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RYK VAN NIEKERK: Welcome to Market Commentator's podcast, the weekly podcast the place I converse to main investment professionals. My identify is Ryk van Niekerk and my guest in the present day is Mark Dunley-Owen, Treasurer Allan Grey. He manages Allan Gray Secure. He additionally manages the Allan Gray Bond fund and the African ex-SA Bond fund
Mark, welcome to the present. Let's start with strong revenue. Fastened revenue was probably the greatest asset classes final yr, with a return of seven%, which was fairly good in phrases of stock market efficiency and even the actual property market. What do you anticipate from 2019? There’s loads of speak about inventory market worth, however do you assume that in the current political local weather and uncertainty we see, fastened revenue investments is usually a protected option to go?
MARK DUNLEY-OWEN: Hey Ryk, and thank you for inviting me. Yes, the fastened rate of interest I need to divide into two broader groups – the cash that is actually low danger fastened price, after which the bond aspect, which is the higher danger, however in all probability not as excessive as the shares. And when you take a look at money, cash has carried out good, as you stated, final yr 7% – 8%. In the future, this return can be engaging; it is a very low danger return, so its volatility must be very small. Inflation is coming to 4.5 per cent proper now, but despite the fact that it should rise to five per cent or 6 per cent, inflation continues to be pretty wonderful with out a lot danger. So for these of you at a lower danger degree, the place you want revenue and don't need volatility, we still think about it an asset class.
On the aspect, as you mentioned, danger belongings like shares have accomplished badly in the earlier yr, however during the last three or five years – no less than in South Africa – and our view is that in the long term we say 5 to 10 years and longer As greater danger belongings, corresponding to greater danger belongings, should, subsequently, be t and searching ahead to a better return on them
Last week's market commentator episode with Jean Pierre Verster? Pay attention.
With a bond – the funds have additionally carried out properly and have been truly the best-performing asset class in South Africa last yr. This is not shocking, because when you think of South Africa's macroeconomic picture in current years, there has been lots of uncertainty, a whole lot of modifications, a number of risks and even bonds which might be very direct macro play, have achieved properly. This simply exhibits that it’s worthwhile to distinguish between the scores of the macroeconomy. The truth is that firstly of last yr – on the finish of 2017 – bonds have been low cost. That they had bought for numerous political dangers, and when you had purchased them and stored them over the past yr's improvement, you’d have accomplished nicely.
RYK VAN NIEKERK: Wanting at the bond fund, it has achieved rather well. It isn’t the most important fund investing about R1.6 billion. Nevertheless it grew by 9.4% final yr in comparison with the 7.7% benchmark. This can be a fairly wholesome efficiency, and the fund's share of the last ten years has additionally been excellent – 8.8%. In the present surroundings, an actual return of over 4.5% or 5% might be an choice if you want to make your portfolios extra defensive or more conservative. Do you see the revenue of funds which are towards the norm?
MARK DUNLEY-OWEN: As you say, the bond fund has carried out quite properly. We management it somewhat in a different way from lots of our friends because we don't need to examine the benchmark because the benchmark is the bond index. We succeed in making an attempt to maximize our absolute return to our clients. As you say, last yr 9% was a very good return. Firstly of final yr, we saw lots of currents, so we saw plenty of currents in the primary quarter of last yr. The fund has doubled. So it's nonetheless small, however it was about seven or eight hundred million, as you stated, R1.6 billion at this time. Then it stayed there for the rest of the yr.
So we haven't seen the later currencies in the bond fund, however we see lots of streams in the money market fund. Just to give you the context, in 2015 the cash market fund was € 10 billion; it is now R18 billion. So over three years we've obtained over R8 billion. I feel that is for the reasons already talked about… that the money has achieved nicely. Some buyers are frightened concerning the dangers they cause and the shares are badly achieved.
RYK VAN NIEKERK: Taking a look at your investments, Eskom represents 11.1% of Eskom's bonds. Are you frightened about them? Do you improve or decrease this exposure?
MARK DUNLEY-OWEN: Eskom is an fascinating case proper now. So, someone who has spent some time on Eskom's financial system would in all probability agree that the company is bankrupt for all intentions and functions. When you take a look at the money circulate statement, they don't make sufficient cash to cowl the interest they pay, to not mention a few of the money owed, not to point out the funding they need to spend on their belongings
If we have been a personal company, we might say that Eskom is chapter and so we wouldn't purchase bonds, particularly at the worth they commerce.
Our view of Eskom is that the bonds we have now are all guaranteed by the state, so sooner or later, if Eskom can't serve the debt, the federal government must step in. Eskom and ANC stated they have been working with Eskom. We anticipate the government to step in and take part in Eskom's debt. In that case, they’re engaging bonds as a result of they give you a better return than the government. It is stated that the state's return on the argument is 9%, you get from 10% to 10.5% of the corresponding Eskom bond – and we expect it is the similar danger as a result of the federal government is more likely to take over the bonds. So despite the fact that Eskom is struggling, we expect Eskom's bonds are engaging investments.
