Show me the money

Investment tips and advice from the pros

By Chandrea Serebro

Errol Shear, Institutional Fund Manager, Sasfin Asset Managers

Any interesting trends in the money industry?

There has been a move by clients to invest offshore and we have seen a steady flow of client money into the Sasfin BCI Global Equity Fund. The other trend has been a flow of money out of the previously popular property sector, with investors scared after year-to-date falls of 62% by Fortress B, 56% fall by Resilient, and 40% decline by NEPI Rockcastle. These falls were from very over-priced levels, and serve as a reminder that a good investor should invest where there is value, not where there is popularity. In the Sasfin BCI Stable Fund, we were fortunate to have sold the last of our shares in the Resilient group last year, well before the shares crashed.

How does one pick good investments?

I firmly believe that fundamental analysis of the investment is the only way to invest. Examine the numbers, look at sales growth trends, changes in margin, and, most importantly, the consistency of cash flows. We have had some embarrassingly bad sets of audited accounts (Steinhoff, Venda Building Society); cash flow is more difficult to manipulate. Look for a good company trading at a reasonable price. Also, take a long-term view, avoid the popular stocks which inevitably become overpriced. A good investment is rarely the same as a fashionable investment.

Where are the next big opportunities?

We have seen some massive falls in share prices on many JSE listed stocks. At some stage, good long-term buying opportunities will emerge.

Local and global insights – where is the ‘clever money’ going?

Seemingly, the clever money is going into global tech stocks. I would caution that what is important is not where the “clever money” has been going, but where it will be going. And that is a far more difficult question to answer.

What is better – the short-term view or the long haul?

Over the years I have seen traders make good short-term profits, in a similar way that I have seen gamblers at the casino win. However, I have never seen either short-term stock market traders or casino punters make profits over the long-term, and, when I hear them say that they do, it’s usually either because they lie or they have a poor memory. I believe in taking a long-term view.

Ryan Friedman, Head of multimanager investments, Investec Wealth & Investment.

Any interesting trends in the money industry?

The debate between active versus passive rages on. Passive investment strategies which, in general, replicate an index at low cost, have captured significant market share over the past decade, pushing up prices of the largest and most liquid stocks. In 2017 alone, a total of $692bn flowed into passive funds, while almost $7bn flowed out of actively managed funds. It’s staggering to think that over $21 trillion has now been invested in funds that don’t do any fundamental analysis or pay any credence to price paid. This has occurred in an environment where investors have questioned whether active investment managers justify their higher fees through superior stock-picking or asset allocation skills. Lending credence to this view is the fact that, in 2016, only 178 out of 1222 funds in the Morningstar Global Large Cap Equity survey outperformed their benchmark.

As active managers, we firmly believe that an investment manager with skill, opportunity, and conviction can beat the benchmark (and by implication passive strategies) over time, net of fees. In fact, after nearly a decade of strong performance by passive funds, market conditions are changing and bottom-up fundamental analysis is becoming an increasingly important tool in determining the winners of tomorrow. There seems to be growing evidence of this: last year, half of the US large cap active equity managers beat their benchmark, the best rate since 2009, and the trend has persisted into 2018.

How does one pick good investments?

The art of fund management is exactly that – an art. Well, part art and part science. In today’s complex world of so many moving parts affecting asset prices – whether it’s politics, geopolitics, macroeconomics, or bottom-up company fundamentals – too many investors rely solely on analysing historical quantitative data to drive what should be forward-looking investment processes. Investors often ignore the qualitative element of understanding and assessing people, such as company management or fund managers. This has become abundantly clear with the number of frauds and management improprieties we have seen, both in South Africa and globally. So, one’s definition and assessment of what constitutes risk is paramount when assessing investment options. This has as much to with what the text books tell us is risky as it has to do with one’s qualitative assessment of what constitutes risk. In simple terms, don’t just rely on past performance and historical risk analysis to drive your investment process. Incorporate a more holistic, qualitative investment process as well. But, probably most importantly, unless this is your full-time job and you have deep investment knowledge, outsource the fund management responsibilities to an honest and ethical investment manager who has the experience and objectivity to navigate this complex financial landscape we live in.

If you could invest in anything, anywhere in the world right now, what would that be?

The answer to this question really depends on a person’s personal circumstances, such as risk tolerance, time horizon, etc. I encourage people to invest in what they understand and make sure there is ample liquidity to redeem (cash in or sell your investment) under the least onerous terms possible. Remember, it is very easy to buy things but not always so simple to sell them. It is also very important to understand the price you are paying for an investment, especially in a world of elevated asset prices and heightened risks. The best determinant of future returns on an asset is the price you pay today!

