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YOUR INVESTMENTS:
ADDING VALUE THROUGH ACTION

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David Lerche

Head of Equities

At Sanlam Private Wealth, we typically follow a long-term investment strategy, focusing not on shorter-term market volatility but rather on good growth in our clients’ portfolios over time. However, with the opportunities presented in the wake of the stock market crash in March last year – one of the biggest in history – we managed our clients’ investments far more actively than usual for the remainder of the year. Looking back over the 18 months to mid-June, was this heightened activity justified? And importantly, did it add value to our clients’ portfolios?

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.

PERFORMANCE ASSESSMENT

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.

MARKET-BEATING RETURNS

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.

We constantly challenge the norm. Our investment process is a thorough and diligent one.

Michael York has spent 18 years in Investment Management.

Michael York

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