OMBA’s Sean Ashton dives into contentious waters here by addressing the naivety that produced “ten lost years” for South African investors overly influenced by home bias. He argues that’s not the only myth needing re-assessment, suggesting that a new investment regime may well have taken hold over the past decade and a half. The highly respected asset manager spoke to Alec Hogg of BizNews.
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Edited transcript of the Interview
Alec Hogg: Sean Ashton is well known in the investment community in South Africa. He works with OMBA, which is London-based. He, of course, is based here at home still. But two weeks ago, he wrote a very instructive piece that was published on BizNews, which focused on the American stock market, highlighting how big caps had massively outperformed medium and small caps. This means shares in smaller American companies have performed worse than those in larger ones over the last five years. Now, we’re going to discuss that in detail, talk about the Magnificent 7, big caps, small caps, and even the Gorilla Game, which I’d love to get Sean’s views on. But before we go there, it’s interesting how South African investors have discovered a world outside the JSC. More people are realising they can invest in Amazon, Apple, Nvidia, rather than just Barlow’s Anglo-American and Sanlam. This transition has been rapid.
Sean Ashton: I’m surprised it’s taken as long as it has. I would have thought it would have been obvious as long as 10 years ago. Local investors have woken up to the damage they’ve suffered in terms of missed opportunities. The South African market has become very concentrated, with liquidity focused on a handful of large stocks. If you want global exposure, you’re limited to probably five meaningful stocks outside the resources sector. That’s not good enough. There are many opportunities across various sectors globally.
Alec Hogg: Coronation’s Chief Investment Officer recently mentioned it’s been a lost decade for South African investors. Yet, for most of that past decade, investment firms were focused locally. What has your strategy been in the past 10 years?
Sean Ashton: My strategy has been to focus more on offshore investments. I don’t see myself as a South African investor. It’s hard to make a case for being invested in South Africa. We’re losing critical mass in various aspects. Not until there’s a change in the governing party would I consider it.
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Alec Hogg: When you focus on international markets, does it give you an advantage in this internet age where information is available to everyone simultaneously?
Sean Ashton: Potentially, but it’s tough for professional asset managers. The playing field is leveling, which is good news for individual investors. Our jobs are getting tougher, but that’s ultimately good for savers.
Alec Hogg: Many savers don’t have the experience or resources to invest internationally. Let’s discuss your recent article comparing the S&P 400 to the S&P 500. There’s a significant negative skew in the performance numbers, especially in smaller portfolios. You haven’t had the opportunity for winners to contribute disproportionately in smaller cap indices, unlike the S&P 500.
Sean Ashton: Exactly. Financial markets don’t follow natural distributions. Returns to scale are real, and big winners can become outsized contributors. Market-cap weighted indices naturally rebalance, where big winners become disproportionate contributors and losers get culled.
Alec Hogg: That’s a fascinating analogy, Sean. Just for clarity, could you explain the difference between the S&P 500 and the S&P 400, and perhaps touch on the Russell 2000?
Sean Ashton: Certainly. The S&P 400 typically includes companies with a market cap around $13 billion. However, the largest constituent, Supermicro Computer, which has seen significant growth, now exceeds $40 billion in market cap. Eventually, such companies should leave the index due to inclusion criteria like trailing profitability and liquidity.
Alec Hogg: It’s important for South Africans to understand these differences. In comparison, $13 billion is over 200 billion Rand. Very few South African companies reach that level. Moving on, let’s discuss the “gorilla game” in the tech industry. The larger companies seem to continue growing. Is this a significant factor in analyzing stock performance over time?
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Sean Ashton: Absolutely. There may have been a regime change in the economic structure of financial markets and the economy due to technology. While historically, mid caps have outperformed the S&P 500, the last 13 years have shown persistent underperformance. Large corporations now gain significant economic clout due to network effects and scale, which may impact traditional market dynamics.
Alec Hogg: Your insights into the impact of technology are invaluable. Speaking of, Nvidia has experienced unprecedented growth despite its scale. How do we navigate as investors? Should we focus on smaller companies, or stick with the giants like Nvidia?
Sean Ashton: It’s a case-by-case basis. While opportunities may exist in smaller stocks, we shouldn’t rush to sell winners like Nvidia. However, we must assess if we’re at peak earnings and consider factors like operating margins. Diversification within sectors may also be prudent. Tactical trades like equal-weighted S&P 500 can be useful, but long-term strategies may vary.
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