In our monthly recap of the markets, David Bacher of Corion looks back at a month when the Rand outperformed, helping South African shares post a rare performance victory over their global counterparts. Bacher highlights the importance of a long-term perspective and diversification in investment strategies, offering examples of the fruits this delivers. The interview also touches on the significance of Women’s Month and promoting greater female participation in financial markets. – Alec Hogg
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Edited transcript of the interview:
Alec Hogg: Even if you’re not constantly monitoring the stock markets, chances are you’re interested in it. Be it retirement funds, unit trusts, direct investments, or business model portfolios, we all have some stake in it. That’s why I appreciate our monthly catch up with David Bacher whose Corion does a great job compiling the relevant information from the past month and sharing it with us, keeping us consistently updated on the state of the investment markets.
David Bacher: Thanks, Alec. I appreciate your kind words about our report.
Alec Hogg: There’s plenty to discuss this month, David. It’s been quite the year, hasn’t it? Allow me to share a personal victory: we launched the BizNews Shift portfolio, a portfolio focused on exponential stocks, on December 14, 2021. You could hardly pick a worse time to delve into those volatile high beta stocks. Nevertheless, we’ve recently broken into profit, thanks in part to a weakened Rand. It just goes to show, stick with it, and the share market will reward you in the long run, assuming, of course, that you don’t invest in complete failures.
David Bacher: Your experience is a classic case study. Time and again, investors, particularly everyday individuals, get emotionally invested in the short-term prospects. But remember, you are saving for retirement and investing is a long game. You’re generally rewarded for enduring short-term volatility. Your story, I’m sure, is one many can relate to.
Alec Hogg: Indeed, it’s a very tangible example. Hundreds of our business and tribe members have been along for this ride. When you’re facing a 35-40% decrease, it’s challenging to maintain faith, but here we are. Our project is set for a five-year term, and it’ll be intriguing to see its returns after that period. Generally speaking, in the stock market, a five-year investment should yield a satisfactory return.
David Bacher: Absolutely. I always stress the importance of sticking to these basic principles. It’s crucial not to over-concentrate on a specific factor, region, or sector, as the resulting volatility from a significant drawdown can be hard to recover from. If you spread your investment across riskier assets, more often than not, you’ll reap the rewards.
Alec Hogg: David, we have these discussions monthly. Do you ever tire of markets or compiling these monthly reports, or of our conversations?
Read more: June’s perfect inversion for investors as May’s disasters become winners – Corion Report
David Bacher: Not at all. At Corion, we’re passionate about markets. The first thing I do each morning is check the market updates and read relevant news. So, it’s deeply ingrained in us. The market is always full of interesting stories and events. For instance, recent market fluctuations have been as unpredictable as the latest Ashes Test Cricket. You never know what the next session might bring. It can be tough at times, but if you maintain a long-term perspective, volatility often creates opportunities. If you keep your eyes on the future, even during trying times, it can actually be the best moment to make investment decisions. times, but if you maintain a long-term perspective, volatility often creates opportunities. If you keep your eyes on the future, even during trying times, it can actually be the best moment to make investment decisions.
Alec Hogg: Now let’s move on to the report. This report you’ve compiled is quite comprehensive. Do you mind if I ask how many people typically receive it?
David Bacher: We have over 6,000, possibly up to 7,000, subscribers for the report. It has gained significant popularity. The encouraging part is that these subscribers are genuinely passionate about investments. This makes for a highly targeted audience for our brand and helps facilitate education about the markets.
Alec Hogg: This report also covers the Fantasy Fund Manager, another initiative you’re working on to pique people’s interest in the stock market, which, in my opinion, is the greatest game anyone can play.
David Bacher: That’s correct.
Alec Hogg: Let’s talk about the asset returns for the month. South African equities outperformed bonds and the US dollar, which faced a bit of pressure. Can you give us an interpretation of this?
David Bacher: You opened this interview discussing investors, and I believe South African investors will be smiling. July was a successful month, with the All Share Index yielding about a 4% return. Our bonds performed well, and the Rand appreciated around 5.5% against the dollar. For South African investors, it was generally a profitable period. Most asset classes and regions worldwide showed positive trends. While it’s only one month, it’s been a good few months overall and a solid start to 2023.
Alec Hogg: But this situation underscores the volatility. In just the last couple of days, the Rand has forfeited many of those gains.
David Bacher: Absolutely. In the last four trading days, the Rand has lost almost 100c. Such short-term volatility is challenging to predict. When the Rand was nearly R20/$, we felt it was overextended, but it quickly returned to the high R17s. As you mentioned, it has quickly retracted since then. Nevertheless, it’s crucial not to fixate on daily movements; adopting a long-term view is more beneficial. We referred to a purchasing power parity graph a couple of months ago, emphasizing the importance of a longer-term perspective. As a team at Corion, we still believe the Rand is undervalued. However, it’s never a good idea to invest all your assets in one regional asset class.
