Money Marketing (31 May 2015)

Equities are a key generator of performance. Over time, equities are the top performing asset class, and the returns they offer can be much greater than the returns of bonds and cash.

Kim Hubner, head of business development and marketing at Laurium Capital says that equities have an important role to play in an investment portfolio. “Although most industry assets are held in multi-asset funds, general equity funds still constitute a significant portion of total assets.”

She points out that according to the 31 December 2014 ASISA stats, there are 189 general equity funds that received net inflows of R14,5 billion in the last quarter of 2014. “Overall there are 248 equity funds, and they hold over R335bn of industry assets.”


Graph equities leading role

“In the long-term, equities’ performance beats the performance from both bonds and cash. Research from SBG securities shows that R1 invested in the ALSI in January 1960 would have been worth R5 748 at the end of December 2014 (income reinvested). The same amount invested in bonds would have been worth R200, R147 if it was invested in cash. The CPI basket saw a rise of R1 to R74 over the same period.”

From 1976 to 2014 SA equities as measured by the FTSE/JSE All Share Index have delivered average annual total returns of between 16.1% and 21.8% over 3, 5, 10, 15, 20, 25, 30 and 39 years.

“Equities are the place to be over the long term,” Hubner comments. The Laurium Prescient Equity Fund, which celebrated its first anniversary in April, offers investors exposure to this important asset class. “The fund is fully invested in SA equities,” she says, “with a minimum 95% equity holding as an internal benchmark. The fund is ideal for investors looking for equity exposure, and can be used as a building block in a balanced portfolio.” The fund is actively managed, relatively benchmark agnostic and has a value bias.

“We believe in number crunching,” Hubner comments. “The core of our philosophy is bottom-up fundamental research and valuations, but top down views are an important overlay. We seek to identify companies whose share prices differ materially from our intrinsic valuations, based on longer term, through-the cycle cash flows and earnings.. Shorter term inefficiencies can also present trading opportunities that can add alpha.

Fundamental analysis is one of our strengths, with founders Murray Winckler and Gavin Vorwerg both having received top analyst ratings when employed at Deutsche Bank.

“It is also important to know the companies and management teams – and this is why the relationships our team has developed over time are so valuable.”

All of these inform a view on a stock. “As a house we focus on the top 160 shares, but our equity fund typically invests in the top 100 shares.” The broad focus is important because research shows that in the long-term the top 40 ALSI stocks, and the mid- and small-cap stocks have all been significant contributors to the performance of South African equities.

According to Hubner, getting the big calls right is critical in an equity portfolio. “Take a stock like Naspers – a big part of the index. We approach an investment in Naspers by doing an in depth business assessment, financial analysis and valuation. The position will also be analysed from a portfolio construction standpoint, including correlation to existing positions, concentration risk and liquidity. Depending on the outcome of this we would set a price target and invest.