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Is SA a bit of a value trap following the events of the past decade?

‘I do believe that our companies from a valuation perspective – even despite those shorter-term risks – are for the longer term in a good position’ – Sonja Saunderson, CIO at Momentum Investments.

RYK VAN NIEKERK: Welcome to this Market Commentator Podcast, my weekly podcast where I speak to the leading chief investment officers of South Africa’s major asset managers. I pick their brains about the perceptions of the market, how they differentiate between noise and market signals, and we also discuss which shares and assets they are buying and selling. My name is Ryk van Niekerk, and my guest today is Sonja Saunderson. She is the chief investment officer at Momentum Investments and has been in the asset-management business since 2000. She started off as a researcher at PSG. She later moved to Advantage Asset Managers, and then jumped to Momentum in 2010 and became the chief investment officer in 2015.

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Sonja, thank you so much for joining me. I bet you get this question a lot: How many female CIOs are there in South Africa?

SONJA SAUNDERSON: (Chuckling) Yes, there are quite a few, but it’s also true that I think the industry is typically underrepresented from a female perspective. I think that’s not just unique to South Africa; it is a global phenomenon. But there are quite a few – if I think of Perpetua, for instance and Alexander Forbes has a female chief investment officer. I should have made a list beforehand. But there are quite a few in the market, actually.

RYK VAN NIEKERK: Well, that is good to see. But let’s talk about markets, especially the local market. Over the past few weeks I’ve spoken to several of your peers and the majority actually stated that they’d increased their exposure to the local market as they perceive it to offer more value than many international markets. Are you in the same boat?

SONJA SAUNDERSON: Yes, we actually are pretty positive on SA Inc and South African stocks in general from a valuation perspective. In some of our funds we invest according to passive smart beta, as well as externalising some of our funds to external fund managers. And then we monitor on a top level. So from that perspective yes, we are generally positive on equity – local and global actually. We are a little bit worried about volatility, but we are generally positive about South Africa.

RYK VAN NIEKERK: We were seeing a significant underperformance of the JSE during the Zuma years – the lost decade, the 2010 to 2020 decade. Then we saw the market crash early last year. But (since) we’ve seen this really significant recovery of the JSE and it was relative even to international markets. It actually outperformed quite well.

But over the past few months, we’ve again seen some underperformance relative to international markets. Are you concerned that we may be a bit of a value trap, given what has happened over the past decade or so?

SONJA SAUNDERSON: I think there could be pockets of value traps in the market. I don’t think that we need to have that fear on the JSE overall. Overall I think there’s been strong performance over the last year, but we also saw a lot of volatility where there’s growth in the system and reasonable valuations. We understand where those returns came from, but there certainly also are  a lot of risks and questions around what’s going to happen around the vaccine rollout, and whether we see any potential new variants and what that is going to mean for different companies.

But overall I think there may be a couple of examples where we need to worry about the valuations. But overall in South Africa I think we were just the beneficiaries of a fairly loose monetary policy that affected markets globally, and we were the benefactor over the last couple of years.

RYK VAN NIEKERK: Let’s talk about the positives. Where do you see value?

SONJA SAUNDERSON: I think there are quite a few places where we still believe, despite what happened (in) the past year and where we are at, that there’s good value in the likes of a FirstRand. We are actually quite positive about Implats and Anglo American. So some of the banks, some of the resource companies.

In MTN and Absa we are heavily weighted, as well as in our portfolios overall. From a valuation perspective I think all of those companies are well positioned. They kept their reserves and they are well positioned to perform better in a post-Covid world.

RYK VAN NIEKERK: Most of those names you’ve mentioned are in the financial sector. Obviously Covid-19 hit that sector particularly hard, especially on the banking side last year when massive provisions were made. It seems, at face value at least, that they may have been too conservative. Do you think that that aggressive approach towards provisions impacted valuation in a significant way?

SONJA SAUNDERSON: I think it would have affected some of the companies that might have made provisions for it to a large extent. And certainly, if I look at some of the companies that we talk to, they are even provisioning and being more conservative on a fourth and fifth wave coming. There are quite a few that are making quite severe reservations for a future world as well. I do think that is something that could be too conservative, but it’s actually a sober approach.

