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ADDING VALUE THROUGH ACTION
Chief Investment Officer
Jun 18, 2021
As an investment house, our investment philosophy dictates that we generally aim to buy businesses at low prices relative to our assessment of fair value, and then hold them through the investment cycle to unlock value for our clients. Not only is this approach more tax-efficient and less costly from a brokerage perspective, but multiple academic studies have shown that over the longer term, this type of strategy tends to outperform those more concerned with shorter-term price movements. This implies that churn in our clients’ portfolios is usually quite low.
We believe that, in general, financial markets are quite efficient. In other words, asset prices mostly already reflect the available information, making it difficult to ‘beat the market’. However, during times of dislocation, markets definitely present opportunities for active management – and the outbreak of COVID-19 was exactly such a time.
In February and March 2020, stock prices crashed the world over, some more materially than others, creating unusual opportunities for investors. In response, while we remained true to our investment philosophy, we at Sanlam Private Wealth markedly increased activity in our clients’ portfolios in the three to four months that followed. By looking through the cycle, we materially reduced the cash levels in the portfolios to buy companies at attractive prices. At the same time, we traded out of certain stocks with the aim of deploying that capital towards more compelling opportunities.
To what extent did this more ‘active’ management add value for our clients? The cleanest way to determine this is simply to assess the performance of our houseview equity portfolio relative to what it would have achieved had we done nothing in the portfolio. Given that financial markets began falling on 17 January 2020 – well before the main COVID-19-related market disruption – we’ll use 1 January 2020 as the base from which to start our assessment.
If we had remained inactive in the houseview equity portfolio over the near 18-month period from 1 January 2020 to 10 June 2021, the portfolio’s total return would have been 14.9%. However, it returned 24.1% over the period, meaning that our activity in the portfolio ended up adding a further 9% to our clients’ wealth.
While with the benefit of hindsight it may now be obvious that late March 2020 was the time to buy, the decision certainly wasn’t quite so clear-cut at the time. On the day we were most active, 18 March 2020, the market had fallen 33% in the previous month and 21% in the preceding week. Investors took flight, and it would have been very easy to simply hide in the shadows and adopt a ‘wait-and-see’ attitude. However, the guiding light of our investment philosophy held firm and enabled us to take the correct perspective that the world would indeed recover from the market collapse. We didn’t panic-sell along with everyone else, and in fact, close to the bottom of the market, we deployed significant cash into Anglo American and Bidcorp.
In mid-April 2020, we were again unusually active as we further reduced portfolio cash levels to their lowest in many years to buy shares in out-of-favour businesses like Absa and MTN, which have since produced encouraging, market-beating returns.
So far in 2021, we’ve been quite inactive, illustrating our comfort with the balance in the portfolio following the flurry of activity in 2020. As markets continue to evolve, extreme events are likely to happen again, when we would expect to be more active than usual.
While no one can predict what the future holds, our clients can rest assured that our investment philosophy of buying assets at prices lower than our assessed fair value, based on the correct perspective of the situation, is indeed sound. Our philosophy was sorely tested last year, but the fact that our activity added more than 9% to our houseview equity portfolio shows that it certainly still works. By sticking to it, the decisions we made, on aggregate, had a significant impact on the performance of our clients’ investments.
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Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.