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A more optimistic fund manager

We’re not bullish, but the market is not completely overvalued – Autus.

JOHANNESBURG – Over the past 18 months several fund managers have warned that the local market is overvalued.

As a result, many of them have taken a fairly cautious approach in their Balanced Funds, with quite a few managers now having a total equity exposure of between 50% and 60%, although Regulation 28 only caps it at 75%.

But not everyone is this pessimistic. Autus Fund Managers, a Bellville-based boutique asset manager with around R2.1 billion in assets under management, still has a relatively high equity exposure compared to many of its competitors.

The asset allocation in the Autus BCI Balanced Fund at the end of May is shown in the table below:

Asset class

Allocation

Total equity

73.2%

Listed property

8.6%

Bonds

2.4%

Cash

15.8%

Total

100%

 

The firm’s strategic asset allocation strategy has stood it in good stead with the fund outperforming its benchmark by a considerable margin over one, three and five year periods. It will have a ten-year performance record next year.

But while the firm is less pessimistic about valuations than many of its competitors, Niël Hougaard, analyst and head of research at Autus, points out that they are not “bullish”. They believe the market is on the rich side of fair value, but not overvalued.

Hougaard says they agree that an interest rate hike in the US and in South Africa could have a negative impact on the local market, but with the local economy still struggling, the expectation is not that interest rates will rise soon.

Although its equity exposure is still relatively high, it has come down in recent months, with the firm taking some profits on companies such as Woolworths and the PSG Group. PSG is its core individual company holding in the fund, and will likely remain so for the foreseeable future.

Hougaard says companies like Capitec and Curro may be widely perceived as expensive, but it still offers value in the medium term.

Capitec has not entered the credit card or home loan market yet and the company still has ample room to expand its product offering, he says.

The same goes for private education firm Curro.

Hougaard says there is a significant demand for private education in South Africa. Curro’s earnings will reap the rewards once its building expansion program starts to slow down.

Another reason that informs Autus’s fairly sizeable equity exposure is its strategic rather than tactical asset allocation strategy. The fund invests in companies that are expected to do well in bull as well as bear markets, he says.

But ultimately it is not married to any position or share and will increase or reduce its exposure as opportunities develop. Its relatively optimistic equity stance does not necessarily point to the fact that it expects the market to continue its strong performance, but rather that it is not convinced that an aggressive correction is on the horizon, Hougaard says.

The fund previously used external funds as building blocks for its offshore component in the fund. This changed recently with the launch of its Global Equity Fund, which is now also used as a building block. As a result the current offshore exposure is only 20% (slightly lower than the 25% offshore cap). The offshore equity exposure is expected to change as opportunities develop, he says.

Since the firm is biased towards companies with a healthy foreign income stream, the fund has a fairly sizeable exposure to groups like Naspers, Richemont, Mediclinic, Steinhoff and SABMiller, who earn a significant portion of their income offshore. Consequently the overall offshore exposure is higher than official percentages would suggest, Hougaard argues.

Its exposure to the listed property sector has boosted overall returns in recent years. Listed property was the best performing local asset class in 2014 with a total return of 26.6% (compared to the local equity market return of 10.9%).

Hougaard says since April, Autus has reduced its exposure to the sector by about two percentage points, an acknowledgement of the downside risk in the sector.

However, they still see listed property as a good inflation-hedger.

* This content was sponsored by Autus Fund Managers.

Please consider contributing as little as R20 in appreciation of our quality independent financial journalism.

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