RYK VAN NIEKERK: Welcome to this Market Commentator podcast. My name is Ryk van Niekerk, and this is my weekly podcast where I speak to leading investment professionals. My guest today is Peter Little, a fund manager at Anchor Capital, and he manages the Anchor BCI Managed Fund and the Anchor Global Stable Fund. He has worked in financial markets for more than two decades.
Peter, thank you so much for joining me. We are currently seeing a lot of uncertainty, a lot of volatility, and we also see very divergent performances by collective investment schemes. Have you in your experience seen periods to which you could compare this volatility?
PETER LITTLE: Yes, certainly. I’ve lived in South Africa and worked in South African markets for probably the last seven or eight years with Anchor Capital. But before that I spent the majority of my career in London and New York.
I was chatting to somebody this morning, and they were saying: “We need to get our clients out of SA equities. This has gone on forever, and there’s no point in further worrying about this.” And I said, it’s a bit like déjà vu in the sort of 2009 to 2011 period, when I was working in the US. At that point after the financial crisis, the S&P had lost so much that effectively over 10 years – call it the lost decade – you hadn’t made any money in US equities. The investors were saying: “Oh, these things are sort of gone forever, there’s no point in investing in US equities.”
Of course, with perfect hindsight, we can now see that the next 10 years were phenomenal for US equities. It kind of feels like the same sort of scenario for South African equities. Investors are saying: “This asset class is uninvestible, an absolute disaster in the local market; let’s just get our clients offshore and invested in offshore stock markets.”
Now, I’m not particularly excited about prospects for the local economy, certainly for the short term, but these things tend to go in cycles. Yes, you get periods like this of high volatilities, but I guess that’s the price for trying to achieve long-term growth.
RYK VAN NIEKERK: I think it could be. As you say, it’s very cyclical. Or it’s probably one of the biggest value traps in the world, and there is risk attached to that strategy. But are you doing things differently when things become as volatile as we are currently seeing in the markets?
PETER LITTLE: We try not to react to stuff. You don’t want to be sort of after the fact, saying, “Oh, this thing is down and it’s disastrous, and now it’s time to get out” – because that pretty much guarantees that you’re going to lose money.
We try to be less reactive.
And making the big macro calls is always a fairly low probability event, because it’s very difficult to predict the future of the economy. As you say, SA could be the biggest value trap ever or the best value opportunity. That’s quite a hard one.
And so we tend to work more in channels, where we say, okay, we want to be invested in this asset class. The prospects for growth aren’t looking particularly good at the moment, but there is some optionality, and so we’re going to take that into consideration when we invest.
Similarly offshore – we’ve had some really phenomenal performance there, and there are some great opportunities and extremely innovative companies that we can find offshore. But you’re paying up for those, as well, and there’s obviously a consequence of paying for that growth. But we try not to sort of take this binary approach of you’re all in or you’re all out, and [we] find that the best way to do this as to have a sort of idea of where you broadly want to be invested, and have little tweaks around the edges of how much SA equity or SA bond exposure you want.
RYK VAN NIEKERK: I’m looking at your latest fund fact sheet for the Managed Fund. It is a Regulation 28 fund. But when I look at the top 10 holdings, at the end of September you had cash at Investec nearly 12%, then you have Naspers in the second position, 5.6%. Then you have the government bond, the 2030 Long Bond, at 4.7% of the fund. I don’t see many SA Inc stocks in this portfolio. If I just look down, I can see British American Tobacco, Anglo American, Prosus and, as I’ve said, Naspers – and those are pretty much international offshore counters.
PETER LITTLE: Over the longer term we generally want to have about 45% of that fund invested in the domestic stock market. Now, as you point out, there are obviously big components of that that have nothing to do with South Africa – things like Naspers and BTI [British American Tobacco], and so forth. At the moment we’re on kind of the lower end of where we would typically be for that domestic equity exposure. We’ve got about 35% of that fund invested in the JSE. And then, within that, we’ve probably got about 13 or 14% in stuff that we would call SA Inc. These are companies that earn the vast majority of their earnings in South Africa — the banks, retailers, and the like. So we have probably about 13% of the fund, in total, geared to South African stories per se.
Within the rest of that 35% domestic equity exposure we probably have about eight or nine between Naspers and Prosus. We probably have another eight or nine in the mining stocks, which obviously are physically present in South Africa, or some of them are physically present in South Africa, but not necessarily geared to the South African economy. Rand hedges – about 4% or 5% in rand hedges, like ETIs [economically targeted investments] and so on.
So very low exposure at the moment to the SA economy, or domestically focused stocks. But that’ll change through time. It’s not a good [place] at the moment, but we’re not writing it off completely.
RYK VAN NIEKERK: The Investec cash investment, 12%. Of course, the yields in South Africa currently, as with the case around the world, are very, very low. Are you looking maybe for some opportunity for that cash?
PETER LITTLE: That’s cash that should typically be invested in equities. That’s more sort of a risk-off place. So we’re sitting on effectively dry powder that we’re looking to deploy should opportunities present themselves. We have probably about a quarter of the fund’s assets invested in government bonds, and that’s typically towards the long end of the duration. I think you pointed out the 2030 was in there – that’s the 10-year bond. We have anything from the R186 to the R2040, so sort of seven- to 20-year maturities in there, giving us an average yield of about 9.5% on a quarter of that portfolio.
