The best investment returns are being generated by smaller, more nimble money managers, according to David Bacher of Corion Capital, whose tables for March have just been released. In this podcast, Bacher explains how asset managers are reacting to the new regulation – which raises the offshore component from 30% to 45% – and why SA’s big three managers, Allan Gray, Coronation and Ninety One, are struggling to match the returns generated by smaller competitors.
David Bacher on the performance of South African asset classes
It has been another good month for South African investors. What stood out for us at Corion was certainly how well South African asset classes have done. If you look at the first three months of this year, South African equities have outperformed global equities by about 25% or just short of that number. That is significant. That’s material. Obviously, it benefits investors. Similarly with bonds; significant outperformance of South African bonds relative to global bonds. So, you could say South Africa has been in the sweet spot of the world, which is nice for change.
On the rand appreciation to influence South African fixed interest instruments
Our analysis shows there is quite a strong correlation between rand strength and bond appreciation. When investors think the currency, which is a big component of their returns, is going to appreciate, they are not only going to get the benefit of the coupon or the interest, but they’re also going to get the currency appreciation. That’s the reason why a strong rand, strong bond, strong financial equity shares amounts to stronger SA incorporated equities.
On outperforming funds
At Corion, we don’t believe investing is a fast fashion. It is not a theme, you don’t go on what was winning or outperforming over the last five to 10 years. You take a long-term view. In investments, a long term is 20, 30, 50 years; and you see what investment strategies work over time. So, although value underperformed significantly for a decade, if you look at the Corion report and see which funds are outperforming, it’s pretty much all the value funds that are at the top of the chart. Hopefully – which, unfortunately, I doubt – those clients who stuck to the investment strategy and took a longer term view have benefited significantly over the last two years.
On what’s driving the markets
South Africa is blessed with some very gifted, skilled asset managers. At Corion, we used to call them the CIA, Coronation Investec Allan Gray. A very smart team, great businesses. But, in the South African context, our market is a lot smaller than it used to be. There are fewer shares, less liquid and you have big houses chasing the same top 40 shares. It is very hard for them to go outside the top 40 shares. Liquidity is a major constraint. What’s driving the markets over the last two years has predominantly been small caps, mid-caps, and they cannot really go and hunt in that area of the market. They can but it’s a lot more difficult. I think we’re starting to see that in terms of their returns where asset management firms – the smaller firms – are really outperforming them over the last year to two years.
On the Naspers and Prosus valuation
I can’t speak for the whole industry, but you have a share that is Naspers plus Prosus at 8% to 10% of the All Share Index. For a big house not to have any of that share is a major call and a major bet for the performance. No doubt, the overwhelming majority of big houses would have it because it’s a big bet and because it covers a large part of the market. If they don’t have it, where do they invest the remaining 8%? So yes, certainly there are some managers – I know of a few large asset managers – who still believe in the Prosus Naspers valuation. They are probably there for their own investment merits. But there are also some who I don’t think have an alternative because it is just such a big share in the market.
Read also:Â
- Valuations matter, forget the story – Corion Capital’s David Bacher
- It’s time for investors to temper their return expectations – Corion Capital’s David Bacher
- Why we are underweight US equities – Corion Capital
