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Walter Aylett: ‘If I was an international investor, I would have 30% of my money in SA’

You protect yourself by not overpaying for assets and then being able to withstand five to 10 years of no growth: Aylett & Co founder.
Image: Waldo Swiegers/Bloomberg

For the 12 months to the end of June, the Aylett Equity Prescient fund was up 41.2%. That is significantly ahead of the FTSE/JSE All Share Index return of 25.1%.

However, senior portfolio manager Walter Aylett is telling investors that they shouldn’t be oblivious to the warning signs that these kinds of returns indicate.

“Markets are pricing in a level of optimism with which we do not feel comfortable,” he wrote in his latest fund commentary. “Government debt levels are at all-time highs in many countries, aided by interest rates at all-time lows. Should anything change, the consequences could be dire.”

‘It’s going to be really ugly’

While Aylett is prepared to admit that, in 25 years, “we’ve had a very poor record of calling markets”, he told Citywire South Africa that he believes it’s necessary to temper the expectations of investors. This bull market will, at some point, have to end.

“Eventually it is going to play out the way we expect, and it’s going to be really ugly,” Aylett said. “We just don’t know how or when and in what form.

“There are generations now that have never seen a high interest rate environment,” he added. “Every metric looks to some form of too much optimism. We know it’s come from all the stimulus that has come from the central banks, and I think their tool kit is now empty. You can see how, as soon as there is a bit of talk of interest rates or inflation, the markets go into a complete spin.”

This is leading him to be extremely circumspect in his stock picking.

Cautious

“I am now 60, and you do get a bit more cautious as you get older,” Aylett said.  “I just can’t help feeling that, eventually, something has to give, otherwise you’ve wasted your time going to university.”

In this environment, Aylett is very aware of building a portfolio that can withstand significant shocks to the system. The fund has therefore been taking profits on some of its US holdings, particularly in financials.

“We sold them off thinking that we would just sit in cash, but some of our core holdings like travel-related stocks were hit due to concerns around the delta variant, and we have added huge amounts of money there in the last couple of weeks. We have also moved a lot of money into energy – particularly oil producers – and buying stocks that we know well that have come off.”

Locally, this includes stocks like Reinet and Royal Bafokeng Platinum. Internationally, the fund has increased exposure to casinos in Macao, and travel-related stocks like Sabre Corporation and Wabtec.

Sabre provides the technology for airline and hotel bookings, while Wabtec produces transportation equipment used in trains.

JSE value

Aylett has also been seeing value in small and mid cap stocks on the JSE. Transaction Capital is a company the fund has held for some time, and he continues to believe in. He also favours platinum producers.

“We are only about 30% to 35% pure South Africa,” he said. “But if I was an international investor, I would have roughly 30% of my money in South Africa too. Everyone says you can’t buy Microsoft or Amazon here, but you can’t buy platinum companies in America.”

His emphasis when adding to these holdings is on building durable portfolios of companies that will endure.

“Our job is to think about the unknown,” Aylett said. “I want to buy great, uncorrelated investments that will survive despite whatever gets throw at them. We will always need trains, hotels, insurance. South Africa will need taxis.”

Arrows in the quiver

“You protect yourself by not overpaying for assets and then being able to withstand five to 10 years of no growth,” he added. “But when you overpaid for Japanese stocks 30 years ago, or the Nasdaq in 1999, some of those shares have never recovered. If you overpaid for Coca-Cola in the late 90s, you would have lost a fortune.

“For example, we are quite big into packaging at the moment. Lots of people don’t like the sector, but you are paying five- or six-times cash flow for these companies. Platinum is another. It is on three-times cash flow at the moment. When we are buying at those levels, if we are wrong, at least we get our money back.”

This does mean avoiding the ‘sexy’ stocks.

“We will just carry on buying things that we know, and things that we know we will need. But paying $2 trillion for Apple, in my mind, is just too much. It’s safer to buy old-fashioned, neglected stocks.”

It also requires discipline, and patience.

“My biggest fight with my young analysts is trying to explain that you need to think like you only have 20 arrows in your quiver. Every time you buy a share, that’s an arrow gone. You need to take that ‘buy’ decision so seriously.

“In fact, you should be prepared to spend two years not buying anything. People don’t want to hear that we might not do anything for two years, but the truth is that if the probabilities are not in our favour, why invest?”

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

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

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This is a very interesting, and in reality, quite a counter-intuitive topic. Government debt at record highs and interest rates at record lows imply that something has to give. When inflation eventually kicks in, rising rates will bankrupt many individuals, businesses, and governments, and the market will crash, destroying the nominal value of my precious investments right? Wrong!

