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.

Finweek English Edition - - FUNDFOCUS -

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.

Tracy Brodziak

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