We typically don’t want to be sitting on cash. We sweep cash into that Investec overnight account, which gives you maybe 3% or 4% at the moment, so we don’t want to be leaving too much money in there for too long. But that’s more tactical cash that we’re looking to allocate to good equity opportunities. But for the bulk of our yielding assets we’re much further up the duration spectrum, looking for very high single-digit rand yields from that part of the portfolio,
RYK VAN NIEKERK: We had the Medium-Term Budget Policy Statement being tabled in parliament [last] week, and it’s clear that South Africa has a very big fiscal problem. Are you concerned by this, especially in relation to the holding of bonds that are long-dated?
PETER LITTLE: Yes, sure. Certainly this is a tough position – not enough revenue and lots of potentials need funding. But the good thing about financial markets is they don’t necessarily have to wait for their event; financial assets are already pricing in a certain outcome in South Africa. And, if you look at our yields on our longer-term government bonds, our 10-year government bonds are now in higher single digits, almost double digits. That’s already pricing in a pretty bad outcome, compared to what you can get globally in yields, where the developed market deals are very close to zero, even at that sort of duration.
So we think there’s already quite a bad outcome priced into South African bonds – not to say that it couldn’t end disastrously – but we think that a sort of disastrous outcome that’s worse than already has already been priced in is a fairly low probability event. And we’re happy to sort of mop the yield out of those bonds for the foreseeable future.
RYK VAN NIEKERK: Let’s talk about the Anchor Global Stable Fund. It is a very interesting fund. It’s labelled as a moderate-risk fund. But when I look at the top 10 holdings, there are some very interesting investments. The top holding is in the S&P 500 futures, close to 10% of the total fund value. Tell us about this S&P 500 Futures Fund.
PETER LITTLE: That fund is the equivalent of a sort of stable fund offshore. It’s Irish-domiciled, it’s for investors who already have cash outside of the country, who can invest with dollars. It has typically about a quarter of its assets in equities, about 60% in bonds – and that’s a combination of government and corporate bonds. And then a little bit in property and cash. And so in that equity exposure, I get about a quarter of it; or, out of the 25% equity exposure, we typically look to take like 8% or 10% of that in just low-cost market exposure. So those S&P futures are just a very cheap and efficient way of getting exposure to the US equity markets. And then we’d supplement that with 15% or so, which would be individual stocks that we’ve selected based on fundamental analysis. But that’s like a core satellite approach. We just want a core of generic, cheap exposure to those global equity markets, and then surround that to get the rest of the offshore equity exposure there.
RYK VAN NIEKERK: You’re also quite heavily invested in US bonds. Now, I believe the yields on US bonds are very, very low. Can you take us through that thinking?
PETER LITTLE: Absolutely. The idea was that in this fund we’re trying to lure investors, sort of 3% to 5% annually, in US dollars. And so we need to get probably about 1.5% to 2% of that in yield; and then we want to get another 1% or 2% of growth. So if we make the assumption that a quarter of that fund is invested in equities, and those can grow sort of 8% a year in dollars, that gives you a couple of percent of capital appreciation. And then we need to get a couple of percent of yield out of the rest of the portfolio.
And, as you allude to the developed market, yields for sovereign risk are very close to zero. US 10-year government bonds are trading at around 70 basis points, so clearly we need to do a little more to get some yield out of that.
So, out of the fixed-income exposure in that fund, or the bond exposure in that fund, which is about 60% of the fund’s assets, we probably only have about 15% or 20% in sovereign bonds. Frankly, as those roll off, we are kind of moving them into the corporate bond market. And so we have 40%-odd invested in predominantly investment-grade US dollar corporate bonds, which can give us a yield of around 2%, depending on which sectors you play in.
So yes, we are generally phasing our way out of the government bonds. We’ve actually given you quite good capital returns for the first part of the year, as the central bank supports those. But we think you’ve kind of squeezed the juice out of that trade already. And, as those bonds roll off, we are rolling that into more of the high-grade corporate bond space.
RYK VAN NIEKERK: That’s interesting, because there is so much liquidity in the US, and a lot of that money is flowing to emerging markets in search of yield. Is this maybe a vehicle to park money offshore until we see a bit more stability?
PETER LITTLE: Given that that particular fund is typically used by the majority of its investors as a sort of stable capital base, it’s typically used alongside an equity exposure. And so they’re getting the majority of their capital growth from the equity exposure. And this part of our portfolio just needs to make sure that there are no major capital losses.
Obviously the things that can help you avoid the capital losses tend to be the sovereign bonds. As we’ve said, that yield has kind of disappeared. And so we’ve moved into the corporate bond space. You could obviously achieve some higher yields in the emerging-market debt, and particularly the sort of high-yield dollar emerging-market debt, but that kind of defeats the object of our looking for capital safety because, as you would have seen in March/April, when we went into the peak of the Covid crisis, those kind of bonds can mark off 2%-plus down. And that’s obviously not what investors necessarily want to see on their statement when they’re in that fund.
So for every bit of yield you add, markets are efficient. You’re getting compensated. In order to achieve that extra yield, you’re having to take on more and more capital risk. And in this fund we don’t need to take that on. We can get the growth through the equities, and we just want to make sure that we get a moderate yield with limited capital risk. Obviously, stay away from the very high-yielding EM [emerging market] bonds.
RYK VAN NIEKERK: Thank you so much for your time today. That was Peter Little, a fund manager at Anchor Capital.