With few exceptions, high-profile investment pundits called 2023 wrongly by predicting a tough year for US equities (especially big tech); a rough ride for Bitcoin; and outperformance by SA share prices. Corion Capital’s David Bacher explains what happened in the “annus horribilis” that wasn’t, and sticks out his neck for 2024. He spoke to Alec Hogg, editor of BizNews.
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Edited transcript of the interview
Alec Hogg: Well, it’s a happy new year to David Bacher of Corion Capital, and we have the Corion Report a little bit later than usual, David. My fault, I was in Australia at a family wedding. Beautiful, lovely to see family and Australia is a nice place but I don’t know why so many South Africans want to live there though. Very different to us, but good to be talking with you again. And we’re gonna try something a little different today by using your video that you put together.
Now, obviously I know that a lot of people listen to our conversation on the podcast. So we’re not going to disadvantage them in any way, but it’ll just add a little bit of enjoyment to those who are watching on YouTube. But David, how’s the new year treated you so far?
David Bacher: Sure, it’s been back with a bang. Clients are obviously coming back from their holidays, asking the right questions and we’re reflecting on 2023 for them and also more importantly, looking ahead at how we need to allocate our clients’ money. So it’s been busy, but I must say I did enjoy the couple of weeks off in late December.
Alec Hogg: I think we all needed those. Now on this video that you put together, and it’s always in the Corion Report, it looks like quite a lot of work.
David Bacher: I suppose the adage practice makes it, I wouldn’t say perfect, that’s a bit arrogant, but better and easier to put out. So we’ve got a good capable team at Corion. We think about it a couple of days before the month ends, so it gives us a bit of time. So as the numbers come in the next day, we sort of know what we’re going to be doing. And we get it out within four or five hours. It’s taken us a long time to be able to get to that position. But with a good team and planning ahead, it enables us to get this out quite quickly.
Alec Hogg: It certainly does make perfect, even though you don’t take that attribute. Let’s just have a look at the major part. I love this animation that you’ve got in there. Talk us through this. That’s obviously Jay Powell, who is now bringing in the aeroplane called the US economy to give it a soft landing.
David Bacher: Yeah, we try and code in the year and try and think of what the highlights were. If you cast your mind back to how we ended 2022, it was all about the hard recession and the fear of recession. And that was the main topic. And I think the Fed has managed it quite well. And James Powell, his interest rates, what we’ve got depicting for those of you on podcast is him being an air controller and a plane landing, a soft landing in the US. And I think that was a reason, or one of the primary reasons why global markets and particularly the US performed so well.
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Alec Hogg: And they took off towards the end of the year after a really awful October. November was a massive rebound and December not bad either.
David Bacher: Correct, I think it was the pivot or the perceived pivot by the Fed in that they were steering the investment community to potentially cutting interest rates quicker than anticipated and that was the fuel that made the markets rally.
Alec Hogg: Why is that so important, David? Why is the US – as 26% of global economic activity – why is its actions so relevant to investment markets and indeed, even to us here in South Africa?
David Bacher: Great question. So I think your number about how big the actual economy is relative to the world is accurate around 26%. But what’s quite important is the actual market cap of America versus the world is much, much higher in like 65, 66%. So it has a massive contribution to global equities. What the US does drives your global return. So that’s the one element that is awaiting. And the other element is, to answer your question more directly, is why interest rates are so important. Well, interest rates are so important because it is one of the key ingredients in how you value companies. If you look at what is a company worth, you’re actually taking its future cash flows and discounting it back to today’s value. And the key ingredient in how you discount those cash flows is interest rates.
The lower the interest rates, the higher your terminal value is, the higher your value is of your company and that’s why it’s so important.
Alec Hogg: Okay, so I’m just going to decode that a little bit. When you buy a share, what you’re buying is what that share is going to, or what the company is going to give you per share for its lifetime or for as long as it exists. And so when you talk about discounted cashflow, it’s what kind of earnings that company is going to make until it dies, I guess one day it is gonna die. And that’s the bet that you’re making. Now, what you’ve just explained to us is that when interest rates are high, then that depresses the value of the income you’re going to get. Of course, when interest rates are low, it makes it more appealing. And so you buy shares when interest rates are low, not so much when they’re high. Is that decoded well?
David Bacher: That’s much better than me, so thank you for that. And obviously, that’s a simplistic view. There are other factors, how the company’s growing, where the valuations start, et cetera. But that is the answer on why interest rates are so important.
