This one-pager describes our thinking behind selected recent management actions in Global Balanced Mandates and provides context to their current positioning against the backdrop of their investment opportunity set. Our funds always consist of a diversified portfolio of opportunities and risks; please bear that in mind when evaluating my commentary about individual fund positions.
This month I would like to share my views with you on 5 interesting observations.
Low balanced fund allocation to SA equity
In my equity comment this month I make a statement that the SA equity building block is priced at an attractive 30% discount to intrinsic value, which represents good long term value. However; we are not fully invested in balanced fund mandates because our investment process and bottom up fund construction demands an adherence to investing in predominantly high quality businesses. The way that Mr Market has offered up investment opportunities in SA of late results in a dearth of cheap high quality assets. In addition we have made no secret of our view that most resources businesses do not meet our quality criteria. It is in fact high quality assets whose price to value ratios remains most unattractive at present, both in SA and globally. I derive further circumstantial evidence supporting this in observing that the overall SA capital markets have just experienced a 10+ year bull market.
We own very little gold stocks and no gold
Gold stocks and the commodity itself have been smashed, to be politely blunt about it. However; we are not yet interested in allocating fund capital to these because a) the gold price is still trading well above its long run real price and b) our work shows that the time to invest in gold equities is when they are priced at a 40% to 50% discount to book value. Currently none of the large investable gold businesses globally are priced at such a discount, with the single exception of Harmony Gold, which we do own a very small position in.
Currencies are important investment decisions
Our work informs us that the most attractive currencies in the world at the moment are US Dollars, Japanese Yen and Hong Kong Dollars. The British Pound and the SA Rand are marginally cheap, but not nearly enough to warrant an investment exposure (seen from a purely currency perspective). In deciding what to do with fund cash, we first take our currency views into account before we consider yields and maturities in the money markets and bond markets.
We own Anglo American but not BHP Billiton
Short and sweet; our work shows that Anglo American is very cheap and BHP Billiton is priced at fair value. Furthermore, this outcome also makes logical sense to me because the commodity mix in these two businesses is very different. Anglo has significant exposure to platinum, which is hated, and BHP doesn’t have any exposure to platinum. As a final comment on this, we are impressed with Mr Cutifani’s public statements to date. Time will tell, but it appears as if Anglo may be going back to its roots in terms of being a counter-cyclical capital allocator in the global commodity markets. This could mark an important turning point for the company and its long term shareholders.
There are stocks in our Global Fund with operations in SA
We own Implats, Amplats and Anglo American in the RE:CM Global Fund. There are a few others but their combined exposure in the fund is negligible. The first point I want to make is that all of these are in fact global businesses with revenues priced in US Dollars and affected by outcomes in global economies. Much of their operations are in SA and most of their costs are in SA Rands. We own these in the fund because we are increasingly interested in cheap global cyclical stocks, because that is where markets are offering the best prospective investment returns. The second point is that we look at individual equity position sizing on a see-through basis in the context of an overall balanced fund mandate and regulations such as Reg 28. Other than taking mandates and regulations into account, the domicile of any investment opportunity makes no difference to us.