PSG Flexible comment - Dec 19
Value-style investing, while proven in the long term, faced ongoing headwinds over the past year. 2019 saw momentum-driven markets in which a few selected stocks drove outperformance, and our funds did not reward our investors as we would have liked. Local equity index performance of 12% masked the reality of a very narrow market in which a few stocks dominated returns, with more than half of that return coming from the resource sector, and from a few shares only. Given our low exposure to popular areas which we consider overvalued, and resources in particular, our returns for 2019 were disappointing on both an absolute and relative basis. The good news, as we outline below, is that the future looks bright.
2019 in review
Fund performance was primarily driven by the disappointing returns from local and foreign equities. Asset allocation and fixed income selection added value, but could not offset the effects of equity selection.
Notable detractors over the period were Tongaat, Sun International, Discovery, Super Group and Stefanutti, while strong performances from AECI, AB Inbev, Quilter and Raubex added to portfolio performance.
Our equity positions are inherently diversified. Many of the factors impacting underperforming equities occurred in the same year, but had very little else in common. In particular, foreign equities usually act as a diversifier to local equities (often through the currency), but this wasn’t apparent this time. The year was equally remarkable in terms of what we didn’t own and therein lies a large part of the reason for the performance of the funds. Large rand hedges (British American Tobacco, Richemont, Naspers) staged a comeback after a difficult 2018. Resources rallied strongly, particularly Diversified Bulk Miners and Platinum Group Metal Miners. US large cap equities in favoured sectors such as technology, or those with popular and (in our view) overpriced attributes such as perceived higher quality, momentum or lower volatility, went to stratospheric heights. Our clients have done very well out of some of the big winners of 2019 (such as Amplats) but, with the benefit of hindsight, we sold too early in favour of what we perceived to be better opportunities.
We believe some important questions should be asked whenever an investment process results in a poor set of numbers in any year.
The PSG Flexible Fund is a managed flexible portfolio and will seek to follow an investment policy which will aim to achieve superior medium to long-term capital growth through exposure to selected sectors of the equity market, and/or the gilt market and/or the money market. The asset allocation will be actively managed and will continually reflect the portfolio manager's view of the relative attractiveness of the equity, gilt and money markets, both locally and abroad. The selected sectors of the equity portion of the portfolio will change from time to time in accordance with changing market conditions and economic trends. The investment policy allows the fund to include listed and unlisted financial instruments (derivatives).