Alec Hogg: Indeed. Of course, it’s simplistic, and of course, it’s far more complex than that. That’s what keeps hundreds of thousands of very well-paid people occupied every day, every second of the day in this incredible thing called the global equity markets. But a good point you made there about American shares being about two thirds of the value of all the shares in the world. So if you’re going to invest in shares, don’t ignore those two thirds.
Now you’ve explained to us why J-PAL is so important. Let’s talk about the year as a whole and how those asset classes rebounded. If you’d had money in equities or bonds or gold or property, how you would have done in 2023.
David Bacher: Investors will be very happy with the outcome. If you look at the high level numbers, you’ve got global equities up 22%. You had bonds being strong, which was a 5%, especially given that bonds’ interest rates were close to zero not long ago and also property was close to double-digit returns. So on a high level, very good returns for investors.
But as always, you’ve got to dig a bit deeper and there was divergence beneath, specifically the equity return.
Alec Hogg: Okay, and gold had a good year.
David: Bacher Yeah, that was quite surprising. I suppose there’s gold in the new liquid gold being Bitcoin, which had a spectacular year. And that was on the back of inflation, geopolitical risk, inflation being high and geopolitical risk being escalated. So the gold price ran north of $2,100, where late last year it was about $1800, $1900.
Alec Hogg: So the younger generation would say, if you were smart enough to go into digital gold, Bitcoin, you would have multiplied your money. If you’d been an old bullet and just held on to the gold itself, you’d be up 14%. But I guess if you bought Kruger Rands, given that the Rand was weak, you would have done even better than what happened to Bullion.
David Bacher: Correct, those are dollar returns, so anything in dollars converted back to rands when your currency is depreciated will make those returns look a lot better.
Alec Hogg: So in the United States, with those mega caps – two-thirds of the market – we got real lucky in the business portfolio. We had Nvidia as one of our equities there, and it has been a spectacular performer. The reason for that, I must tell you, David, is a year ago I was in Davos and I was listening to the guys talking about the artificial intelligence revolution, and I came back and added a few AI companies into the business portfolio. But my goodness, when you consider 239% in the year, almost 200% for Meta, and Amazon up 81%, Tesla up 100%, Alphabet up 58%, you’ve got to ask yourself whether it’s overdone.
David Bacher: 100 percent. I think one of the most outstanding statistics of last year was the so-called Magnificent 7, which you just named plus Microsoft, contributed I think almost two-thirds to the S&P 500 return. So you could have got a much more benign return if you weren’t invested in these seven shares that had such a massive contribution to global returns.
Alec Hogg: Very diplomatic, benign return, i.e. just about nothing. But if you had the Magnificent 7, or if you were individually invested in the Magnificent 7, as our portfolio was, Nvidia, Amazon, and Microsoft, those three really shot the lights out.
David: Bacher Correct. And talking from our personal experience and the Korean experience: one thing we got wrong as a house was we were underweight in the US and underweight in tech. I think in the beginning of the year I said that we overweight the equities but underweight the US. My goodness, was that the wrong call. We got it wrong and we own it. That’s investing. You’re going to get things wrong. So on the base of valuations, we were positioned differently, but AI was a big defining event that changed the landscape. I think there were lessons learned from our side, but thankfully for our clients, the net returns to our clients for 2023 were actually quite good. Most of our funds outperformed their benchmark. I think that’s the lesson of investing, you’re always gonna get things wrong, just make sure you’re not putting all your eggs in one basket. Make sure you’ve got enough drivers of return because you are going to get things wrong and as I said, fortunately our portfolio construction was right but on this specific position we looked a bit foolish.
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Alec Hogg: All the investment books that you read tell you that if you can get it just two thirds right, if you get two out of three of your calls right, you’ll be a spectacularly successful investor. So I guess humility helps as well. South Africa, however, not a great year.
David Bacher: Yeah, so the chart that you’re showing is dollars. And you will see in a dollar perspective, we returned 1.5%, closer to 10% in the Rand perspective. So it looks a bit worse because of our currency depreciation. But I think you do have to value assets in hard currency. So South Africa did struggle. We didn’t struggle as much as China. And I think that was another key feature of last year. Everyone was rushing to China. China was down 11% last year in dollars. So, with the US up 26%, China down 11%. Those are your two biggest economies, two very, very different results.