RYK VAN NIEKERK: Let's see Allan Gray Secure. It’s a R50 billion fund, fairly giant, and last yr it grew by 2.9%, in all probability primarily on the bond market. Are you glad with this performance? I see that the benchmark is closer to eight%
MARK DUNLEY-OWEN: The brief reply is in fact not. Our aim is to name it CPI-plus three, and naturally, if we get three%, we've fallen under our benchmark. After that, the fund is an asset allocation fund, so we attempt to try to give money to shares, some bonds, some cash and a few overseas. And in the long run, from four to five years, we anticipate our asset classes to combine CPI-plus-three benchmarks.
So over a yr that has not occurred, mainly as a result of South African equities are the entire share worth fell final yr by 9%, so the fund's SA capital share has struggled and in addition our overseas stake has additionally fought. Together, this a part of the fund lost money last yr. It is offset by affordable efficiency on the fixed-rate aspect and in money.
The question is, do you assume South African equities supply value to our clients at this time in the subsequent four to 5 years, and our vision is
It has been troublesome and we are dissatisfied with the efficiency, but the best way we take a look at issues is that we examine the worth to the worth and the costs have fallen so the fund has fought.
consider that the worth of a number of fund shares has fallen to the same extent. So, if something, we expect the shares are extra engaging than they’ve been in South Africa for a couple of years now. To wait, we anticipate the fund's return on equity to be relatively engaging, and we’re extra constructive concerning the outlook for the Stability Fund than in the earlier yr.
RYK VAN NIEKERK: Naspers is the corporate that represents a lot of the portfolio, but it is just three.2%. This appears to recommend that you’ve plenty of shares in the portfolio. How many corporations have you ever invested in equity?
MARK DUNLEY-OWEN: Two Things. The first is that three.2% is the share of the fund, however we’ve got as much as 40% of the shares. At present, roughly 27% of the fund is South African equities, so three.2% truly characterize greater than 10% of South Africa's share of the fund in Naspers. So it’s principally in Naspers, but because it’s a low-end fund, it means a reasonably small proportion of the fund. Variety of Shares – I don't have the precise quantity, but on the South African aspect, the guess can be 40-50 shares, primarily due to the dimensions of the fund.
RYK VAN NIEKERK: The large question is the place
MARK DUNLEY-OWEN: I feel South African equities are engaging. So, should you take a look at three of the 4 Naspers, Glencore and British American Tobacco shares, all of those shares struggled last yr, especially British American Tobacco and Glencore. And all of them have unique explanation why they happened. However the values we expect are preserved, until they’ve been added just lately. So we discover them notably engaging. And there are a selection of shares that we anticipate good returns over the subsequent 4 to 5 years. We aren’t proper in all of them, but we frequently don’t have numerous shares in which we see value, as we are doing now.
So I feel South African equities are engaging. Simply because something is engaging or low cost at present, it doesn't mean it gained't be cheaper tomorrow. So it’s a actually bumpy journey, however our buyers have a longer time span, and tomorrow we don't need cash, then we expect that South African equities are engaging.
RYK VAN NIEKERK: You also have some exposure to overseas markets and what do you anticipate from the performance of worldwide markets in the near future, given the US instability and the issues experienced in the UK and Europe?
MARK DUNLEY-OWEN: It's a very rather more troublesome question to reply. So in case you ask me what my views are on the worldwide market, I couldn't offer you a selected knowledge-based reply as a result of we don't assume we are notably good at predicting such macro-issues. I principally agree with you that there are loads of dangers. In addition, we consider that the appreciation of many overseas markets is excessive, especially in the USA. Taking a look at US metrics, plainly stock prices and asset costs in America are excessive. At the similar time, the risks are high. Watch out on the macro degree
An exterior part – like South Africa – we don't make investments in a macro, we invest in sure corporations. And the companies that the sister company Orbis is investing proper now seem engaging. So our view is that there is absolutely elementary worth, and we’ve a constructive view of Orbis owned shares, but at the similar time we are properly conscious of the global dangers you’ve got talked about.
RYK VAN NIEKERK: Have you raised or decreased the fund's international publicity?
MARK DUNLEY-OWEN: For a secure fund, it’s 26-27% proper now and we will go up to 30%.
South Africa is a small market, so there ought to be as much overseas publicity as potential, so that diversification is feasible everywhere in the world.
We all the time anticipate virtually 30%. But when we take it from 27%, if the rand can affirm right here, we’ll increase it to 30% and vice versa. We are happy with the place it is right now, but our movement is dependent upon what the date makes.
RYK VAN NIEKERK: We have now to go away it there. Thank you Mark. It was Mark Dunley-Owen, a portfolio supervisor at Allan Gray.