A good time to start
As the adage goes, the best time to plant a tree was 20 years ago; the second-best time is now. If you haven’t yet invested in offshore products, now is as good a time as ever to start. It strikes me that investing in the Absa Global Value feeder fund (or the somewhat duller Global Core fund) is a convenient way to do so.
There is no need to apply to the Reserve Bank for foreign exchange. Unlike an exchange traded fund, there is no need to get a stockbroker involved to fleece you with that hidden charge known as the bid/offer spread. Best of all, the minimum debit order is just R200/month. Plenty of literature shows that rand (or dollar) cost averaging works — it means you can buy more units when markets are depressed.
I was fortunate to meet Kevin Murphy, Schroder Global Recovery fund comanager, at an investment conference last week. Absa Global Value is fully invested in this fund. Murphy says the fund looks for shares with low profits based on cyclically adjusted expectations as well as low price to assets.
The key questions are: what are normalised cash profits, and is this a good business? Murphy insists the fund does not invest in weak companies — they need the scope to get better to be called recovery shares. But there is an unashamed focus on p:e ratios. In his publicity pack Murphy carries a chart drawn up by investment guru Robert Shiller. It shows that over 10 years the annualised return from a business with a starting p:e of seven or less was about 15%. It declined steadily until, for a p:e above 35, it was a negative 4%. But Murphy says cheap stocks are disliked and bring potential embarrassment: just look at the banks and resources.
Citigroup and Royal Bank of Scotland, two of the largest shares in Global Recovery, have had their share of poor top management and appalling capital allocation. But Murphy says Citigroup has one of only a handful of global banking franchises and it is well capitalised, with the proportion of loans to deposits just 70%.
Recovery expected
The fund even owns Lonmin — Murphy believes the share price is poised to recover sharply if it survives.
In any case, it has covered itself by holding Anglo American and Impala Platinum, which would clearly benefit from Lonmin’s demise.
The fund has also chosen South32 in preference to its former parent, BHP Billiton, as it has a better balance sheet.
The fund has about 8% in materials and 35% in financials, including reasonably well-managed businesses such as HSBC and Standard Chartered, as well as Coface, a French trade insurer similar to Credit Guarantee in SA.
Coface is the largest holding in the fund, out of the total of between 40 and 50. It has a 4% allocation. The Coface share price fell sharply after two profit warnings in less than 12 months and after higher than expected losses in Latin America and Asia. But Murphy says it has long-term potential as one of the two dominant players in the global credit market, along with Euler Hermes. And after some “stress tests”, Schroders determined that Coface could withstand its catastrophic 2009 losses.
The largest nonfinancial is Bridgepoint Education at 3.6%, which has flourished as an online-education provider in the US, where fewer people can now afford conventional college education.
For a recovery fund it has a high 7% in IT. You won’t see Apple or Netflix, but boring hardware and infrastructure businesses such as Intel, Cisco and Hewlett Packard.
The fund looks for shares with low profits based on cyclically adjusted expectations as well as low price to assets