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Investment Strategy
Thursday, November 12, 2015 - 03:16
End of the cycle?

Since 1997 the performance of “value” has been cyclical. But over the very long term value as an investment style has still outperformed the “growth style” of investing. This means that when value outperforms, it does substantially better than growth.

There has been a particular long run of value underperformance. Since 1997 there have been five periods where value has underperformed, says Ricco Friedrich, Portfolio manager at Denker Capital, “but the current period is the longest one of underperformance – four years! The longer this phase of the cycle continues, the more severe it becomes. If you look at the relative value of the expensive stocks in SA versus the cheaper stocks, it’s currently at extremes.” Also, this period of value underperformance since 2011 has coincided with P/E multiples rising from around 11 to about 19 earlier this year.
Denker Capital was formed out of the merger of two businesses within the Sanlam Investments fold: SIM Global and SIM Unconstrained Capital Partner, last August, a rebranding intended to “better serve clients”.
P/E multiples need to return to normal, he continues. As P/E multiples are currently very high, it’s highly unlikely they’ll go any further, which supports a reversion to normal. And when P/E multiples come off, Value generally outperforms. What is the catalyst for P/E multiples to come down? “The most likely factor is going to be a normalisation of interest rates. Globally they’ve been kept artificially low since the Global Financial Crisis. The current US Fed interest rate (base rate) is 0.25% and the ECB’s main interest rate is also at a record low of 0.15%. As soon as the normalisation of interest rates start, P/E multiples will come down.”

The SIM Value Fund

In light of the recent long run underperformance of the value style, Friedrich says he would expect the SIM Value Fund to lag considerably. However, this has not been the case. Despite markets not favouring the Value style of investing, over the past three years to 31st August 2015, the SIM Value Fund’s annualised performance (+14.8%) only marginally lagged that of the FTSE/JSE All Share Index (+15.6%).
Contributors to the past year’s performance include the 22% offshore component and the 23% exposure to Financials. Detractors from performance were the investment in resources and the construction sector. Steinhoff and Old Mutual have been two bellwethers that contributed positively to returns over the past 12 months. Standard Bank, a new position since the start of this year, has also done well for the fund.
So what differentiates the fund? “The fund’s positioning is differentiated from its competitors by the following significant positions,” says Friedrich. They are:
• large high-conviction offshore positions, such as AIG, Oracle and Microsoft;
• big financials position, particularly banks that are growing their earnings by double digits and paying good dividends;
• a 15% allocation to smaller caps, such as Hudaco, Italtile and Combined Motor Holdings.

To conclude, now is the time to capitalise on the extreme mispricing opportunities in the market by increasing the exposure to the value style of investing.

Copyright © Insurance Times and Investments® Vol:28.11 1st November, 2015
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