PSG Asset Management has been highlighting the current opportunities in neglected SA Inc stocks for some time.
“Stocks exposed to the SA economy remain out of favour given the low-growth environment and intensified political tension,” said Justin Floor, fund manager at PSG Asset Management. “However, many of these businesses have proven track records and strong management teams, and we believe they have a good chance of weathering the storm – as they’ve done before.”
“We have been able to acquire their stocks at low prices and on arguably low levels of earnings, which bodes well for future returns,” said Floor.
Top 10 holdings PSG Asset Management have previously referenced include Super Group and AECI, while the recent sell-off has allowed for new additions to their buy list, such as JSE Limited.
“Globally, valuations remain high, but we are finding select opportunities in less popular market segments,” said Floor. These include investments in Japan and US real estate and, more recently, quality names such as Anheuser-Busch InBev, Asahi Holdings and Prudential plc.
Good prospects in US real estate
Fears around the impact of Amazon and other online players on traditional retail outlets have presented an opportunity in US retail real estate. “Some of the businesses in this sector have valuable property portfolios, which we think the market is underestimating,” said Floor. The shares are also offering high real dividend yields.
“Local listed property does not yet present the margin of safety we require for investment,” said Floor.
What about rand movements?
“We don’t take an explicit rand view and aim to build portfolios that will deliver on their mandates regardless of how the rand moves,” said Floor. The segments separated out in the graph below indicate portions of the fund that are exposed to the South African economy: SA Inc. stocks and South African government bonds. These instruments are influenced by local macroeconomic events and could respond similarly to movements in the rand. Foreign equities, foreign real estate and local equities listed offshore (shares such as Quilter plc) act as a counterweight to balance the portfolio.
The fund’s allocation to inflation-linked bonds (ILBs) provides an additional diversification benefit, as these instruments behave very differently to others in the portfolio. “We think it is unlikely that local inflation will rise significantly, but ILBs will offer some protection if it does,” said Floor.
Graph: The PSG Balanced Fund is diversified across geographies and asset classes