When any market cycle is prolonged, or becomes extreme, something happens in many investors’ minds: they forget, or stop believing, that markets have cycles at all.
For Anet Ahern, the CEO of PSG Asset Management, the chronic under-performance of South African equities over the past six years is a clear example of this.
‘I’m very much reminded of 2011 and 2012 when you couldn’t sell a foreign investment to people,’ said Ahern. ‘The rand was R6.80 to the dollar, and you could not get people to invest offshore. At that stage it was only local. Now it’s swung completely the other way.’
In PSG’s view, however, the contrarian opportunity in local stocks is substantial. The PSG Equity fund currently has 39% of its portfolio in the most un-loved part of the JSE: SA Inc. stocks.
So far, this hasn’t worked. Two years ago, the fund was topping performance charts over all time periods. For the three years to the end of August 2020, however, it is down -22.9%, and ranked 160 out of 174 funds in its peer group.
‘We are not happy with the results we have had over the past two years,’ said Ahern. ‘We have been honest about that. We have had a compounding of value-style investing being out of favour, the environment not being conducive, and some things we could have done better.
‘But we always remind ourselves that sometimes we go through these long cycles. And when there are extremes in the market, those cycles become long and uncomfortable. That’s when styles are really rested, but when staying true to process is also vital.’
Correlations become binary
As Ahern pointed out, the firm’s funds do have a record of coming out of crises well. And she believes that there is good reason to believe this could be the case again.
‘When you have a big macro event like we have had, diversification breaks down,’ she said. ‘Correlations become quite binary. So even though a local stock might have a large portion of dollar-based income, the market doesn’t care. It sees it as a South African stock, and it sells it.
‘But these things don’t last forever. You are not going to have a company that gets its income from other economies staying on a rating that says it is only depending on the South African economy and the South African economy is dead.’
Holding this position has meant that the firm’s funds have experienced high short term volatility. This could make it very difficult for some fund selectors to consider them as suitable for their portfolios.
Yet a recent Citywire analysis of the unit trusts most widely held in local fund-of-funds, found that PSG funds are amongst the most popular. This may seem anachronistic, but it appears clear that the firm’s distinct approach is something that fund selectors want in their portfolios.
‘I was very fortunate in my career to work as a multi-manager for a few years,’ said Ahern. ‘That completely opened my eyes to different investment styles.
‘Asset managers, particularly active managers are quite self-absorbed. We are very focused into our belief systems and processes, and passionate about the way we do things. But when you are sitting on the other side, you understand better what the entire experience of the client is.’
In this respect, they key is appreciating how a fund works within a portfolio of funds, and not just how it is performing on its own.
‘No style works all the time,’ said Ahern. ‘And one of the biggest dangers is investors trying to time when to move in and out.
‘As we have found with shares, sometimes diversification is easier to obtain than at other times. With fund managers, the more discreet their process is, the more accessible true diversification is for a multi-manager or DFM.
‘That allows them to build portfolios where the bulk of the portfolio will be working, even though there is a piece that isn’t. But they don’t have to worry about chopping and changing. It enables them to construct something that is fairly robust, and only needs to be re-balanced every now and again.’
What Ahern has also found encouraging in this regard is that in the current environment, some fund selectors have been adding PSG funds to their portfolios.
‘They are quite excited about the fact that we bring something different,’ she said. ‘And that goes back to their portfolio construction.
‘We use a system that maps the correlation of our funds to others, and that clearly shows that our funds can actually bring the volatility in a portfolio down when combined with others.
‘We understand the cyclical nature of investment styles and markets, and with the investment experience in mind, we would prefer being part of a diversified investment portfolio,’ she said. ‘We very much want our investors to be with us for the long-term, and get maximum benefit from our investment style.
‘Where a DFM of multi-manager has a certain portion combined with other strategies, they can build something that doesn’t have to be changed very often because the different strategies are so distinguishable and complementary.’