Alec Hogg: The South African Equity returns are particularly intriguing, with notable differences across various market sectors over the past month. Financials emerged as the top performer.
David Bacher: Indeed, and that’s to be expected when the Rand is strong and interest rates are perceived to be nearing their peak. A low-interest-rate cycle is generally favorable for financial shares. What stands out in this matrix is the three-year number. I was examining the SA equities versus global equities, which I believe was on the previous page. Surprisingly, SA equities outperformed global equities. It seemed counterintuitive given the exceptional run of global equities. So, I delved deeper into how this was possible. This serves as a good reminder not to accept numbers at face value. Three years ago, we were in the throes of COVID-related concerns, and the Rand escalated from R14/$ to R19/$ before retreating. Always consider what’s been phased out of the data and the starting point of your reference. That period marked the height of COVID panic and the Rand fears. You’ll see that number gradually shift back into global equities outperforming South African equities over three years.
Alec Hogg: This reminds me of something Warren Buffett consistently says at Berkshire Hathaway’s annual general meetings. He warns about carefully choosing the periods you’re comparing since manipulators can make the numbers say whatever they want. Here’s an example: if someone wanted to promote South African equities, they could point to the last three years, say from July 2020 to 2023, and it would look fantastic. However, as you explained, if we adjust the period even slightly, the results may not look as great.
David Bacher: In financial terms, that’s called framing – choosing a specific time period. Always examine the data thoroughly and consider not only the stated time frame but also what was happening just before that, as the results can vary significantly.
Alec Hogg: What’s Corion’s stance on resources? They’ve been remarkably volatile, but they’ve outperformed other sectors of the South African market over the long term. What’s your current outlook?
David Bacher: Resources are difficult to analyze because you’re heavily reliant not on fundamental research, but rather on macro factors, such as the trajectory of commodity prices. And predicting commodity prices is challenging, which contributes to the sector’s volatility. Recently, several resource shares have come under considerable pressure. Take Sibanye, for instance. Despite its unique circumstances, it’s trading at a P/E of around 5.5 times. That seems attractive, but it’s a highly leveraged company with a considerable amount of debt. So, you really need a perspective on where commodity prices are headed before making a decision on resources. To answer your question, as a firm, we believe there’s potential upside given that many commodity prices have declined significantly.
Alec Hogg: Let’s switch to the Fantasy Fund Manager. Given it’s Women’s Month and looking at the current situation, it seems to be quite fitting. Is that Renee Zietsman leading the pack? Is Renee a female?
David Bacher: Yes, Renee is a female. Looking at the leaderboard of the top 15, I’m happy to see that about five or six of them are either service providers or work at Corian. Rena used to be a service provider here but has since moved on to a trust company. So it’s lovely to see someone we know, and a woman at that, leading the charge.
Alec Hogg: Also on the list, we have Marilee Taljart, Charlotte von Tiddens, whose research reports I receive regularly—clearly someone knowledgeable. Paul Floquet, any relation to Winston, do you know?
David Bacher: I’m not sure about that, but it’s nice to see Grant Morris at number seven. He co-manages a portfolio with Andrew Vincent at Clucus Gray. It’s great to see a diverse mix of industry people and those from various walks of life.
Alec Hogg: Wasn’t Anthony Hall at the top of the leaderboard recently?
David Bacher: Anthony Hall won for the month of June, so he was the top performer that month, and he’s also doing well in the overall competition.
Alec Hogg: Paul Floquet could potentially be related to Winston Floquet, a big name in South African investing during the ’80s and ’90s with Martin & Co. I believe he’s still operating his own business. Another interesting name in the top 15 of the overall leaderboard is Eugene Cox. I doubt it’s the former jockey and racehorse trainer Eugene Cox, but it’s a renowned name regardless. Looking at these stats, the top performers have just over 15% growth, and you can make the top 15 by growing by 11%. These are not exactly mind-blowing returns.
David Bacher: Yes, a 15% return is certainly not something to be scoffed at. In this period, the market has been mostly flat, with perhaps a 1% increase. So, achieving an alpha in double digits is definitely a good outcome. I’ve been comparing the returns from the entire universe against the Fantasy Fund Manager’s benchmark, which is equally-weighted. It’s encouraging to see that the majority of participants are outperforming this benchmark, which actually surprised me. You would think investing, being a tough game, would result in around 50% of people outperforming and 50% underperforming. But we’re seeing 60% outperforming, which required some digging from my team and me. The reason seems to be that popular stocks – household names like Naspers, Sasol, and Richemont, which have been outperforming – are the majority shares owned in the game. This was a key contributing factor. Overall, the participants’ returns have been quite good.
Alec Hogg: Certainly, looking at the unit trusts themselves, Merchant West – Piet Viljoen’s company – caught my eye with its good performance in the past month, and on the other end of the spectrum, Rezco had a poor showing. Who is Rezco? I haven’t come across them before.
