Our approach to the global equity markets
Global equities don’t rise forever. Should we expect a market correction? As Pierre Marais explains in this video, we can’t know for sure whether this will happen but we can prepare by following our tried-and-tested value investment approach.
Watch the video or read the article below.
How we prepare for a global equity market correction.
Over the last quarter, global equity markets have advanced another 5%. Over the last 12 months, the return from global equities was 18%, while the last five years (a more meaningful investment period) has produced a remarkable bull run return of some 70%. That’s 11% per year, compounded, since September 2011.
Inevitably, such a prolonged period of equity market gains makes investors uncomfortable about what might come next. There have been many debates about the likelihood of a correction, especially during these unusual monetary conditions. The truth, of course, is that nobody really knows, although some people are well paid to pretend that they do. We are by nature sceptical of forecasters and forecasting and therefore attempt to prepare rather than predict. To this end, the Sanlam Global Best Ideas Fund is built from undervalued, developed-world companies. These companies’ prices invariably fall far less than those of overhyped expensive businesses when the market corrects, as it inevitably must at some point, if history is any guide.
We’ve applied this approach in the two largest sector exposures of the fund – financials and information technology.
Our value approach has been rewarded in the financial sector.
Financials are currently the Sanlam Global Best Ideas Fund’s biggest sector exposure and also the fund’s most significant contributor to outperformance over the last year. Our bottom-up stop picking has been rewarded in a sector where sentiment has remained poor for close to a decade now. While financial businesses have been repairing balance sheets since the financial crisis struck, their valuations have only lately begun to reflect this significant reduction in risk. We believe there is more value to be unlocked here and are happy to be patient while this process unfolds. We are also lucky that, in this specialist area, we can work closely with our very experienced financials team.
Our diversified approach to the IT sector has paid off.
Our approach to the IT sector has been two-pronged.
- Ownership of the ‘old’ era companies has been a very profitable strategy for the fund. These are companies that were dismissed by the market for the likelihood of being overtaken and made obsolete by the so-called FANGs (Facebook, Amazon Netflix and Google). This is the classic value opportunity, where unpopular businesses are made available to the market at well below their intrinsic worth. The fund’s holdings in businesses like HP Inc. and Microsoft have risen well above 30% over the last year, while Apple has returned close to 40% over this period. Cisco and Oracle are other noteworthy fund holdings.
- We have also closely studied some of the disruptor companies. We are satisfied that a select few, while expensive-looking at first glance, have only modest growth built into their share prices – compared to their likely potential. In this vein, we have bought exposure to ASML (the sole provider of next-generation lithography machines for the manufacture of semi-conductors) and Alibaba (the rapidly growing Chinese online and mobile commerce enterprise).
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The fund’s risk profile is aggressive, so if you are an existing or potential investor: You can afford to take on a higher level of risk (i.e. will have a greater exposure to equities in your portfolio) because of your investment time horizon, or your appetite for risk. You know that in taking the risk, you need to be patient if you want to achieve the results. So you are willing to invest for the long-term and are prepared to tolerate some volatility in the short term, in anticipation of the higher returns you expect to receive in five years or beyond.
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