One interesting feature of The Stanlib Balanced Fund is that of the 32 stocks it invests in, there are just ten stocks in each of which it holds on average 5% of the total equity weighting. This suggests some very big calls.
The fund is about 46% invested in domestic equities, almost 20% in foreign equities, 17,5% in domestic bonds, just 2,7% in commodities and 14,3% in cash. Stanlib is warning clients to shift some of their liquid assets out of cash and into higher yielding assets, as the money market is currently delivering negative returns at our present inflation rate.
The fund’s top ten equity holdings are: Life Healthcare (5,2%), Anglo American (8,4%), BHP Billiton (8%), AVI (3,6%), Woolworths (4,3%), Vodacom (4,4%), Imperial (3,9%), Bidvest (4,2%), Richemont (4,6%) and MTN (8,5%).
Unpacking the big calls
“Of the big current themes, Healthcare and Pharmaceuticals top the list. We are invested in Life Healthcare and Netcare, which both have good management teams. Hospital groups are oligopolies serving stable markets, and we do not see government’s proposed National Health Insurance regulations as a major threat to that.
“A second theme is Retail, and we are invested in Woolworths, Shoprite and Mr Price, as well as MTN and Vodacom, which continue to offer good value. When stock picking, our philosophy is to look at companies with growing revenue streams, profit momentum, balance sheet efficiency and generally good management teams,” explains Paul Swanson, manager of the Stanlib Balanced Fund.
In terms of asset allocation, he points to the fact that Industrial stocks have outperformed even Property over the past three-year period to March 2012.
Some of the other big calls include what it is not invested in: Sasol, Naspers, SAB and Kumba. The fund is underweight in Construction stocks, except for PPC in which it is overweight.
“Offshore, we are invested only in equities: no bonds or cash. We are underweight in Europe, where we see no recovery any time soon, and overweight in North America.”
He points out that notwithstanding the highly pessimistic themes coming out of developed countries at the moment, many companies continue to report strong earnings growth. “It’s only governments that are not doing well.”
Domestic bonds have been in a consistent bull run since 2000, with recent good performance due in part to the imminent listing of South African bonds on the Global Bond Index, which means global tracking funds will have to buy our bonds. In net terms, foreign investors purchased more than R40 billion of South African bonds in 2011 and more than R30 billion year-to-date as at 31 May 2012.
Retail has profit momentum
A couple of Swanson’s particular stock picks are Woolworths and MTN.
“Woolworths has profit momentum based on an improving operating margin trend, ongoing cost reduction and revenue growing ahead of costs. The firm is sweating existing stores by expanding its product mix to achieve optimum trading densities, while at the same time forecasting higher capex spending over the next three years to accommodate new store openings and expanding profitable stores. Its loyalty programme has also been a marked success.
He anticipates the dividend yield over the coming year will improve from 3,9% to 4,6%.
MTN’s attraction is its strong footprint in Africa, a continent recording exceptional growth at the moment. “GDP and population growth will provide MTN with growth for the medium term. It anticipates 50 million new subscribers over the next five years: a 36% increase. It has a position of dominance, being the No.1 operator in 15 of its 21 markets.” While it has the $4,2 billion Turkcell legal dispute hanging over it, Swanson believes it’s still a worthwhile investment.
Resources sector bombs
Somewhat unusually for the JSE, the Resources index is down during what has been a bull market on the JSE. Though the fund has reduced its weighting of Resources in favour of Industrials over the past two years, Anglo American and BHP Billiton still feature in its top ten.
Stanlib’s Paul Hansen attributes the poor performance of resources to fears of a bigger than expected slowdown in China. Today, China buys 40% of the world’s copper production and 60% of its iron ore production, among other metals and minerals.
“However, it also reflects concerns about Europe’s economy, the biggest buyer of platinum for diesel vehicles. Earnings forecasts for miners have consistently been lower over the past six months to the point where minimal earnings growth is expected for the coming year.
“This is because metal prices have declined with both copper and platinum having fallen 17% over the past year,” says Hansen. He points out that this is in stark contrast to Financial and Industrial companies forecasting 12% – 15% growth for the next 12 months.
“The big question is how China performs: if China grows at its new target rate of 7.5%, then resources are excellent value.”