Alec Hogg: Yeah, South Africa being affected by that China situation as well because of Prosus and Naspers in the last month of the year, getting that shock when the Chinese government decided in December to give Tencent another hiding by affecting the amount of gaming that the Chinese population are allowed to do. It’s very dangerous when you have an all-powerful government and particularly one that is not focused towards free enterprise or indeed won’t get voted out of power by the population anytime soon. So I guess good lessons there as well, David.
David Bacher: I remember I was about to go for a swim on the beach when I looked at my phone and saw that and it certainly ruined my swim. But the good news is I think the rhetoric afterwards from the Chinese government was that they realised that was very negatively – and rightly negatively – perceived and I think the rhetoric following that was a little bit more supportive for investors and I wouldn’t say all the damage has been caught up, but the majority has been made up.
Alec Hogg: Prosus is also in the BizNews portfolio. So while on the one end we did exceptionally well from Nvidia, Prosus: not so good. But we live in hope- and the Rand – the poor old Rand.
David Bacher: Yeah, especially if you look at the last half of last year. Over the full year it depreciated 7.5% versus the Dollar, while the Euro, the Pound, and the Brazilian Real were all gainers to the Dollar. We did go the other way, but another interesting fact about the Rand is if you last six months, it was $0.00: very, very volatile, intra-quarters and intra-month, but for the second half of the year, it went actually nowhere. So the loss was actually in the first half of the year, but if you manage to buy dollars at the right time and sell Rands at the right time, there were a lot of investment opportunities to allocate capital because of the volatility during that period.
Alec Hogg: Well, moving on now for the local asset classes here in South Africa. It has been an interesting time for equities and, as you said earlier, overall the market here didn’t do too badly, even though, in US dollar terms, it wasn’t great. But in Rand terms, at least it went forward.
David Bacher: Correct. It was also heavily impacted by resource companies. Platinum shares particularly were down – some of them 50 percent. So it was a tale of two outcomes really. Financials were up north of 20 percent, I think 21, 22 percent, while the resource sector was down about 11 percent. So it depends on which equities you were invested in. And those funds that were overweight. Resource shares found themselves at the bottom of the rankings and vice versa. Those who overweight financials and more industrial shares had a better outcome.
Alec Hogg: It’s interesting to notice that property did okay relative to the other sectors in South Africa. But the big winners were resource shares and particularly gold shares. I mean, how many doubling in the year?
David: Bacher Yeah, so gold shares did well. Obviously, the Rand depreciated and the spot price of gold increased. So that’s a good combination if you get to those two key drivers of returns. But gold shares were the exception in terms of the resource basket. Copper, iron ore had a very very tough year on the back of declining commodity prices.
Alec Hogg: Interesting to see Sanlam up nearly 60%. Is there any story there that you can elaborate on?
David Bacher: Sure. Financials as a whole did really well, so that probably contributed to approximately half of the reasons why it had a particularly good period. But company specific reasons I actually don’t have an answer to put forward to you that can attribute that properly.
Alec Hogg: Well, I can tell you one person who’s delighted with that is Paul Hanratty – the ex-old mutual CEO went over and worked for Sanlam, took a lower salary and a bigger incentive and he didn’t look terribly clever for the first couple of years – but my goodness 2023 has been good for the Hanratty household. But worst of the bunch, I guess is pretty sad there to see that the platinum shares, Stillwater and Impala platinum really getting hammered.
David Bacher: I mean losing 50% of your market cap in a year is dire. There’s no two ways about that. It is to some extent the nature of investing in resource shares. They are cyclical, they are highly leveraged companies. But these things can turn quite quickly and it just takes a change in a commodity price – and maybe load shedding – to turn that. So a tough 2023, and hopefully a better 2024 ahead.
Alec Hogg: Isn’t that a theory that some people adopt: where in the year ahead they sell the shares that did the best last year and buy the shares that did worst?
David: Bacher Yeah, it’s called your mean reversion strategy. There are different ways of investing. There’s no one that is right, they’re just different. I haven’t seen enough empirical evidence to suggest that that’s a winning strategy. So I’m on the fence on that one. I don’t think you can limit that kind of outcome to a specific period. We at Corion feel much more comfortable looking at the value at a particular time and relative to a long history and a long outlook, rather take a mean reversion outlook in terms of a company’s valuation as opposed to its company’s return of the previous year.