So we do like management teams that think through a cycle, but that also spot the risks coming. And yes, I do think some of those reserves would have affected the valuations in the past, but it’s probably the most realistic approach for the future as well.

RYK VAN NIEKERK: Are you holding on to those shares at the moment or are you reducing or increasing your stakes?

SONJA SAUNDERSON: No, we are pretty much holding the same positions. We haven’t rotated the portfolio significantly. As I said, it’s probably more a function of the way that we construct portfolios from an outcomes-based perspective. We look through a cycle, we look over the long term, and we don’t make too big a tactical call on those positions. By virtue of implementing through different style factors and the way that we believe various factors will be affected from a market-cycle perspective, we don’t have to chop and change and tune the portfolio too often.

RYK VAN NIEKERK: So you are not too actively changing portfolios at the moment; you’ve made your decisions and now you wait like good long-term investors?

SONJA SAUNDERSON: That’s right. I mean, you’re obviously on the margin, you do need to stay close to the views in the market and, if anything changes from a valuation perspective, overall we think we’re quite well positioned for the next cycle and even a fourth and a fifth wave, as I said before.

RYK VAN NIEKERK: I’m looking at a list of all the Momentum funds, and I must say there are three-and-a-half binders within Momentum funds. How many funds do you manage?

SONJA SAUNDERSON: Look, as a house in Momentum Investments, we’ve got various cycles and styles that we try and solve for because we believe that, as I said, from an outcomes-based perspective you can get different types of investors and they all have different needs. So from that perspective we do have quite a few in the equity space. For instance, we solve for valuation-centric portfolios from a value equity- centric perspective. And we also have a quality portfolio that looks more at quality companies from a South African perspective.

Then we also follow a bit of a trending strategy – what are the trending portfolios in the market? All of those talk to different styles or risk premiums in the market, if you will, and we know that they show different risk-return dynamics over time. As a result, all of those you can almost see as a building blocks towards creating a solution with different moving components over time that are sustainable over different cycles.

RYK VAN NIEKERK: Many of the funds have different classes. I see virtually all the funds have an A, B or C class. What are the main differences between those classes?

SONJA SAUNDERSON: We typically manage exactly the same portfolio. When that refers to different losses on the unit trust side, it actually means that we are simply solving for different client sets from a different fee perspective. For institutional clients bringing bigger scale and bulk you can imagine there’s a price discrimination as a result of that. And then for certain of our partners within the group, Momentum’s own agency force and our financial planners and so forth also have specific agreements in place for fees and things. So they are exactly the same portfolios but, based on the type of investor and a fair discrimination based on the assets that they bring, different losses, let’s solve for it. So it’s purely on that level.

RYK VAN NIEKERK: I’m looking at the Momentum Equity Fund. It’s the fact sheet for up to the end of July. The portfolio size is R3.6 billion, and it has outperformed the benchmark, which is the Capped Swix Index. From what I can see, over the past 10 years the fund has really performed well.

If I look at the top holdings of the fund, they are the top internationally exposed companies in South Africa. Naspers at the top is the biggest holding in the fund, (with) Anglo American, MTN, BHP Billiton, FirstRand…  Apart from FirstRand, those top five holdings are very, very exposed to their international operations. Is that a theme that you actively explore?

SONJA SAUNDERSON: Definitely. We do think that diversification from a South African perspective helps us, as I said before, because we believe in quality as a style and therefore the rand-hedge stocks and companies that have global exposure are something that we specifically monitor in our portfolios. So, when we do our market-risk analysis and we understand what our exposures are, we specifically take that into account. Yes, I’m not at all surprised that the top five look like they’ve got global exposure. That is a deliberate positioning on our behalf.

RYK VAN NIEKERK: Why would you buy Anglo American in South Africa and not in London?

SONJA SAUNDERSON: For Regulation 28 reasons, normally. It’s not that we can’t buy it in London but, from a South African perspective, it forms part of local regulated Regulation 28 portfolios where we track, as I said before, certain styles in the market.

