In the current market environment, it takes a lot for a unit trust to stand out. The JSE has been so broadly depressed that managers have struggled to find any way to generate meaningful returns. A 26.2% return over the past year is therefore something quite remarkable.
It is even more so when one considers that only five other general equity funds in South Africa have managed to earn even a double-digit return over this period, with the next best being 14.2%. The FTSE/JSE All Share Index (Alsi) is up only 7.8%.
Anyone familiar with the Investec Value Fund might, however, not be that surprised that it is the lone unit trust delivering this kind of performance. The portfolio has always behaved very differently to its peers and to the market, due to its committed deep value approach.
More down than up
Over the past decade, this has mostly been to the downside. In fact, despite the 12-month surge, the fund is in the bottom quartile of equity funds over a 10-year period. Its annualised return over this time is 9.4%, which is meaningfully below the 13.5% of the Alsi, and the category average of 11%.
The graph below shows how the fund has performed in fits and starts.
John Biccard, long-time manager of the fund, says there has been a number of factors that have led to this see-saw performance. The first is the global backdrop.
“Globally, value has underperformed for 10 years in a row, and the underlying picture is that value is still massively out of favour,” he says. “That is mainly because the last 10 years have been about quantitative easing and low interest rates, and in that environment the rules of finance are broken down a bit. Basically, when the cost of money is zero, companies with long-dated growth just go to infinite valuations.”
While the environment for value in South Africa has not been quite as negative, the market here has faced its own challenges. The depressed local economy as meant that the ‘signs of life’, as Biccard calls them, are ‘very patchy’.
A story of two stocks
The past year has been a quite a patch, but in a very specific way. As Biccard points out, the fund’s performance is almost entirely due to just two stocks that have been exposed to a rebound in the prices of platinum group metals (PGMs) palladium and rhodium.
“What you have seen over the last 12 months is 70% because of Impala and 30% because of Sibanye,” he says.
A year ago, Impala was trading at under R20 per share. It is now over R70. Sibanye has rerated from R7.50 per share to R16.50 per share over the same time.
“We have been bullish on platinum shares for five years, and for four years we’ve been wrong,” says Biccard. “But we kept buying all the way down so when they got to the bottom a year ago we had 10% of the portfolio in Sibanye and 10% Impala.”
As palladium and rhodium prices have shot up in dollar terms and the rand has weakened slightly, these counters have responded.
“We have liked the fundamentals of the PGM industry for a long time,” says Biccard. “We saw this deficit in palladium and rhodium coming years ago, and in the last year it has started to play out. The economics of platinum miners in SA have completely changed.”
Impala has been the biggest beneficiary.
“To rebuild Impala’s mines would cost R150 per share, and at one stage it was trading at R16,” says Biccard. “The market had priced in that PGM mining was a sunset industry and we said it wasn’t, and it’s turning out that it isn’t.”
He also feels that at a price-to-earnings multiple of 7 times, the valuation on Impala is still attractive.
“Normally if something goes up four times we sell everything, but in this case we still think the metals can go higher,” Biccard says. “The share prices say the metals aren’t going to go higher, but I’m not so sure that this is the top.”
While these platinum investments have paid off for the fund, the rest of the local portfolio still looks depressed. Around 30% of the fund is in JSE-listed, mid-cap stocks.
“Broadly speaking South African shares have been very bad the last few years,” Biccard says. “If you look at banks they are down 15%, and retailers are down 30%, but those shares haven’t fallen enough to be attractive to us.
“There is however a whole raft of mid-cap shares that have fallen 80% or 90%,” he adds. “Where banks and retailers trade on 12x and 15x earnings, these mid caps trade on 6x or 7x earnings. That is the way that we want to buy into South Africa.
“I’m not optimistic about South Africa, but a lot of these shares have discounted [as though] the country is like Zimbabwe. When that is the case we are happy to buy them.”
While many might agree that these shares look cheap, they would also argue that there is also nothing that will evidently change that. Biccard, however, is more philosophical.
“A year ago people would say what is the catalyst for Impala, and I would say obviously it’s higher prices,” says Biccard. “But if you wait for higher prices it’s too late. You have to buy when there’s nothing evident other than the valuations of those shares.
“So for mid-caps, I don’t really care what the catalyst is,” he adds. “But one day the catalyst will appear.”