The long-awaited rotation from growth to value has arrived, and picking value stocks with the best return potential in a progressively complex investment universe is an increasingly sophisticated skill.
The multi-asset high equity Amplify SCI* Balanced Fund was an early switcher into value as the cycle turned, and its managers believe the cycle has legs.
Value stocks are companies with a low price to earnings (P:E) ratio, low price to the book value of their assets, and, generally, offer a relatively high dividend yield. These stocks have been out of favour during a prolonged period of underperformance – since as far back as 2006 – until the cycle started to turn towards the end of 2020.
Murray Winckler, Laurium Capital co-founder and portfolio manager of the Amplify SCI* Balanced Fund, said value has massively underperformed growth. In the short run, P:E multiples drive the market, but in the long run, earnings do, and earnings growth of value stocks is starting to rise. Value stocks have become extremely cheap, and current valuations are very low, while earnings going forward are in many cases looking more attractive than growth stocks.
The biggest driver for value stocks is a rebound in growth, and projections for world growth are 5.5% in 2021, while the US will be even higher, with experts continuously revising their forecasts upward. South Africa is not bouncing back as much, and Laurium has pencilled in 3.5% GDP growth in 2021.
Over the next 12 to 18 months, this growth will provide a tailwind for big industrials and other real economy stocks relative to growth counters.
Excess savings recorded across developed market economies during the pandemic resulted in pent up cash that will be spent on holidays, restaurants, food and drink (the primary beneficiaries of spending) as well as on electronics, vehicles, furniture, household equipment, events, health products and education, and this will be reflected in the earnings growth of companies in these sectors.
The fund has not bet the whole house on this rebound but has decent exposure to it. As a high equity balanced fund, 50% of the fund is in South African equities and 23% in foreign equities, with local stocks spread roughly into four main components:
- Global consumer, through British American Tobacco (BAT), offering an 8% yield, and Naspers, with the potential to narrow its discount;
- Healthcare, largely through hospital stocks, which are trading cheaply, have strong balance sheets and can withstand low capacity utilisation;
- Financials, with more exposure to insurers than banks currently, with stocks at decade-low multiples, and with strong annuity earnings streams; and
- Resources, particularly diversified miners and platinum, which have had a phenomenal run and have high free cash flow yields.
The fund’s top 10 holdings include exposure to the Russell 1000 Value ETF (7.1%), which is made up of real economy stocks such as Berkshire Hathaway, JP Morgan, Johnson & Johnson, Walt Disney, Bank of America, Comcast, Exxon, Verizon and AT&T.
An Amplify analysis on how the fund performs relative to capped SWIX over time showed that over five years, it captured 75% of the upside relative to the ASISA Multi-Asset High Equity category average (59%) but captured 52% of downside in line with its peers.
The fund has provided an annualised return, after costs, of 8.7% since inception, and 9.1% over five years, placing it fifth out of 147 funds in its category.
Laurium Capital portfolio manager Brian Thomas said that the fund’s managers see quite lot of value in the resources space, where P:E multiples “are incredibly low in view of earnings we expect to come through”. There are also pockets in areas such as healthcare and insurance, while SA government bonds are offering healthy yields.
He said the earnings momentum drivers on value counters are expected to be strong relative to growth counters. The fund’s managers expect the rebound to last at least 18 months.
*Sanlam Collective Investments
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* 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.