SA edging up to ‘death spiral’, says Allan Gray's Duncan Artus
Markets flashing red signals to Pretoria over urgent reforms
● Duncan Artus, the new chief investment officer at Allan Gray, one of SA’s largest asset management firms, says every day that the government fails to implement critical reforms, the country moves closer to an inescapable downward spiral.
“We’re getting closer to that death spiral all the time.”
Based on its track record, he is not confident the government is going to implement these reforms, and this scepticism is shared by the markets, he says.
“To me there’s a very transparent way to see what markets think about our government’s performance, and that’s the yield on our 10-year government bond.”
Investors are demanding almost a 6% real cost of funding to lend the government money. “Our government is paying significantly more to borrow money than most countries in the world.”
That speaks more eloquently than any number of commitments President Cyril Ramaphosa makes to revive the economy.
An appeal to the International Monetary Fund (IMF) to bail out the country is looking inevitable, he says.
“The cost of our 10-year government debt is higher than our economy is growing. Just do the maths; it can’t carry on like that.
“Unless we make some brave economic decisions, it won’t be long. We’re running out of time.”
He says he doesn’t believe populist pressure on the government to print more money will prevail over going to the IMF.
“We only have to look north of our border to see the consequences if that happens,” he says.
“I think there’ll be way too much pushback from our public institutions and our financial system, as when Des van Rooyen was appointed finance minister.”
The bond yield rocketed and bank and property shares fell 20% in one day.
“So, boom! There was a one-day warning to government and they had to reverse that decision.”
He says he believes that before that point is reached the markets will signal it.
“They’re starting to do that if you look at the cost of our borrowing rate. What you don’t want is to be caught in an ever downward spiral.”
Through an investment Allan Gray had in Argentina, Artus has seen this playing out before. It can happen very quickly.
“The worse the economy does the less taxes, so you have to raise more taxes, noone will invest and things just keep going down and down.
“You get to a stage where you can’t get out of it. That’s where you never want to go.”
Artus, 44, who succeeds Andrew Lapping as head of investments, matriculated at Krugersdorp High, did business science at the University of Cape Town, a postgraduate degree in accounting and two weeks of articles with the intention of becoming a chartered accountant, before quitting to work for a small asset manager for a year.
He joined Allan Gray as an analyst in 2001 and has been a portfolio manager since 2005.
When he joined Allan Gray, which has R518bn under management, it was consistently ahead of the local asset management pack. Though still in the top 10% of managers and, he says, getting six and a half of its stock picks right out of 10, it no longer has the same pre-eminence.
The industry is far more competitive, he says.
Back then, like now, no-one wanted to invest in South African equities because they’d underperformed cash and inflation for a decade.
He remembers a headline in the Business Times telling people to get out of equities — just before the South African stock market went up seven times.
“There was the promise that the economy would do better, that things would be better run.”
Instead, things went to pieces “and the reforms we need have not been implemented”.
This has affected local equities, which have been flat or worse since at least 2014, though the performance of the JSE as a whole has hidden the full horror.
“Strip out Naspers and BHP and what’s left gives a far more accurate picture of what’s been happening in SA in the last decade,” says Artus.
He says the underperformance of Allan Gray over the past five years is the result of an investment strategy that is about taking a long-term contrarian view.
“We look for areas in the market that are depressed, where sentiment is really poor. Poor sentiment creates low prices, which create great returns.”
But only over the long term, by which he means more than five years.
“Being contrarian is difficult in the short term because it can lead to periods of significant short-term underperformance. But they all add up to good long-term performance.”
The other part of its strategy is “to try to avoid the big losers”.
He admits they invested in a couple of big losers, Sasol being one of them.
“Sasol is clearly today worth less than we thought it would be.”
He describes the Sasol story as “a perfect storm”, although this implies unforeseen outside circumstances rather than something brought on by bad executive decisions.
“When you build a project [Lake Charles in the US] with that much debt then things move against you. It’s obviously not a great story.”
The asset management industry has been under attack for charging high fees and even performance fees in spite of dismal performances.
Allan Gray charges up to 1.5% a year, which compounded over 10 years removes
Over the longer term you can’t have successful companies in a country that fails Duncan Artus
Allan Gray chief investment officer
a substantial chunk of whatever returns its clients get. Artus says 1.5% is only if it outperforms the benchmark. It’s 1% if it does the same as the benchmark.
There’s been an increasing focus on the fees fund managers charge even when their performances are no better, and mostly worse, than those of passive index tracking funds, which cost almost nothing.
By charging high fees, aren’t asset managers selling the lie that they have the expertise to pick the winners of tomorrow?
It’s no lie in the case of Allan Gray, says Artus.
“The average manager will underperform the index. We’ve outperformed the index consistently over the long term.”
But finding great investments from South African consumer and domesticfacing businesses is going to become harder and harder, he says.
“Over the longer term you can’t have successful companies in a country that fails.”