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Fund manager resists pot of gold at the end of the rainbow

Pyrford International’s Tony Cousins sees reason to be overly cautious in the current market environment.
Image: Shutterstock

The Nedgroup Investments Global Cautious fund has notably underperformed its peers over the past three years. Of the eight funds in Citywire’s Mixed Asset – Conservative USD category, it shows the lowest return over 36 months to May 2021.

The fund is up just 18.4% over that period in rands, compared to a category average of 27.4%.

However, the fund, which is also available in South Africa as the Nedgroup Investments Global Cautious Feeder fund, has a much stronger longer-term track record. Over 10 years, it is the second-best performer in the category, up 171.7%.

Pyrford International has managed the fund since 1 July 2019. It’s objective is a return of cash + 3%, with low volatility and a focus on capital protection. In March last year, the fund was down just -3.4%.

Tony Cousins (pictured), CIO of Pyrford International and manager of the fund, said at the Glacier Invest Summit last week that he and his team remain committed to their philosophy of protecting client capital. And as value-based investors, this demands a cautious approach in the current market environment.

Equity valuations
‘We believe that markets have returned to very expensive levels,’ Cousins said. ‘At the bottom of the Covid crisis in March last year, we increased our exposure quite significantly because equities had returned to a reasonable value. Since that point, markets have risen very sharply in a period when earnings have actually been very disappointing.’

He pointed out that the price-to-earnings (P/E) multiple on global equities at the end of 2019 was about 20 times. That dropped to 15 times in the crash.

‘Subsequent to that, markets have gone up a lot, and earnings have fallen back so that this is now sitting at 30 times earnings,’ Cousins said. ‘This is very expensive.’

Dividend yields tell a similar story.

At the end of 2019, the yield on global equities was 2.3%. That increased to 3.0% as markets fell.

‘Since that point, in a period when dividends have been cut, equity markets have gone up. The yield on global equities today is a measly 1.9%.’

Is it sustainable?
Cousins added that this market continued to be dominated by growth stocks. Despite the value rally in the first quarter, growth has recovered sharply in recent months and is once again out-pacing value for the year-to-date.

‘These growth stocks often don’t make a lot of money now, but promise a pot of gold at the end of the rainbow in a few years’ time,’ Cousins said. ‘If you discount that with very low bond yields, that’s how these very high prices are justified.’

However, he questioned the sustainability of this premise, even though the likes of Microsoft and Amazon are ‘good companies and strong franchises’.

‘They are simply too highly valued,’ Cousins said. ‘If we cast our minds back to the last tech boom, Microsoft’s share price ended in 1999 at 65 times earnings. In the year that followed, the company continued to prosper, but its share price fell 60%, simply because it was too highly valued at the start.’

Microsoft’s share price reached a new all-time high last week. It is currently trading on a P/E of just under 40 times.

The alternative?
While these kinds of valuations mean that a value-oriented investor like Pyrford is wary of equities, the bond market is hardly offering a rich alternative.

‘Bonds have been driven up in price and driven down in yield by central bank intervention and the phenomenal printing of money,’ Cousins said. ‘The real yield on the German 10-year bond is -2.0%. Its nominal yield is below zero.

‘This is a return-free risk. It is a zero-coupon bond. The only way you can make a positive rate of return is for this already historically low yield to just keep falling. That is clearly not reasonable.’

Cousins said that this was a false market driven by central bank activity.

‘The only way to protect yourselves here is to have very low duration bonds,’ he said. ‘They won’t make you a lot of money, but they won’t lose you a lot of money either.’

Currently, 77% of the portfolio is in bonds, but with very low duration.

Pyrford has just 20% of the fund allocated to equities, with a significant tilt towards Australia and Asia. This includes Singapore, Hong Kong, Malaysia, Taiwan and Indonesia.

‘This is the best fundamental area for long-term economic growth within the world,’ Cousins said. ‘It has the best demographics, the best productivity growth, and markets which are better valued than either Europe or the US.’

Patrick Cairns is South Africa Editor at Citywire, which provides insights and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Just buy cheap SA Gold miners, Platinum, Coal and Iron ore shares.

You will have a good Rand hedge (resources get paid for in Dollars) plus the demand will rise.

ANG, AGL, GFI, HAR, SSW, EXX, BHP, KIO

Good point-mind you, BeesWax, why exclude the likes of DRD and GLN?

End of comments.

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