NAV on 2017/11/20
|NAV on 2017/11/17
|52 week high on 2017/11/13
|52 week low on 2017/06/22
|Total Expense Ratio on 2017/09/30
|Total Expense Ratio (performance fee) on 2017/09/30
PSG Collective Investments (RF) Ltd.
South African--Multi Asset--Flexible
Inflation plus 6%
Shaun le Roux
PSG Asset Management (Pty) Ltd.
PSG Flexible comment - Jun 17
At an index level (FTSE/JSE All Share Index), the JSE has gained 3.4% this year. However, all of this can be attributed to one share: Naspers (up 26%). Most shares on the JSE have declined in 2017. High levels of political uncertainty and weak economic conditions in South Africa have seen widespread selling of domestic equities, particularly by foreigners. South African banks are down 5%, the general retail sector is down 8% and the broad mid-cap sector is down 7%. Generally, confidence levels are very low and the sentiment around local equities is very poor. In contrast, global equity markets have generally enjoyed a strong year – South Africa is a stand-out underperformer.
The current market environment is a difficult one in which to make short-term investment decisions. This is an unpredictable time, and can result in portfolios being positioned around binary potential outcomes. We position our portfolios based on a consistent process that ensures inherent quality and sufficient margin of safety in all instruments we buy. We also avoid building binary portfolios that are skewed towards any particular outcome. Although this may result in short-term underperformance, we believe it increases the number of outcomes in which we will achieve the benchmarks set by our funds over the relevant time horizons. Large parts of the South African market are currently deeply out of favour due to the political backdrop, recessionary conditions and aggressive foreign selling. As a result, we can buy quality companies at a widening margin of safety. We believe that this environment – where there are very diverse valuations on equity markets – is good for making long-term investment decisions.
The broad perception of the market is that risk is low when share prices are high, and have been rising. Contrary to this view, we think that risk is in fact lower when share prices are low (as is currently the case with out-of-favour domestic counters). We do not consider very expensive stocks that are deemed to be defensive as low-risk investment opportunities, and we expect muted long-term performance from such stocks. We believe the market is missing the fact that earnings are depressed for many South African companies, and we expect earnings to improve for most of our local investments despite the recessionary conditions. The combination of low earnings and low valuations supports strong long-term investment decisions.
The PSG Flexible Fund remains conservatively positioned. We are happy to sit in cash while we wait for opportunity to invest in businesses that meet our required standards of quality (moat and management) at the appropriate margin of safety. Given the generally high levels of valuations on the JSE and other stock markets, we had been running at well above average cash levels earlier in 2017. We have, however, taken advantage of the sell-off in domestic counters to employ capital. Cash levels were 32% at the end of March and are currently 26%. Included in this cash classification is a 1.5% offshore gold holding. Our domestic cash is primarily invested in short-dated liquid bank negotiable certificates of deposit, yielding 8.3% on average.
We have taken near full advantage of our offshore allocation (22%) to invest in high-conviction global equity opportunities. While we anticipate superior returns from some of our domestic opportunities after the recent price declines, we continue to believe that our offshore holdings offer important diversification benefits as well as attractive long-term returns.
We think it is a good environment for long-term stock picking, and have a track record of generating good returns for our clients in tough times when sentiment is poor. Typically, we have enjoyed strong subsequent medium-term outperformance when fear is prevalent. We retain a healthy cash buffer that we will aggressively employ in times of panic when a broader selection of quality shares can be bought at a wide margin of safety.
The PSG Flexible Fund is a managed flexible portfolio and will seek to follow an investment policy which will aim to achieve superior medium to long-term capital growth through exposure to selected sectors of the equity market, and/or the gilt market and/or the money market. The asset allocation will be actively managed and will continually reflect the portfolio manager's view of the relative attractiveness of the equity, gilt and money markets, both locally and abroad. The selected sectors of the equity portion of the portfolio will change from time to time in accordance with changing market conditions and economic trends. The investment policy allows the fund to include listed and unlisted financial instruments (derivatives).