These results are logical and correct when we assume that money, as we know it today, has intrinsic value and represents something that is scarce, as it did during the gold standard under the Bretton Woods agreement. Benjamin Graham published his book, “The Intelligent Investor” in 1949, during the early days of the Bretton Woods agreement. Many handbooks about the subject were written before the USA unilaterally abandoned all convertibility of the dollar into gold with the “Nixon shock” in 1971. Our understanding of money has been turned on its head since then. The reality is the opposite of what the rational and educated spectator would logically expect.

National debt for leading nations is around the same levels as after the Second World War. The period after the war was known as the Golden Age in the USA, even though the gold standard restricted devaluation at the time. They used financial repression to allow inflation to grow the GDP to escape from the dangerous Debt/GDP ratio. The point is, they will do the same today. Financial repression is a type of sovereign default that does not destroy the financial system. This mechanism transfers wealth from savers to borrowers. It syphons off the purchasing power of government bonds to pay down the national debt.

Listed companies that issue debt to purchase their own shares, or to expand into new markets, benefit from this process. When the real rates are negative, inflation creates wealth for borrowers and impoverished savers. Those investors who have the wrong perceptions about the reality of money will avoid shares and buy bonds to “lower their risk”. The reality of Fiat money necessitates the opposite strategy though. The monetary tools will reward those who sell bonds to purchase listed shares.

It is a crazy, upside-down world, because money, which is the token of trust and value, has been debauched for political gain.

The silent Tax. begs the question, when do we see an end to this financial repression if we ever do?

In response to your comment -When you leave your socks and underpants in the hallway, it is an accurate leading indicator that you may be sleeping on the couch tonight. There is this very accurate leading indicator that predicts market crashes. This indicator has predicted every major crash since 1930 and there hasn’t been a market crash without this advance warning.

The market itself warns investors 12 to 18 months in advance, that it intends to crash. The market does not crash while the cost of credit is lower than the rate of inflation, and always crashes when it is. The yield on the 30 US Treasury Bond acts as a barometer for inflation because investors demand this yield to compensate for inflation. When the yield on the 2 year Treasury Note is above the yield of the 30 Year Bond, it implies that credit has a positive “real” cost. Banks borrow short term and lend long term. The inverted yield curve creates an unprofitable environment for banks and prevents them from rolling on production loans and working credit. This leads to a credit crunch and liquidity squeeze that causes bankruptcies in all geared investments opportunities, from industry to the housing market.

It is impossible for the market to crash in terms of the unit of account when that unit of account crashes at a faster rate. Einstein was correct – relativity matters.

Sensei – Thanks for the above, you are wise beyond years sir.

During the 1950s the US economy boomed. The national debt was reduced and at the same time the money supply expanded. This was only possible because of the gold standard. Gold is the form of money that is nobody’s debt. Under pure fiat it is impossible to pay down the debt without crashing the money supply – which creates a recession/ depression. Money is debt and is always created by an act of borrowing. The only solution to today’s debt problem is to inflate it away. Coming to a place near you sometime in the future.

If I were an international investor, I would have had less than 1% invested in SA, if any.

But you aren’t. And you have most of your money in SA. And you live there. Hard to take you and your advice seriously if you don’t.

But you aren’t. And you have most of your money in SA. And you live there. Hard to take you and your advice seriously if you don’t.

Local fund managers have been desperate for a while, but this article takes the cake. I can imagine the wealthy people and fund managers all around the world rolling in the aisles all when they read this puffery from an SA-based fund manager who barely manages R3bn in total.

I know body shaming is a thing on the internet but this is new, shaming a manager for his level of assets under management! That is a new low for this forum.

Magnus is no Elke Brink, that’s for sure.

Simbian dont read between the lines.
Its a way to point out that a manager with such an opinion doesnt have the backup of the investing fraternity otherwise his clientele would show it.

And while mentioning Elke Brink, she can just sit there and smile and I will give her all my money 🙂

She can manage my portfolio any time.

Many seasoned investors have long maintained that FAs have a very limited knowledge of the financial markets and are brainwashed by their employing financial companies to believe that they are delivering financial products that add value for their “clients.” Or should that be “victims?”

“My biggest fight with my young analysts is trying to explain that you need to think like you only have 20 arrows in your quiver.” They can’t find any instrument outside of that quiver.

When the only tool you have is a hammer, every problem looks to you like a nail.

End of comments.

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