Alec Hogg: That old story about the voting machine, which Warren Buffett and Benjamin Graham spoke a lot about. So let’s give the best funds, the best funds of the past year, because this is really what theCorion report hones in on every month. The best performing fund in 2023 in general equity, which is, I guess, where most of the money is. Once again, went to Fairtree. These guys are getting it right, David. Nearly 18% return in the year when, as you explained to us a bit earlier, the market itself wasn’t anywhere close to that.
David Bacher: Yes, I mean, I have been quite complimentary of Fairtree in previous interviews. I do want to state though, on this occasion, it’s important to know that there’s two different Fairtree equity funds. So the much bigger fund, which has done really well over longer periods, actually had a tough year. They were overweight resources. This fund, which is still in the house and managed by a different team and different process. actually was on the other side of the scale. So they have two horses in the race. So the one did really well is managed by a different team, and the bigger more flagship portfolio actually had a difficult year.
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Alec Hogg: Multi-asset high equity. Explain that to us and indeed the leader there, Centaur Balanced Fund.
David Bacher: So what the industry does, which is for the benefit of investors, each fund or collective investment scheme has to declare which category it invests in. So clients can know that they’re comparing like funds to like funds. So the multi-asset high equity portfolio is actually the biggest category in the universe. It is funds that, as the name says, have a large exposure to equities. but is regulation 20A compliant. In other words, it’s fit for pension fund, it’s fit for retirement fund. And the retirement fund regulations limit certain things. And one of the things that it limits is that your exposure to equities can’t be more than 75%. So what you’ll find is your high equity funds, your biggest category is those funds that have a significant exposure to equities. but not fully invested in equity. So it will have cash bonds, et cetera, and a more diversified asset mix.
Alec Hogg: And Centaur.
David Bacher: Centaur had a very good year. I mean, 18.2% is significantly ahead of its peers. I think the category average was about 12%. So that’s about a 6% alpha. You know, it’s more of a boutique house. The overweight position to offshore assets and the asset allocation contributed to that. I want to maybe also make a shout out to the 91 Opportunity Fund. And the reason why I’m doing that is it probably didn’t get as big a return as is it’s a significant fund. I think that fund has about 75 billion rands of assets and it came close to that number. So a lot of investors would have been affected. We often punt a lot of the boutique houses and rightly so they’ve done so well. But it’s nice to know that a big fund also had a good outcome in that category. Because obviously a lot of savers would have benefited.
Alec Hogg: Well, I’m going to be talking to Cy Jacobs at the business conference in March. Sadly, all the tickets have been sold. So those who haven’t booked will have to wait for people to cancel now to get back in. We only have 400 people there, David, and it’s two months to go, but Cy will be there. And he can tell us a little bit more about how he makes such a good return on such a huge fund. You say 75 billion. That’s almost the GDP of a small country.
David Bacher: It is a big fund. On the conference, that’s good news as I’ll be there. The bad news is people relying on people cancelling the tickets is not going to be from me. I really enjoy the event and try and get there every year. So looking forward to it.
Alec Hogg: Thank you, David, for your support. It’s always good to have you there as well. That brings the conclusion for our conversation today. And I’m very pleased that we were able to do things a little differently and to use your video to good advantage for those who are watching on YouTube and not disadvantage those who were, or prefer to consume via podcasts. Before we go though, David, after a year like we’ve had in 2023, when there was a view that it was gonna be a really tough year, that equities would probably go backwards, and yet they didn’t, and they went forward quite strongly, especially as you mentioned earlier, the tech funds.
I suppose anybody who makes a forecast is really just looking to get their neck chopped off. But I’m going to ask you anyway to just give us some kind of a rational approach to how we should be looking at our investments in 2024.
David Bacher: I think at Corion, we stress the point, don’t look backwards, look forwards. Look at a philosophy or investment approach that works over time. Sometimes you’re gonna get it right, sometimes you’re gonna get it wrong, but in the fullness of time, if you stick to a proven process, you’re gonna get it right more often than wrong. So on that basis, we still see a lot more value outside the US tech companies.
South African bonds, in the middle of last year were looking really, really attractive. That played out quite nicely. We still think it offers quite an attractive real return for investors. There’s a lot of geopolitical risks – in fact 2024 is probably the year with the most geopolitical risks that I can think of – you’ve got the US elections, South African elections, two wars going on. So there’s lots of noise out there and things to consider.
But given that, there still are attractive opportunities out there. Don’t just think that because tech companies or this magnificent seven are at such an outstanding return over the last year, that necessarily means it’s going to continue often. It means actually the reverse.
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