5 IN­VEST­MENT IDEAS FROM TOP FUND MAN­AGERS

On many fronts the world is in tur­moil. There­fore tak­ing the right in­vest­ment de­ci­sions be­come very dif­fi­cult. There are, how­ever, cer­tain prin­ci­ples that re­main con­stant.

Finweek English Edition - - Front Page - By Natalie Greve Ed­i­to­rial@fin­week.co.za *fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

with po­lit­i­cal, so­cial and tech­no­log­i­cal dis­rup­tion the new world or­der, over 500 fund buy­ers re­cently gath­ered in Jo­han­nes­burg at the Ned­group In­vest­ment Sum­mit 2017 to share ideas on how to nav­i­gate an in­creas­ingly un­pre­dictable in­vest­ment ter­rain. Here are five top tips from sev­eral of the world’s top fund man­agers that emerged dur­ing the dis­cus­sions:

1. Re­view the ba­sics: Risk and re­ward

Abax In­vest­ments port­fo­lio man­ager Rashaad Tayob shared a story of a large in­ter­na­tional sovereign wealth fund that ap­proached him last year with an in­ter­est to in­vest in the South African bond mar­ket.

Fol­low­ing mar­ket anal­y­sis, Tayob ad­vised the client that bonds were, at the time, trad­ing at yields of 10% and posed good re­turns. He was sur­prised, how­ever, when they ul­ti­mately de­cided not to in­vest, cit­ing un­cer­tainty sur­round­ing the coun­try’s po­lit­i­cal and eco­nomic out­look.

“I found that odd, be­cause you never have cer­tainty on any­thing. Peo­ple talk about it as though there is cer­tainty in in­vest­ing, but there are ul­ti­mately only two ques­tions to ask: what is the risk and what is the po­ten­tial re­turn?” he com­mented.

Ac­cord­ing to Tayob, the risks and re­wards in the in­vest­ment propo­si­tion in SA are still quite bal­anced. While debt is in­creas­ing, fis­cal deficits linger and struc­tural is­sues re­main, there has been an im­prove­ment in the po­lit­i­cal sta­tus quo in re­cent months, he said.

“As we get closer to De­cem­ber, we are see­ing some struc­tural re­form and house­clean­ing in state-owned com­pa­nies,” he said. “There can never be cer­tainty in in­vest­ing in any as­set class in SA, but we weigh up risk and re­turns – which is our job.”

2. Em­brace the tech­nol­ogy revo­lu­tion

Abax In­vest­ments in­vest­ment man­ager Omri Thomas ad­vised in­vestors at the sum­mit to look at in­vest­ment op­por­tu­ni­ties that mar­ried tech­nol­ogy and as­sets, cit­ing ex­am­ples such as Airbnb and ride-hail­ing ser­vice Uber.

“In the next few years, we will prob­a­bly see driver­less, au­to­mated cars in SA, so I rec­om­mend de­lay­ing pur­chas­ing a new car un­til au­to­mated ve­hi­cles are re­leased lo­cally,” he sug­gested.

In­creased tech­no­log­i­cal ad­vance­ment and au­to­ma­tion mag­ni­fies many of the ex­ist­ing is­sues in­flu­enc­ing the global econ­omy – in­clud­ing weak de­mand, sub­dued in­fla­tion, low wage growth, and in­equal­ity, said Alice Leedale, fixed in­come strate­gist at Schroders. With in­fla­tion re­main­ing per­ma­nently lower, de­vel­oped world bond yields would likely fall fur­ther. This is be­cause the pre­mium that bond in­vestors typ­i­cally de­mand to com­pen­sate them for the risk of in­fla­tion would be greatly re­duced, she added.

“If we are op­ti­mistic and the global econ­omy is able to sur­face from its cur­rent state due to the rise of au­to­ma­tion and tech­no­log­i­cal ad­vance­ment, de­vel­oped mar­ket bond yields should fi­nally break out up­ward from its five-year range, and im­proved sen­ti­ment could even drive buoy­ant, de­mand-driven in­fla­tion. In a sense that would rep­re­sent an am­pli­fi­ca­tion of the ‘re­fla­tion trade’ wit­nessed fol­low­ing the elec­tion of Pres­i­dent Trump,” Leedale said in a re­cent in­vest­ment note.

This en­vi­ron­ment should en­cour­age the po­ten­tial for growth in de­vel­oped world risk as­sets, while com­modi­ties and in­fla­tion­pro­tected as­sets could sim­i­larly do well, she ex­plained.

“Peo­ple talk about it as though there is cer­tainty in in­vest­ing, but there are ul­ti­mately only two ques­tions to ask: what is the risk and what is the po­ten­tial re­turn?”

