This is an article written for press by Patrick Cairns, The Investor’s Guild
South African investors seem to live in state of perpetual concern about the outlook for local equities. However, portfolio manager at Gryphon Asset Management Casparus Treurnicht believes that the robustness of the SA market is underappreciated.
“The back testing we’ve done shows that the SA equity market really does perform well over time,” Treurnicht says. “Since 2000, the SA equity market has delivered about 15% per year on average.”
It has outpaced the MSCI World Index over this period.
FTSE/JSE All Share Index vs MSCI World Index in rand
Gryphon believes there are two primary reasons for this.
“The first is that 55% of the local equity market is offshore counters,” Treurnicht says. “And those are ‘best-of-breed’ businesses like Richemont, Naspers, BHP, British American Tobacco, and Anheuser-Busch.”
This lends a certain heft to the market way beyond what would be implied by the local economy. The diversity of these counters also adds an additional dimension.
“You have a mix of stocks that do well in different market environments,” says portfolio manager Ruan Goosen. “For example, if gold is running like it has been you have the mining sector. If China or tech is doing well, you have Naspers and Prosus. If oil is shooting through the roof, you have Sasol and dollar hedges.
“It’s really a robust market composition. There’s a perception that the ALSI is concentrated and a commodity index, but there is more nuance to it. There are defences built into it that that carry it through different regimes.”
That said, there is no disputing that the market is resource-heavy. And Treurnicht believes that, in fact, this is the second reason for why SA equity returns are so robust.
“We’ve been doing some back testing to determine what a good asset allocation and return profile would look like over multiple cycles if you’re purely looking to maximise growth,” he says. “Broadly speaking, what we’ve got down to is an allocation of around 35% to the MSCI ACWI, 35% to the ALSI, 20% to local bonds and 10% to gold.
“But the important part of this argument is that the 35% local equity exposure could equally go to Australia, Brazil or Canada. What we’ve found is that it’s important to have commodity market exposure, because whenever that cycle runs it has a multiplier effect.”
What Gryphon’s analysis shows is that when commodities run, resource-focused equity markets outperform to such an extent that to maximise your wealth generation potential you need to have that exposure.
“Getting the timing right is obviously ideal, but you are never going to do so perfectly,” Treurnicht adds. “That means keeping that exposure all the time.
“No one would have told you at the start of last year that the SA market was going to return 45%. In order to get that return, you had to have consistently maintained that holding.”
And for that exposure, Gryphon’s view has always been that investor’s should invest in the broadest available index.
“That’s because if you only invest in large caps you are excluding an efficiency component of a market,” Treurnicht says. “You want to be able to upweight counters that start to run and downweight counters that underperform, but on the broadest level.
“The example we always use is Capitec. For a long time, it wasn’t part of the Top 40. If you only followed the Top 40, you didn’t get the initial pickup when the share price began to climb.”
The Gryphon All Share Index Tracker has a track record going back more than 20 years, and over that period is in the top-quartile of local equity funds. This record holds over the past decade as well.
“The other thing about a market like the JSE is that when you have a pickup in the commodity cycle miners are the initial recipients of capital,” Goosen says. “But as that flows into taxation, improves the fiscal picture and trickles down into the economy, you get a rising tide that lifts all boats.”
This then generates momentum in smaller cap stocks.
“These are the first, and second and third round effects of a commodity run,” Treurnicht says. “It starts with commodities, but ends up affecting everything else eventually. And with a broad market index, you enjoy all the benefits at various points of the cycle.”
And while one of the primary criticisms of the ALSI for many years has been its tendency to become concentrated in a sector or stock, Treurnicht believes these concerns are misplaced.
“There was a period when Naspers/Prosus was 25% of the market. At the moment, commodities are 37%. Richemont at one point was more than 10% of the market. That can be a concern. But did that concern ever evolve into a negative event? Concentration risk in our market has never actually caused a problem.”
Of course, risk is about what might happen rather than necessarily what actually does, but Treurnicht argues that there are almost no examples of concentration risk ever in itself resulting in negative outcomes for investors.
“Right now, a lot of people talk about concentration risk in the ‘magnificent 7’,” he says. “But concentration risk never actually causes a problem on its own because when that bubble pops everything else will also get affected.
“In the GFC, for example, property caused it, but everything else was affected. And if you want to avoid that risk, then the argument would be that you shouldn’t be in equity markets at all.”