David Bacher: Rezco is a value-oriented firm. They have a conservative position and tend to hold a bearish view of the world, if I remember correctly. In times of high volatility, such as the bullish month we had last, this can make you look quite foolish. But as we mentioned at the beginning of this interview, the market and the Rand are under pressure this month, and that can reverse quite rapidly. Rezco isn’t afraid of making contrarian moves. This means that there will be periods where they are among the worst performers. But up until this year, their performance was commendable.
Alec Hogg: It’s interesting to see Merchant West also topping the SA low equity category, despite it only being for one month. Any idea how they achieved this at a house level? It’s quite an accomplishment.
David Bacher: Yes, Merchant West has been generally bullish on SA Inc. This is evident in Piet’s challenge with Magnus. Their position has been concentrated more on SA Inc. shares. The environment during this period has been conducive to that kind of positioning. Once again, this is a house that isn’t afraid to take a stance. With those stances, over shorter periods, you shouldn’t get too alarmed if one of your asset managers appears in the worst-performing segment of the leaderboard. If you’re paying a manager for active management, it’s similar to a tennis player – even if you’re Djokovic and hitting a lot of winners, you’re still going to occasionally hit the ball into the net.
Alec Hogg: Something intriguing on this table in the SA low equity category is that the four largest funds make up half of the entire industry. Two of these four underperformed the average, and none made it into the top five performers. It’s interesting that there is still a massive concentration of money amongst the big houses, such as Allan Gray, Coronation, M&G, and Ninety One.
David Bacher: Absolutely. South African investors are fortunate to have such high-performing, respected, large asset management houses. I believe investors have done well over time with these firms. But as these houses have succeeded, they’ve grown very large, making it more difficult to change investment decisions and buy or sell shares. The past is the past, and it’s crucial to look ahead. From our perspective at Corion, there are many excellent boutique asset managers out there who are much more nimble. Just because a firm has performed well and has a great brand doesn’t necessarily mean that’s where your investments should be. And I don’t think it’s healthy for the industry to be so concentrated, with such a large proportion of the assets managed by a small number of houses. It’s not a competitive environment and it doesn’t promote liquidity in the market. We look forward to hopefully seeing that change in the coming years.
Alec Hogg: To quote Warren Buffett again, “Size is the anchor of performance.” Let’s look at global equity now. The breakdown here is interesting, particularly the one-year position. The Signia FAANG Equity Fund is leading with a 53% return over the past year, which isn’t surprising considering the performance of the FAANG stocks. However, coming in second with a 44% return is a value fund – Sean Peche’s Ranmore Global Value Equity Fund. We’re seeing two very different styles at the top of the performance list over the past year.
David Bacher: It’s intriguing to see two different investment philosophies performing so well simultaneously. Understanding the success of the Signia FAANG fund is quite straightforward. The impressive performance of the “magnificent seven” has been driving the market during this period, making it the place to be. However, the question remains: why is Ranmore also doing exceptionally well? I’m pleased to see Sean’s success on the leaderboard. I’ve known him for years, and his passion for investing is evident in his approach. I believe several factors contribute to their success. Firstly, their skillful stock picking sets them apart. Even outside the FAANGs, there are ample opportunities for stock pickers, and they have capitalized on those opportunities effectively.
Ranmore holds a substantial position in European equities, which have performed exceptionally well over the past year. With about 40% exposure to Europe, this regional allocation has been a significant contributor to their success. Moreover, their selection of banking shares within these stock picks has yielded fruitful rewards.
Alec Hogg: Let’s talk about the flows into the funds. I found the table interesting, especially the significant inflows into some of the smaller funds like PPS Equity, Truffle, and the relatively unknown Commissa.
David Bacher: Indeed, Commissa is a rebranded name that was previously known as Kagiso Asset Management before a management buyout. They have a reputable institutional background and are known as a relative value manager in South Africa. Their ability to attract fresh investments shows their appeal in the market.
Alec Hogg: On the other hand, it’s disheartening to see the decline of the Old Mutual Investors Fund, which was once a strong performer. It appears that size can be an anchor to growth, as the larger funds tend to experience significant outflows during times of underperformance or when investors need to draw from their savings.
David Bacher: You’re absolutely right. The decline of the Old Mutual Investors Fund is regrettable. Being a larger fund, it tends to face more substantial outflows during challenging periods. However, the percentage of the fund affected may not be as significant as the outflows suggest.
Alec Hogg: Thank you for your insights, David. It’s always great to catch up with you on a monthly basis. Before we wrap up, is there anything notable from July or anything we should keep an eye on in August?
David Bacher: Certainly! I’d like to highlight Women’s Month in Fantasy Fund Manager. We’re proud to promote and educate people, especially women, in the financial industry. Currently, 47% of our gamers are female, which is fantastic. In honor of Women’s Day, we’re celebrating Women’s Month and encouraging greater female participation in the markets. We have additional prize money for females, and we hope to see more daughters, mothers, and aunts participating in the game. As an industry, we’re making strides towards greater inclusivity, and this initiative is another step in the right direction.
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