Nick Balkin of Foord Asset Management, Portfolio Managers of the Nedgroup Investments Stable Fund, talks about finding stability in uncertain times.
We are living in unprecedented times. This is the first time in global history that the West Texas oil futures index has traded below zero, down to -$40 – crazy to comprehend. We are also experiencing one of the fastest bear markets ever, taking just 20 days for the S&P to fall more than 20%, compared to the global financial crisis, which took 274 days. The virus seems set to be with us for a lot longer and we expect borders to remain closed for some time still as countries protect themselves.
Prior to the virus at the peak of the market, valuations were high at the 19x PE level and confidence was too high. Given the risks out there, there wasn’t a large enough margin of safety. As mentioned, oil has hit an all-time low and presents a real problem in the subprime bond market, especially the US shale gas producers, where we expect a fair amount of defaults for US banks.
In February, we had optionality built into the Stable Fund portfolio. Within the fund, we had sold some ALSI futures, had S&P 500 put options, which reduced the equity exposure quite substantially and we also added call options on the bonds with longer duration. This optionality aimed to protect our portfolio in tough times and those tough times arrived with a ferocious selloff and the ALSI year to date being down more than 20% and the S&P down 13% in dollar terms. It’s only due to this positioning and performance that the fund was down only 3% in March against these substantial falls. As our focus is always on long-term performance, we seldom crow about short-term performance, but when the market does sell off, it’s encouraging to see only a 3% drop against all the other indices that are really struggling. In terms of the SA Inc performance, the financials of the mainly South African focused companies are down 40% year to date.
Our 10-year annualised return of 8.7%, where we are ranked number 1 in the category, has given a really solid return to our investors and that‘s what we need to do, position ourselves so that when tough times come we are able to protect the fund. Given that the last 10 years have been tough and that we have no platinum, gold miners or Naspers in the portfolio, this is an even more credible performance.
In terms of contributors to the fund and the average weight of various asset classes, we will continue with our low weighting in domestic equities and high weighting in interest bearing and SA Bonds, which were more resilient over the year. We also have a big weighting in foreign assets, which generated substantial performance.
The fund’s positioning has not changed much with a diversified and liquid asset allocation. SA government bonds and foreign assets make up just more than 60% of the fund with the balance split across property, money market, SA equities, commodities ad corporate bonds. We did take the opportunity in the bond market, which is offering very good yields, to own mid-duration bonds. We are more cautious about the long-duration bonds given the government’s high debt levels.
In terms of our top 10 equity holdings, a lot of these businesses are stable companies who will continue to function in good and bad times, which is key to a defensively positioned portfolio and has served our investors well. The economic drivers in the fund continue to be global growth assets, which are globally focused equities and bonds.
Given the current crisis, we did add more protection into the portfolios recently. Because we have a fairly significant offshore weighting, we used a few percent of the portfolio to buy some currency puts and we’ve financed that with a written call at no premium to the portfolio and to protect against a sudden Rand appreciation over the period to December. Tactically, the Rand has weakened a lot and is due a breather, but we continue to worry about the long-term trajectory and retain our long-term view that the Rand will continue to weaken even at these levels. In order to maintain our significant global equity weight, we’ve been able to lock in a few percent of that to make sure that we’re protected against tactical Rand appreciation.
Regarding the R500 billion stimulus package announced last night, it will at best offer some stability for a very vulnerable economy. The risk though is the Gini coefficient. Most of the money we’re getting, regardless of the 1% interest rate, still has to be paid off and adds to our debt burden, whose trajectory is at an unsustainable level. A lot of the stimulus is going towards social grants and maintaining people’s salaries. We need sustainable long-term growth to pay back these debts, which requires reform of the country and stimulus in infrastructure, reform of the education system, etc. This short-term fix is not going to achieve that. The risk is that this additional debt will further put the long-term sustainability of South Africa at risk