SA investors continue to look for greater diversification amid a struggling local equity market

Werner Burger, Equity Analyst and Portfolio Manager: Momentum Securities

While the JSE has seen some recovery after the lifting of the hard COVID-19 lockdown, investors are still flocking out of local equities. In fact, Morningstar data shows that more than half of local equity funds experienced net outflows over the year ending February 2021.

South African investors across the spectrum – in search of shelter from currency fluctuations and tepid local economic growth forecasts – are therefore increasingly looking for offshore exposure. Fortunately, there is indeed growth to be found.

This is according to Werner Burger, Equity Analyst and Portfolio Manager at Momentum Securities, who points to the performance of the Momentum Securities’ International Portfolio which has returned 77.7% since it was launched on 1 June 2016 to the end of February 2021. This is a full 14.70% above the benchmark’s 63% return on a cumulative basis. It translates into an annual return of 12.90% compared to the benchmark’s 10.80%. Over four years, the portfolio ranks in the first quartile compared to peers with annualised returns in excess of 12.4% per annum compound after fees.

Burger explains that the fund’s appeal has grown as local investors look for increased access to global markets against a difficult local backdrop. “The SA Equity market has under-performed relative to the US Equity market over the past decade or so. Various factors have contributed to the US Equity outperformance including the very strong growth of the mega-cap US listed technology stocks. US Corporate tax cuts by the Trump administration, as well as large scale share buy-backs, have also contributed to the relative outperformance. During the same period SA entered a low growth, low confidence cycle of under-investment caused by the politically volatile and uncertain environment. As a result of the local environment, we’ve seen the number of stocks listed on the JSE decrease by nearly half since its peak in 2001. The opportunity set for local stock investors has reduced due to mergers, management buyouts and a lack of new listings. SA investors have realized the importance of diversifying their portfolios by investing in offshore markets. We do however forecast returns in the mid-teens per annum for the SA Equity Market over the next three years or so. The SA Equity market screens as very attractively valued compared to both our emerging equity market peers as well as developed equity markets. That, combined with very strong relative earning growth from the SA equity market over the next 12 to 18 months, should see the SA Equity market perform well”.

According to Burger, the international portfolio is a high conviction portfolio made up of 20 – 25 stocks on average. “It aims to maximise risk-adjusted returns by actively investing in global listed equities. The fund is typically for investors who are comfortable with a high degree of risk. Potential investors should be aware of the fact that share prices can fluctuate significantly based on investment cycles and should therefore be prepared to invest for the medium to long term.”

Speaking about the investment team’s stock picking philosophy, Burger explains that the fund invests in companies with strong balance sheets, high cash conversion and good capital allocation track records: “Our objective is to generate benchmark-beating, risk-adjusted returns over time.”

“The Momentum Securities International Equity Fund was conservatively positioned going into the COVID-19 crash in March 2020, holding over 15% USD cash at the time. We were therefore able to deploy cash post the collapse in markets. Over the second half of 2020 we started rotating exposure from some of the expensive technology counters into value investments including a UK FSTE 100 ETF as well as a MSCI Value Factor ETF. More recently the fund added exposure to the Hong Kong listed tech giant Tencent, where we started to see value in the counter post the selloff since January 2021.”

“One of the biggest holdings in the fund is currently Mastercard as we expect the secular shift toward card-based and electronic payments to continue. Mastercard has a robust balance sheet and we expect the company to continue delivering strong earnings growth over the coming years. We also have a large allocation to gold, which includes the physical metal via ETFs, as well as gold shares. In a world where interest rates in many developed markets are at (or very close to) zero percent, we view gold as a defensive alternative to the currencies in these markets.”

Burger also explains how investors interested in the Momentum Securities International Equity portfolio can invest. “You can either invest in the portfolio directly with a minimum investment of $80 000 or through an exchange-traded note (ticker UMMIEA), listed on the JSE, which invests in the portfolio. The minimum investment here is R5000,” he concludes.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.