Deep-value convictions give Investec fund the edge

[First published in Personal Finance, January 2017]


Raging Bull Award for the Best South African Equity General Fund on straight performance over three years to December 31, 2016

The Investec Value Fund did its investors proud in 2016, delivering a whopping 62.37 percent for the year, according to ProfileData. This boosted its annualised return over three years to 15.56 percent, making it the top-performing equity general fund over the period.

Compare these figures to the FTSE/JSE All Share Index (Alsi) and the performance of the fund’s peers: the Alsi delivered a feeble 2.63 percent in 2016 and an average of 6.16 percent a year over three years to December 31, 2016.

The average performance of all the funds in the South African equity general sub-category, of which there are 178, was 3.66 percent for 2016 and 4.91 percent a year over three years.

The Value Fund did so well in 2016 compared with its benchmark and its peers thanks to the deep-value convictions of its manager, John Biccard. Success came largely from the local mining sector, which soared to great heights from the record lows in 2015. Anglogold and Goldfields, for example, roughly tripled in value in the first half of 2016, and Impala Platinum rose 47 percent in the third quarter alone.

Around mid-year, when he felt that gold shares had run ahead of the gold price, Biccard halved his position in these stocks and redeployed about 15 percent of the portfolio into mid-cap shares and banks.

In the fourth quarter, the fund gave up some of its spectacular gains. Says Biccard: “We know from experience that performance from purist value portfolios does not neatly arrive in a straight line, but is often delivered in large chunks, with periods of under-performance not uncommon. We were not surprised therefore that, after four quarters of significant out-performance, the portfolio lagged the benchmark over the fourth quarter, following a correction in both gold and platinum stocks. However, as a result of some well-timed selling of our gold position, this under-performance was somewhat mitigated.”

The fund maintains a strong offshore component; at the end of 2016 it was about 11 percent of the portfolio. However, about two-thirds of the US dollar exposure is hedged, because Biccard is no longer as negative on the rand. He says the offshore portfolio returned 14 percent in the fourth quarter of 2016, far outpacing the MSCI World Index, which gained one percent in rands. “This was primarily driven by our position in Israeli-based SodaStream, which delivered robust returns (49 percent). In fact, 2016 was the offshore portfolio’s best year since its inception five-and-a-half years ago,” he says.

Currently, a more balanced view is appropriate, Biccard says. “While the portfolio’s positioning remains very different to both the index and the average strategy in the South African equity general sector, our repositioning has left it the most balanced it has been in the past three years. The portfolio is now split among five different themes (general mining, gold, mid-caps, offshore and platinum) against just three a year ago (gold, offshore and platinum).

“Our long-held positive view on gold remains. We see the persistent (and rising) high levels of global debt keeping interest rates low, and in a world of continued negative real interest rates on fiat currency, gold should remain an attractive asset,” he says.

On the US under Donald Trump, Biccard is far less upbeat than many in the investment industry. “The narrative is that Trump will kick-start US growth and inflation through spending on infrastructure. The US (and the world) will grow its way out of the debt trap through a combination of additional real growth and inflation, and there is thus less need for gold and more need for US equities.

“We could not disagree more. First, if it was that easy to fix the growth-inflation problem we have had since [2008], the central bankers and economists would have thought of it by now, or is Trump just that smart? Second, the US government’s balance sheet does not allow for higher deficits. Last, if this did occur, the higher interest rates that would follow would choke off the consumer side of the US economy, which constitutes 70 percent of its economy. We thus remain as positive as ever on gold and would argue that rising debt levels in a Trump fiscal expansion make the case for lower real rates even more compelling.”

Biccard concludes: “Although it is unlikely that 2016’s gains will be repeated in 2017, we remain optimistic that the value cycle has now conclusively turned.”

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