Not many fund managers call themselves value managers any more, other than a few diehards such as John Biccard at Ninety One, where his franchise has a place as one of the more exotic dishes — a hot vindaloo perhaps — in CEO Hendrik du Toit’s smorgasbord of investment options. Even Adrian Saville is spending more time on his academic job and has been able to avoid talking about the awful returns Cannon Asset Managers has produced.
But just as growth managers have rebadged themselves as quality managers, with the halo that surrounds the word, value managers are drifting to the term “contrarian”. Contrarianism has a great pedigree. I was privileged to meet the late Allan Gray in 2000 and he told me he always preferred the term contrarian to value. It involves, as the name suggests, taking a different outlook from the market. Allan Gray in Cape Town has been a victim of its own success, and with R600bn under management, about half of which is in domestic equities, it inevitably has to focus on the megacap shares.
Contrarian investors don’t just buy the shares that are out of favour and cash in those that are in — though that is a big part of it. Increasingly, contrarians are defined by their high active share, a measure of their deviations from the index weightings. This concept would have been almost unknown 20 years ago, and it was useful to get a full explanation from Gavin Wood, chief investment officer at Kagiso Asset Management. He spoke at last week’s virtual Meet the Managers forum.
With R31bn under management, Kagiso has a lot more flexibility than Allan Gray. Wood says contrarians exploit the consensus view and profit from it. “We believe that if everybody dislikes something it is likely they are uncomfortable to differ from public opinion.” The process is working, as the Kagiso Equity Alpha Fund is well into the first quartile of general equity funds over five years, even though it has struggled in the year to date.
Areas of the market contrarians are likely to avoid now, as they are on frothy multiples, are large US technology corporations, online retailers, gold and platinum miners, as well as global consumer staples. Just one SA retailer looks overpriced, Wood says, and that’s Clicks. Otherwise SA banks and retailers are a contrarian investor’s hunting ground. Retail property is another area on the radar, though it would certainly take courage to buy shares there.
Kagiso has held platinum shares from the days when they were unpopular five years ago and hasn’t sold the position entirely from its peak in September 2015. Wood says active managers cannot justify their fee premiums to index funds if they are no more than closet trackers. He suggests investors consider switching out of large managers to a blend of high active share managers. If a manager with R300bn (such as Allan Gray, Coronation and Ninety One) held 10% of Pick n Pay, it would account for just 0.7% of the portfolio, and if they wanted to bet on the recovery of PPC, a 10% holding would make up just 0.05%.
The top 50 shares on the JSE make up 87% of the market cap, yet 66% of the Equity Alpha Fund is held outside the top 50 — one of the reasons it has battled in a market where mid- and small caps have been poor performers. The fund owns a few large rand hedges such as Naspers, Quilter and the somewhat smaller Datatec. It holds AECI, one of the few SA industrial success stories, but it has fallen for the odd value trap, notably Tongaat Hulett, and remains invested in Omnia, a poor short-term performer. Brait, the troubled owner of Virgin Active, would have provided it with an interesting ride.
Wood says there are still quite a few mispriced mid caps to choose from and he has invested in Metair, Altron, Telkom and Libstar. But he remains cautious about financials, and apart from UK-based Quilter, FirstRand is the only significant holding.
Kagiso can increase its active share even more through its international holdings. No Apples or Amazons here, though it does own JD.com, China’s largest online retailer, which is not nearly as loved by analysts as Alibaba and Tencent. Wood has picked old line cyclical industrials such as Du Pont, Siemens and Honda. A rare financial holding is Prudential M&G in the UK.
It might be tempting to try to find comfort and security in an index fund, and in recent years that was the right decision as the megacaps, particularly of course Naspers, have ensured that the market had positive returns. Until recently at least. But it is now time to diversify. Kagiso Equity Alpha is probably a better way to get small- and mid-cap exposure than any of the legacy unit trusts in the small- and mid-cap sector.
• Cranston is a Financial Mail associate editor.
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