restructuring story. We believe that as it splits up, considerable value will be unlocked. Much of the market opportunity, though, will depend on how well the restructuring can be operationally executed.
Is Investec plc currently fair value?
We thought at one stage that there was upside to it, but our concern is that it could remain cheap because of the environment. It is very much a play on the UK economy, more so than Old Mutual. It has really been hurt on the UK banking and asset management sides, even though these divisions are very good, solid businesses.