Now, that still being such a big dominant share – even after how the market has evolved in the past five to 10 years – it is still a particular stock that you would want exposure to, so as not to take too much of a tracking-error risk relative to the South African  market.

We always start off from a liability perspective. We say, well, what are we trying to achieve? We decide which benchmarks in combination will get you to that outcome and liability as closely as possible. And then we decide: if you’ve got that benchmark, how far do you want to deviate from that benchmark? Sometimes it’s very big and you can take very active positions, not benchmark-cognisant. And in other instances, you do have to be more benchmark-cognisant.

Now, in that particular example, you do want to have Anglo. First of all, it is a good stock. It does have good valuations. But also, because it is such a big stock in the South African market, it is something that you will typically find in a portfolio – and not just buy it from a global basis.

RYK VAN NIEKERK: Yes. You also have BHP in there, which is also listed in London as well as British American Tobacco. But if Regulation 28 did not apply, would you still buy those stocks in South Africa as opposed to in London?

SONJA SAUNDERSON: I think it depends on what you are solving for. Again, if you just ask me outright where’s the best place to buy it, there’s lots of logic divide from a London exchange perspective. But for us, in a solution and an experience that you’re creating for a client, you definitely do need to take the wrapper of the legal vehicle and the tax regime of the investor into account, as well as whatever regulatory framework you’re operating within. And hence the reason why you see stocks the way that you do.

But yes, there’s definitely lots of logic to buy. And from a global perspective on the basis that you don’t have any other constraints under which you need to operate.

RYK VAN NIEKERK: Then, I’m looking at your small and mid-cap fund. It is small, R170 million, and it has underperformed a bit over the past few years. But over the last year, it has gained 52%; the benchmark, which is also the Swiss Index, only 21%. It has performed significantly well over the past few months. The main shareholdings are Royal Bafokeng, an  interesting company, Quilter, Impala Platinum, Alviva Holdings, Karoo. How patient should one be when you look at a small- and mid-cap fund, because I think many investors would have been really disappointed until a year ago, and now they would be smiling as if it’s the best investment ever.

SONJA SAUNDERSON: That’s true. Sometimes patience is a virtue. To look overall from a philosophical perspective, we do believe in being patient with fund managers, with stocks, with management teams. But I don’t think there’s a perfect answer to that. I do think it depends on the specifics of the company, what the management team’s approach is, whether you believe in the approach, what their plans are, how short- or long-term you think those plans are going to need to play out over time and they fall? I don’t think it’s necessarily something that we put a timeframe to. We do look at all of our funds through cycles, as I said before. So we don’t try to be too tactical about it. But I don’t think there is one silver-bullet answer to how much time you need to give it to really come to fruition.

RYK VAN NIEKERK: Just lastly, there are many political and economic clouds hanging over South Africa. We have a governance issue at government level, and there are really many, many worried people about the fiscal position of South Africa and what can and will happen in the future. How do you foresee equity markets reacting over the short and medium term in response to some of those risks I’ve mentioned?

SONJA SAUNDERSON: I do think there’s always an element of risk to the downside that we do need to be careful of. But I also think that, looking at most of the risks for the rest of the year, we foresee those to be the global vaccine rollout, how that affects global sentiment and, as I said before, whether there are any new variants and a resistance to the vaccine. That then means that inflation could be getting a hold in the developed economies, requiring some central banks to tighten their monetary policy.

When that happens, our course could change about what happens from a South African perspective. But I do believe that our companies from a valuation perspective – even despite those shorter-term risks – are for the longer term in a good position. I do think that despite the risks locally from a governance perspective as well as all of the fiscal challenges that you mentioned we are all facing, that we are in a good position to perform well. And therefore we remain positive about SA Inc.

RYK VAN NIEKERK: Sonja, thank you so much for your time today. That was Sonja Saunderson. She’s the chief investment officer at Momentum Investments.

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Is someone shorting our resources/commodity shares in a very big way?

The only thing to do is for them to start buying back their own shares else we will see them at R5 soon.

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