Justin Floor – Head of Equities at PSG Asset Management
PSG Asset Management’s “3M investment philosophy” targets under-appreciated companies trading at favourable prices. Head of Equities at PSG Asset Management, Justin Floor, notes that the current market environment is offering an above-average number of these opportunities, many of which are unlikely to be found in more mainstream portfolios.
Unpacking the positioning in the PSG Balanced Fund, Floor explains that they do not position their portfolios with a single macro outcome in mind. Instead, their aim is to ensure that their portfolios are diversified in order to benefit from multiple sources of return.
The result is that their current equity exposure can be viewed in three primary buckets, each likely to benefit in different environments.
“The first bucket contains high-conviction ‘quality and growth’ stock picks such as local financial services group Discovery, global brewer AB Inbev, European telco Liberty Global and Asian insurer Prudential, where temporary factors are obscuring the inherent quality and growth potential of these companies. These opportunities are more idiosyncratic and therefore less dependent on broader macroeconomic support,” Floor explains.
Owning growth shares in the current environment seems like a contradiction, but Floor elaborates that their clients own portfolios of shares and instruments that look very different to the popular shares and large index constituents. “Consequently, we believe our portfolios to be a lot less risky than popular alternatives by virtue of their lower prices (many stocks are still out of favour).
“The second bucket comprises real assets, including commodity, energy and related shares. Here we emphasise the unprecedented level of under-investment in productive capacity in real economy sectors. This deep focus on the supply side underpins our approach and provides the conviction we need to take long-term positions in what have historically been cyclical and demand-sensitive sectors. The events in Ukraine, which have added further geopolitical constraints to supply in certain commodities, are likely to extend and amplify the compelling pre-existing investment case,” he says.
And then the third bucket, Floor says consists of South African domestic shares, such as Remgro, Standard Bank, the JSE Limited, AECI, gaming and leisure positions and South African construction names.
In terms of their fixed income positioning, Floor notes that it is concentrated in longer duration government bonds (earning equity-like real returns) balanced against substantial inflation-linked positions. This results in a healthy yield profile that also offers protection against inflation pressures.
The PSG Balanced Fund also has a sizeable exposure to listed property. Fund Manager Dirk Jooste explains that while PSG Asset Management has successfully avoided listed property exposures due to high valuations and debt levels over the last few years, they believe a substantial recalibration has taken place post Covid-19 and that there are a number of attractive opportunities for those who are selective.
“Most of our current listed property exposure is concentrated in the retail sector, with key holdings in local REIT Resilient, US REITs Tanger Factory Outlets and Simon Property Group, and a more recent investment in Hammerson. We view retail property as a classic real asset, with the added benefit that it has been deeply out of favour, especially given narratives regarding e-commerce killing the shopping centre.” Jooste explains. “Underlying cash flows from these businesses are now likely to broadly keep pace with inflation, as they are linked to the nominal sales trajectory of their tenant base. Fixed expenses are reasonably low and finance costs are fixed with very long maturities, resulting in a favourable prospect for inflation-beating cash flow growth.”
What you don’t own is as important as what you do own
“Perhaps the most telling reflection of our current outlook is in what we do not own, or where we are underweight relative to the rest of the market,” Floor continues. “We are cautious about over-owned long duration parts of the global equity market which tend to be well represented in benchmark indices. This leads us to favour equity opportunities outside of the US market, where earnings are generally still high and valuations still unattractive. We still approach direct Chinese investments with some caution, and try to ensure our commodity exposures are not dependent on heavy Chinese demand given the uncertain macro-economic prospects in the highly indebted investment-led economy. From a fixed income perspective, we are cautious on developed market government bonds and both local and global credit instruments.”
“Ultimately, we believe that the opportunities over the next decade are most likely not to be found in the big name index counters, but rather among unloved gems. Many larger managers are driven to stick close to the index for structural and behavioural reasons, and therefore smaller managers with unconstrained mandates have an opportunity to exploit by wider opportunity set. This is a key advantage for PSG Asset Management,” Jooste points out.
“From a practical perspective, we have reasonably full exposures to risk assets where we have strong reasons to believe that future returns will be satisfactory. To control aggregate portfolio risk, we employ pragmatic offsets that reduce risk at a portfolio level. Examples of these would be put option hedging on expensive US equity markets, some gold positions, and shares that are less dependent on the macro cycle or with unique special defensive characteristics (such as the JSE),” Floor concludes.