Dirk Jooste, Fund Manager at PSG Asset Management
The waters investors have had to navigate over the past three years have been exceptionally choppy. Since 2020, we have seen a brutal market correction, global bonds and equities going into retreat at the same time in 2022, a banking crisis, and more recently, yet another fallout in bond markets coupled with stock markets turning negative. Locally, it feels like we have been buffeted by one wave of bad news after another. So, in the midst of this uncertainty, investors may be forgiven for wondering if any assets are making the cut. Is it not perhaps safer to simply hold cash?
As price-sensitive, bottom-up stock pickers, at PSG Asset Management we put a great deal of thought into the assets we include in our portfolios, and determining at what price we are happy to do so. In our world, it is definitely not a case of ‘any’ asset (or index constituent) will do! We are comfortable holding cash where the mandate allows us to do so, if we do not believe we can find an asset that will adequately compensate our investors for the risk they are taking on. To cut a long story short, we set a high bar on the assets we include in our portfolios.
Looking at our portfolios, however, we see that they have not retreated to cash, with high allocations to equities in for example the PSG Flexible Fund, which has considerable freedom when it comes to how assets are allocated (for more insights into this fund, watch this video). One reason for this is that we often find great opportunities during periods of market turmoil, when the market pricing mechanism is prone to breaking down. When it comes to finding overlooked gems, periods of market stress provide fertile hunting grounds for those who apply a selective lens and scrutinise assets closely before making the call on including them – or not.
However, for investors – who need to look ahead and commit money in uncertain markets – the decision is often fraught with anxiety and fear. Investment processes and philosophies sound lovely on paper, but how do you know they ‘work’ in practice, and are they worth the ‘hype’ the investment community often bestows on them? To put it in investment speak, how do you know a specific manager can reliably tilt the odds of success in your favour over time, and across asset classes, especially when we all know that “past performance does not guarantee future performance”?
The SA stock market provides a test case in harsh investment conditions. GDP growth has been muted, consumers have seen their real incomes decline over the past few years, energy supply is unreliable, infrastructure is eroding and concerns around social instability remain. Yet despite these hardships, selected local shares have delivered handsomely for investors in our portfolios (not only since the Covid-19 reset, but also over the past year). The local stock market is not a linear reflection of the local economy, and there are always opportunities for excellent companies driven by sound management teams to excel, even in difficult conditions.
Performance of selected SA shares
Nevertheless, some investors may still be sceptical, wondering how a bottom-up selection process can translate into outperformance at the aggregate level, especially in multi-asset portfolios where asset allocation decisions are often perceived as being key.
However, taking a step back and getting a broader view by looking at the performance of the various asset classes within our portfolios over the long term, we find evidence that our tried and tested bottom-up 3M investment process has reliably succeeded in adding value to our investors over time. It is especially pleasing that our process is also able to deliver alpha in global equities – perhaps one of the most challenging mandates in which to demonstrate reliable capability. It is indicative of the fact that our focus on quality and price, driven by independent thinking and in-depth research, enables us to reliably replicate our process – not only across asset classes, but also across territories.
PSG Balanced Fund
10-year alpha analysis
Sources: PSG Asset Management as at 30 September 2023. Indices used are the JSE Capped SWIX, MSCI ACWI, JSE SAPY, JSE ALBI and the ASISA MA High Equity peer average. The graph shows the performance of various asset classes within the PSG Balanced Fund versus indices typically used to track performance for those asset classes/portfolios in that sector.
To answer the question posed above: yes, investment processes and philosophies matter materially to the outcomes investors ultimately achieve.
Looking at the current investment environment, we believe this question is becoming even more relevant, as we consider our investment approach to be a key differentiator in terms of client outcomes in the years ahead. This is because we believe the market is in the process of undergoing a structural inflection and, as long-held imbalances start unwinding, different types of assets are set to become the market leaders of the future. These are most likely to be found outside the major indices, in areas of the market that are currently overlooked and often unloved. It is an environment where bottom-up stock pickers who are driven by robust research and who set high bars on the assets they invest in, are poised to excel.