Valuation theme the only solution in overvalued environment

MANY investors appear to be ignorant of the risk they are taking in their portfolios and the real possibility of capital loss, more especially in the case of the valuations of many domestic equities, says Greg Hopkins, Chief Investment Officer, PSG Asset Management. PSG is a bottom-up value based asset house.

“We follow a bottom-up approach to portfolio construction and look at each asset relative to others without making macro calls on where we want to invest.

“If we look at the stocks we have on our local and global buy lists, it is clear that there is more value offshore than domestically, but we can still definitely find stocks at home which meet our investment criteria.

“We are constrained by the regulations which prevent us from investing more than 25 percent of our portfolios offshore and in almost all our equity and multi-asset funds we would hold more quality global companies than we do now if the restrictions were not in place.

“The diversifying (risk-mitigating) effects of diversification are another good reason why we like the global companies in our funds,” says Hopkins.

“As we comb the world for mispriced securities, we more often than not circle back to the same conclusion: numerous securities across a range of asset classes currently appear overvalued.

“At PSG Asset Management we believe that one of the surest ways of incurring permanent capital losses is to invest in companies where there is not a sufficient margin of safety.

“We evaluate risk first and foremost in everything we do, and one of the primary ways we protect investors is to ensure that when we buy or hold assets we do so only when we believe they are at a discount to our calculation of what their intrinsic value is,” explains Hopkins.

With many asset houses attempting to moderate the future performance expectations of their investors based on already expensive equities, Hopkins says: “There is no doubt that central banks have had the effect of creating an extremely accommodative monetary policy to counter the effects of the global financial crisis and the unwinding of a debt ‘super-cycle’.

“The consequence of very compressed yields on cash, government bills, treasuries and investment grade credit is that investors requiring income from their investment portfolio have been forced further out on the risk curve, into things like property, high yield credit, equities and emerging markets.

“To maintain yields, investors have had to move into riskier assets and securities. If we look back at the returns that equity funds and listed property funds have delivered investors over the last years, it is clear that these returns have well-exceeded the longterm average returns for these asset classes,” he says.

“We don’t try predict what returns can be expected but we do know that valuations of many of the assets in these funds have become stretched and investors should be mindful of how much risk there is in specific portfolios.

“At PSG we avoid expensive assets in favour of assets which meet our investment criteria. In this way we continue to deliver the long-term returns that our investors require in the portfolios we manage.”

The PSG Equity Fund has been the bestperforming equity fund since March 2002 outperforming the All Share Index by a significant margin.

Over shorter periods of time, the fund has maintained its top quartile relative ranking and over all periods the fund has outperformed the Index.

“We have achieved this performance by having a culture of research in our equity team which ensures a very thorough analysis of the stocks we consider and hold.

“It has also been achieved by following a bottom-up process of investing in companies which offer value, sometimes excellent value, and of avoiding expensive companies,” says Hopkins.

PSG’s view on bonds is negative, says Adriaan Pask, Chief Investment Officer, PSG Wealth. Currently, global bonds are (on aggregate) around 69,5 percent overvalued. Relative to historic yields, global bonds are one of the least attractive asset classes, second only to global cash yields.