Risks – should we be risk-averse or should we start taking risks to see bigger rewards?

In developed markets (US, Europe, Japan, etc), valuations of most asset classes, whether they are equities, fixed income, listed property, or listed infrastructure assets, are not cheap. One can make the argument that, on a relative basis, equities are cheap compared to developed market government bonds, or emerging markets are cheap relative to developed markets. But, in general, given the loose monetary policy, easy financial conditions, and historically low interest rates of the last few years, asset prices across the board trade at or above long-term averages. Given this backdrop, together with heightened political and geopolitical risk globally, one needs to be diligent about not taking excessive risk, or, at the very least, having some hedges in place that can provide downside protection in a risk-off environment. We are at the tail end of one of the longest ever economic expansions in most economies around the world and the risks are rising, so it is prudent to be bear this in mind. That being said, equity markets almost never peak without there being a recession on the immediate horizon (on average six to 12 months before), and our best guess of when a US-led recession will occur is at least 18 months away. Given above-trend global growth, muted inflationary pressure, and still low (although rising) interest rates globally, tactical investors might not want to de-risk their portfolios too early as some of the best returns are captured in the later stages of a bull market. In this regard, global equities still offer the most attractive return profile, with Europe and Japan trading at significant discounts to US equities. Within sectors we would favour more economically sensitive (cyclical) areas of the market like Energy, Financials, Resources, and Technology.

Note that any investment you make should take into account your own circumstances, financial goals, and tolerance to risk. Consult your financial adviser before acting on any of the ideas above.

Chaim Shalpid, specialist risk and investment consultant, Octagon Financial Services

How does one pick a good investment?

There are many variables involved in making such a decision. On a fund management level, the fund manager of any type of unit trust fund has at his disposal a team of analysts and researchers that do all the necessary due diligence and investigations into different listed companies before choosing a specific stock/share on the stock exchange. As an investment advisor, we do not involve ourselves with share selection, we rather focus on selecting the most appropriate funds to be included within an investment portfolio so that certain return outcomes can be achieved over measured periods of time. Therefore, our focus is not on share selection, but on selecting the correct type of investment portfolio that will meet the investors long-term investment goals and objectives. It is believed that, through such a process, an investor, although he has not picked or selected shares, would have chosen a good investment vehicle that will assist the investor in realising his investment goals

If you could invest anything, anywhere in the world right now, what would you do?

Currently, I would personally look at increasing and building my Rand hedge [protection] portfolio through investing money into off-shore markets, preferably in USD currency. Historically, the Rand over the past 30 years has decreased [depreciated] against the US Dollar by an average of no less than 6% pa. By utilising Rand hedging, an investor will protect their assets against a decreasing currency (Rand) and invest into a more stable and stronger currency [USD] over longer periods of time (7–10 years). The products available to investors to achieve such goals are through off-shore ETFs [tracker funds], or a well-diversified off-shore investment portfolio.

Local and global insights – where is the clever money going?

Notwithstanding the answer given above, interestingly enough, off-shore analysts are very bullish (positive) about emerging markets, more specifically, SA. They are of the opinion that the local market will perform well within the foreseeable future, stating that GDP growth of at least 2% is forecast for 2018. Therefore, in my opinion, the clever money would be split 50/50 between local and off-shore markets, within well-diversified multi-manager-style portfolios

What do investors look for?

The average investor looks for a low-risk, high-return type of scenario; ‘I do not want to lose my money, but I want a great and good return.’ It sounds logical, but the reality is very different, as is the investor. No two investors have the same investment goals and objectives, each investor is dealt with separately and portfolio recommendations are made according to the investors specific needs and wants. Therefore, typically, the average investor looks for a low risk, high reward/return type of investment, but, more often than not, trying to achieve such an outcome is easier said than done. Only through long-term investment positions being held within correctly assembled investment portfolios will investors achieve their long-term investment objectives. This theory has been proven time and again over many years of investing

Where are the next big opportunities?

I’m not a predictor of the future, therefore I do not know where the next big opportunity might lie. What is clearly evident, however, is that the advancement of technology within the investment industry is moving at a rapid rate and things are changing or will change in the future. Here are some of the ideas to lookout for:

·         Blockchain technology (Bitcoin and the like)

·         Robo advisors

·         AI – Artificial Intelligence

These ideas are already in motion and will play an ever-increasing role within the investing environment, but, at the end of the day, when it comes to investing and all the processes involved, nothing can replace the human element and interaction.

