Renewed interest in emerging market investments and the move from growth to value are reflected in the stock picks of Amplify fund manager, Omri Thomas.
“While global markets look expensive, we still manage to find value in South Africa,” says Thomas, portfolio manager of the Amplify SCI* Flexible Equity Fund and a director at Abax Investments, adding that the fund finds this value both in the hybrid space – with convertible bonds – and in some quality shares on the JSE.
The Amplify SCI* Flexible Equity Fund’s biggest position is in the Royal Bafokeng Platinum convertible bond. Thomas says the Royal Bafokeng share has done so well that the share price has run through the convertible price resulting in substantial value in the convertible. He says Royal Bafokeng had spent capital on expansion in the last few years but has yet to benefit from the cashflow emanating from the expansion. “In the next couple of years, we are going to see strong cashflow from them and an expanding production profile. Royal Bafokeng is moving more of production towards a block where the rhodium content is much higher, and the rhodium price is extremely high at the moment, so the more they mine there, the higher the yields per ton.”
Thomas says Royal Bafokeng is “a very attractive takeover target, being contiguous to Northam and Implats, which both sit with substantial cash”. If that does not happen, there is a good chance Royal Bafokeng could use excess cash to buy back its convertible bond.
Another of the fund’s biggest positions, and “one of the best opportunities in our market”, is British American Tobacco (BAT). Thomas says the dividend has consistently grown and the dividend yield is now over 8%. “In a world where we are not getting any yield, this is an attractive real return,” he says.
BAT has traditionally paid attractive dividends and used excess cashflow either to buy out other tobacco manufacturers or do share buybacks. BAT’s 2017 buyout of Reynolds led to an increase in debt, and while it continued to pay dividends, share buybacks have been on hold. Its annual cashflow is £10bn and by the fund’s calculation, debt will decline from 5x ebitda to 2x by 2024 or 2025, after which buybacks, which are earnings accretive, will resume.
A P:E of 8.5x, implies a 16.1% internal rate of return, excluding any currency effects. Should it drop to a 6x P:E, the return is still 14% and if it rerates to 14.5x P:E, the IRR would be 20.5%. BAT is a share “to buy and put in the bottom drawer and collect dividends along the way,” Thomas says.
At Naspers, another of the fund’s top stock picks and holdings, the discount to the sum of the parts keeps increasing. The value of Tencent, Naspers’s major investment, is now significantly more than the Naspers share price. For every 10% that Tencent goes up, Naspers should go up by 15% to 20%, but it also goes up by 10%, and the discount widens, Thomas says. Management is incentivised to close that discount, and at the end of last year Naspers announced buybacks in Prosus and Naspers. “Each share they buy is accretive and their economic interest in Tencent actually goes up,” he says.
The fund values the Naspers investments outside Tencent as the value at which it is trading, implying a P:E below 20x, which makes it attractive relative to global tech valuations. Tencent is currently trading at a 40x P:E, or 19x stripping out its investments, so if you invest in Naspers what you are paying for Tencent is closer to a 10x P:E.
As economic recovery continues, retailers have been announcing results that were largely better than expected, and the Amplify fund, which holds FirstRand and other banks, expects to see some uptick in banking. Banks held back dividends in June 2020 and increased provisions. This may see them start to release excess capital, and investors could see dividends, share buybacks or some form of return of capital plus earnings recovery, while banks are relatively cheap currently.
However, he remains cautious on the domestic economic outlook, and cautious about the environment of high investor risk appetite. There has been a significant increase in the value of non-profitable (largely tech) companies where a lot of investor money has been flowing, irrespective of earnings. Another concern is retail investors entering the market, taking out options and speculating.
These trends have led to some disconnect, with consumer staples and some high yielding stocks, including tobacco and food, offering value.
South African stocks remain relatively cheap and attractive, especially given the serious warning lights in global markets. Knowing when the tide will turn for global growth stocks “is a nervous dance – leaving just as the last song plays”, says Thomas. As this is difficult to time, caution is necessary.
Amplify SCI* Wealth Protector, for example, has been ranked number two since its August 2016 inception and number one in 2018 and 2019 relative to its peers in the multi-asset low equity space. The manager, Truffle Asset Management, has won a Raging Bull award in 2020 and 2021 for its income fund, indicating its ability to unearth opportunities and act quickly on them.
Amplify SCI* Defensive Balanced fund, managed by Matrix, has ranked as the leading Defensive Fund since its September 2014 inception, with the highest risk-adjusted performance in its class through the use of derivatives to protect on the downside and ensure a smoother return profile.
Amplify’s bouquet of hedge funds, which are by their nature designed to mitigate downside risk, but are relatively complex investment products, provide an added layer of diversification for investors that are well on their way towards their savings goals. Amplify is the first asset manager in South Africa to make its hedge funds available to retail investors on LISP (Linked Investment Service Provider) platforms.
*Sanlam Collective Investments
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Disclaimer:
Amplify Investment Partners (Pty) Ltd is a wholly-owned subsidiary of Sanlam Investment Holdings and an authorised Financial Services Provider. Sanlam Collective Investments (RF) (Pty) Ltd is a registered Manager in terms of the Collective Investment Schemes in Securities. A schedule of fees can be obtained from the Manager.
Amplify SCI* Strategic Income Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 0.58%; Total Expense Ratio (TER): 0.65%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Strategic Income Fund.
Amplify SCI* Defensive Balanced Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 0.92%; Total Expense Ratio (TER): 0.94%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Defensive Balanced Fund.
Amplify SCI* Wealth Protector Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 1.00%; Total Expense Ratio (TER): 1.09%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Wealth Protector Fund.
Amplify SCI* Absolute Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 1.03%; Total Expense Ratio (TER): 1.28%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Absolute Fund.
Amplify SCI* Balanced Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 0.95%; Total Expense Ratio (TER): 1.14%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Balanced Fund.
Amplify SCI* Flexible Equity Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 1.21%; Total Expense Ratio (TER): 1.14%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Flexible Equity Fund.
Amplify SCI* Equity Fund
Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 1.15%; Total Expense Ratio (TER): 1.23%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Equity Fund.
