Valuations matter, forget the story – Corion Capital’s David Bacher

Corion Capital’s chief investment officer, David Bacher, focuses on the paradigm shift taking place in markets, the rotation from growth to value. Valuations have started to matter and many of the pandemic winners – stocks that have attractive stories but not necessarily attractive financials – have begun to suffer. Bacher is quietly optimistic about South African equities and bonds, given the lofty valuations and inflationary concerns in the world’s largest economy. Many of the out-of-favour companies of a year ago are today’s hot picks. – Justin Rowe-Roberts

David Bacher on Corion Capital’s positive view for South African equities

Looking back at January, the buzzwords were definitely ‘inflation’ and ‘rising interest rates’ and that spooked the market. Despite a very strong last few days, global markets ended down 8%. If you look at the MSCI South African index, we were up 6% in dollar terms, and that’s a phenomenal result. Corion has had a positive view on South Africa; we’ve had a positive view on South African equities. Fortunately for our clients, this proved to be the right move. We went against many of our peers, seldom picked up a newspaper or read a negative article about South Africa on social media. We thought the valuations in South Africa were compelling. So, we went against the grain and that paid dividends.

On being in the investment space

Mr Market can humble you very quickly, so you have to be careful what you say. Investing is a long-term game. You could look cleverer than you actually are and you could look stupider than you really are. You have to think about long-term numbers in investing. From our side at Corion, we try to stay away from funds we feel are more about the current story than about current valuations. For this reason, we have little exposure to tech-centric funds. We are underweight on that side of the market. Maybe I am being a bit critical but there seems to be a lot of market commentators selling the easy sell. You hear all the time that SA is un-investable, “get your money out the country”; it’s all about the Fourth Industrial Revolution. It’s a new world. But at the end of the day, there is a price for the asset you pay and you’ve got to take that into account.

On growth to value rotation

It is just the beginning. It has been a massive step back. If you look at global equities, MSCI Value Index was down about 1%, while the growth index was down 9%. That’s an 8% dispersion, which is significant. But we still think that there is a long way to go. There are two main reasons for that. One is rising interest rates tend to favour value stocks and the reason for that is a lot of investors value stocks using the net present value of future earnings, especially high-growth stocks that have expected earnings in the distant future. This means they are discounting earnings back at a much higher discount rate. And when your discount rate goes up, your net present value goes down. We think rising interest rates are favourable for value stocks. The second point – when we look at our graphs and our analysis – in just terms of valuations where value stocks have been trading relative to their history and growth stocks and momentum stock relative to their history, there are two different extremes. The value of value, so to speak, is still compelling.

On John Biccard’s interesting investment philosophy

We admire John a lot because he sticks to his knitting. Investing is not a fast fashion. It’s not about constantly chopping and changing. It is about sticking to your process and making sure you follow the philosophy that you think will provide your clients with the best return over the very long term. That is something I believe John Biccard is a flag bearer of. He doesn’t think one year, three years out, he thinks five, 10 years out. He expects his clients to understand what they are getting into, he sticks to his principles. At Corion, we probably have a different risk appetite. Our clients have a different risk appetite than him but sticking to your philosophy and focusing on the long term is something we have in common. If you started in a fund and you held your course, you would have significantly outperformed.

On the managers of funds that are currently performing well

It was great to see boutique and smaller managers doing so well. The one-year and the one-month numbers show a lot of the smaller managers at the top of the rankings. At Corion, we love to invest in small managers. The South African market is relatively small, relatively liquid, and the ability to go down the market cap size – mid caps or small caps – if you are nimble and move fast, you can take advantage of those situations. Apart from boutique managers, the big house that caught my eye is M&G. Their equity fund is a significant size fund in South Africa. It outperformed peers by about 10% over the last year. That is a really commendable performance.

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