3. In to­bacco we trust?

Adopt­ing a po­ten­tially un­pop­u­lar po­si­tion, Abax In­vest­ments’ An­thony Sedg­wick be­lieves in­vest­ment up­sides can be found in study­ing the more he­do­nis­tic traits of hu­man be­hav­iour.

Ac­cord­ing to the fund man­ager, peo­ple are largely pre­dictable in the con­sumer de­ci­sions they make – par­tic­u­larly if these pur­chases soothe a short­term plea­sure. “Why do peo­ple con­tinue to con­sume things that are bad for them? Be­cause the con­sump­tion of plea­sur­able prod­ucts is what makes life worth liv­ing and bear­able. That’s why [de­mand for these prod­ucts] won’t go away,” he con­tended.

Among the sec­tors de­voted to hu­man plea­sure-seek­ing, the South African al­co­hol in­dus­try would not be the best place to start in­vest­ing, he cau­tioned, ar­gu­ing lim­ited op­por­tu­ni­ties, a flooded mar­ket, high val­u­a­tions and threats in the form of a bur­geon­ing craft beer in­dus­try.

The lo­cal gam­bling sec­tor is sim­i­larly high-risk, with most casino de­vel­op­ments trad­ing un­der its peak price, an un­sus­tain­able level of debt, an in­abil­ity to pass on in­fla­tion­ary price in­creases and “mas­sive” ex­penses associ­ated with the main­te­nance of brick­sand-mor­tar in­fra­struc­ture.

Sedg­wick’s rec­om­men­da­tion? In­vest in the to­bacco in­dus­try.

“It’s not for me to ques­tion the ethics of ben­e­fit­ting off the fal­li­bil­ity of hu­man na­ture, so look for these op­por­tu­ni­ties,” he ad­vised the sum­mit. “The to­bacco in­dus­try has been the tar­get of vex­a­tious and ve­he­ment at­tacks, but the to­bacco busi­nesses don’t want to kill clients. In fact, they’ve spent bil­lions of dol­lars to de­velop health­ier smok­ing op­tions, such as va­p­ing [or com­bustible] prod­ucts. The to­bacco in­dus­try has pric­ing power and is be­com­ing in­creas­ingly pop­u­lar and health­ier.

“Put all of this to­gether, and it’s a tremen­dously com­pelling in­vest­ment op­por­tu­nity,” he en­thused.

4. Look for a mix of clicks and bricks

Truf­fle As­set Man­age­ment fund ad­viser Iain Power ad­vises in­vestors to look for op­por­tu­ni­ties aris­ing as a re­sult of con­sid­er­able changes in re­tail be­hav­iour to­wards e-com­merce.

While ini­tially slow to take off in SA, on­line shop­ping has re­cently gained mo­men­tum, with a re­cent PayPal and Ip­sos cross-bor­der com­merce re­port in­di­cat­ing that 58% of on­line adults in SA shopped on­line over the past 12 months, amount­ing to an es­ti­mated to­tal spend of R37.1bn.

“The end game of the re­tail sec­tor will be a com­bi­na­tion of bricks-and-mor­tar in­fra­struc­ture, which al­lows prox­im­ity to con­sumers, with on­line plat­form and scale,”

Power noted dur­ing an ad­dress at the in­vest­ment gath­er­ing.

On­line spend in SA is forecast to grow to over R53bn by 2018, pre­sent­ing sig­nif­i­cant growth po­ten­tial for on­line ven­dors such as Takealot, Spree and Su­per­bal­ist, which are all owned by Naspers*.

5. Fo­cus on what you un­der­stand and know the con­text

In­vest in in­dus­tries you un­der­stand, ad­vised Ver­i­tas As­set Man­age­ment fund man­ager and head of the global divi­sion An­drew Headley.

“Stick to the things that you know about, be­cause you are more likely to be able to pre­dict them, and avoid the ar­eas that are likely to be dis­rup­tive. Fo­cus on com­pa­nies with mass com­pet­i­tive ad­van­tage and big mar­ket shares,” he com­mented at the sum­mit.

“Pre­dic­tions are highly in­flu­enced by the con­text they are made in,” added Headley. “There is an in­abil­ity to ac­cept that the sta­tus quo is tem­po­rary and an in­abil­ity to pre­dict ma­jor changes, even when they are right on the hori­zon. All our hy­pothe­ses [as in­vestors] should in­clude po­ten­tial wrong­ness,” he ad­vised.

Omri Thomas In­vest­ment man­ager at Abax In­vest­ments

An­drew Headley

Fund man­ager and head of the global divi­sion at Ver­i­tas As­set Man­age­ment

An­thony Sedg­wick Co-founder of Abax In­vest­ments

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