November was a particular difficult month for Emerging Market Equities, but especially for those Emerging Markets that have greater exposure to resources, like South Africa. The FTSE/JSE ALSI ended the month down 3.9%, with the Resource Sector shedding more than 20%. The rand-hedge sectors on the other hand, continued to outperform the overall market, led by Media, Paper and Beverages.
Over the last 12 months there has been an acceleration in the disparity between Value and Growth in the South African Stock Market. Value continued to significantly underperform growth over the past 12 months. Since October this year, the MSCI Growth Index is up almost 7%, while the MSCI Value Index declined by 7%. This significant disconnect is the worst we have seen.
While the Sanlam Investment Management (SIM) Value Fund has underperformed the market over the past 12 months, it was the last 3 months in particular that detracted from overall returns. This coincides with the period of significant under performance of the value style of investing referred to in Graph 1. Over the past 5 years, the SIM Value fund has returned a cumulative 69%. This is substantially ahead of the MSCI Value Index for South Africa which returned 38% (Source: Factset, MSCI South Africa Value – Total Return Index).
Factors which have contributed to the challenging performance in November include our investments in select resource counters such as Anglo American (-25%), Amplats (-18%), Northam (-26%), Standard Bank (-11%), Stefanutti Stocks (-32%) and Altron (-30%). We believe the prices of these shares trade at significant discounts to intrinsic value and while we have no control over the emotions of investors which impact on share price movements over the short term, we are of the view that in the future investors will reflect on the bargain basement levels which many of these business are currently trading at.
Graph 2 highlights the extremity of the current disconnect in market valuations and shows the relative price to book value of SAB Miller vs Anglo American. In 2008, SAB Miller traded at 0.6x the price to book value of Anglo American. This was a great time to sell all your Anglo American shares and buy SAB Miller. Today, SAB Miller is trading at over 11x the Price to Book value of Anglo American. These extreme opportunities arise very few times in a lifetime.
This is just one example of the many great mispriced opportunities we are currently seeing in the market. In the past few months, we have added several new positions to the portfolio such as Nampak, Imperial and Shoprite. In addition we have also been adding to existing positions which continued to get cheaper. These include Group Five, Altron, Northam and Standard Bank. Together these stocks make up just under 20% of the portfolio and offer material upside to our estimate of their worth. As the portfolio currently stands, the 32 South African business we are invested in offers over 52% upside to our assessment of their intrinsic value. This is the highest it has been in almost 9 years, and was only exceeded during the sell-off in 2008 global financial crisis. We believe this is an incredible buying opportunity.
The way forward
As investors will know, the value style of investing has lagged overall market returns since 2011. This is not unusual as Diagram 1 highlights the periods in which value investing and growth investing do well. Typically in periods of an economic slowdown or recession (period 3 and 4) value investing takes a back seat to investments in stocks which exhibit the following characteristics: growth, momentum, high quality, low risk and large caps. This has been a significant head wind for value investors. The good news however is that as we move into the recovery period (period 4) all these trends will shift strongly in favour of the current positioning of the SIM Value fund.
We would like to thank all our clients for their ongoing support in 2015. While we do not have control over the outcome of markets, we are confident that by sticking to our time and tested investment approach and maintaining a laser like focus on our investment process that investors will in time be handsomely rewarded.
In conclusion the following key points are worth emphasizing:
– We have not seen as many mispriced opportunities in the market in a long time
– The upside to intrinsic value of the SIM Value fund is the highest since the global financial crisis sell off in 2008
– The portfolio is extremely well positioned as we enter the “recovery phase” of the economic cycle
Note: The appointed investment manager of the Sanlam Investment Management Value Fund is Denker Capital (Pty) Ltd, trading under Sanlam Investment Management (Pty) Ltd, an authorised financial services provider in terms of Financial Advisory and Intermediary Act, 2002, FSP 579.