Itai Liptz, CEO, Mexem

Investors – what do they look for?

In my view, there are two types of investors who differ based on their timeframe and outlook. Short-term investors are those investors who want big returns within a short period of time. They are willing to take more risks to obtain the greater returns, but this can often turn against them. Long-term investors are more patient – desiring good returns over the long term. They understand that the market can be volatile over the short term, with losses in some years being expected. However, over the long run, their portfolios should generate acceptable returns.

Increasingly longer-term investors are understanding that asset managers often do not add much value to their portfolios compared to simply investing in a market index – especially with the large fees that asset managers charge. So, increasingly, investors are looking for cost-efficient ways to invest in the market, with low brokerage fees and low/no management fees – and this is where Mexem and Interactive Brokers are seeing large demand.

Where are the next big opportunities?

The biggest opportunity that we see is the opportunity for the investor to simplify the investing value-chain and disintermediate the middle men. The way that most South African’s currently invest is like a journey with many turns. You begin the journey with the full savings that you would like to invest. But then, at each turn, another middleman takes a fee until eventually your savings reach their final investment account at a value quite a bit less than when it started.

As a quick example, imagine you have 100 to invest. After paying your broker and the management fees of the asset manager, you are left with 97. To get your savings to just 105 to cover inflation, you now require a return of 8,2% instead of a return of 5% if these fees were not present. This difference makes an enormous impact on your savings and returns over time.

There are opportunities for South Africans to invest more directly, as is being done in many developed markets. We encourage South Africans to invest a bit of time into understanding how their investment accounts work, what fees are charged, and what options are available to invest in a more direct, lower fee, and more transparent way.

Local and global insights – where is the ‘clever money’ going?

We are seeing increasing flows into algorithmic trading. Algorithmic trading is trading based off a defined set of rules, which is executed by a computer. The advantages of this is that the computer can execute trades faster than a human, can work around the clock whenever a market is open, often costs less, and does not involve human emotions and biases. An algorithm will never ‘fall in love’ with a stock or miss a trade because it was sleeping.

What is better – the short-term view or the long haul?

I cannot say that either the short-term or long-term view is superior. It depends on a person’s outlook, emotions, and preferred investment style. Those following a long-term view need to be aware of how dynamic the markets and industries are. Many stocks that we invest in today will not be around in 10 years, and many industries may not withstand the winds of change, which we will see over the next few decades; while those following a short-term view need to be aware that short-term trading often entails heightened emotions and the fact that it is impossible to make a profit on every trade.

Daniel Isaacs, Analyst, 36One

Investors – what do they look for?

This varies notably based on age, cash flow requirements, and time horizons. What we focus on is capital appreciation over the medium to long term.

Where are the next big opportunities?

There are always opportunities, and they are always evolving – that is the best part of this industry. I would say the gap between small cap and large cap valuations is too large. In times of uncertainty, the premium paid for liquidity (the ability to trade the stock quickly) increases, but at the moment it seems extreme in some cases. The caveat is that if global and local politics get worse, cheap small cap stock can get even cheaper

Local and global insights – where is the ‘clever money’ going?

I would say the clever money globally and locally is generally more cautious at the moment, given the potential for rate increases in America and American/Chinese trade issues, and local issues regarding the form and policy the ANC will take under Cyril. If rates start to rise in the USA and things like land reform locally become more onerous, you would prefer to be in Rand hedge stocks (stocks that earn their income in foreign currency).

What is better – the short-term view or the long haul?

The longer haul should always be the focus. It’s possible for the longer haul to become the shorter haul if your thesis plays out quickly, but having a thesis on the performance of a business and expecting it to play out exactly when you think it should is a bit too much to ask

Risks – should we be risk-averse or should we start taking risks to see bigger rewards?

Again, this varies based on the specific investor profile. However, one risk you are taking when you think you are taking no risk is inflation. In reality, this is not even a risk, but rather a certainty that this will eat up the purchasing power of your finances. Money today may be ‘safe’ under the mattress, but it will be able to buy less tomorrow than today. Money in the bank earning interest may bring some returns, but they are less than inflation, especially after high income taxes. Over the medium to long term, the best chance I can think of beating inflation is to have some exposure to ‘riskier’ asset classes such as equities.

Related posts