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STANLIB Standpoint October 2016
1. VOLUME 04 | 2016
THE BIG FIVE FACTORS
RESTRAINING WORLD
GROWTH
03
Diversification is not the “be all and end
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3. VOLUME 04 | 2016 | 1
03THEBIGFIVE
FACTORS
RESTRAINING
WORLD GROWTH
Despite unprecedented
monetary stimulus,
world economic growth
remains well below its
long-term average.
What is restraining world
growth?
07DIVERSIFICATION
IS NOT THE “BE
ALL AND END
ALL” OF RISK
MANAGEMENT
Most investors in
South Africa use asset
allocation as the primary
way to manage risk.
However, if the global
financial crisis made
one thing clear, it is that
diversification across
asset classes alone is
no longer sufficient for
mitigating investment
risk.
09INVESTING IN
STANLIB EQUITY
Herman van Velze, Head
of Investments, shares
his views on the world
of investing, the lessons
learnt over time as well
as his thoughts on the
markets.
11STOCK PICK:
CURRO –
A THEMATIC
GROWTH
OPPORTUNITY
The company’s
vision is to develop
80 campuses or 210
schools by 2020. Can
Curro sustain its current
growth trajectory?
13RISKS SHOULD
REWARD NOT
DETRACT
There is no benefit to
taking unrewarded
investment risk.
How can investors
identify and mitigate
unrewarded risk?
NOTES
FROM
THE
EDITOR
Forregularinvestmentupdates,
followSTANLIBonTwitterand
LinkedInorvisitSTANLIB.com
Ihopethatyouwillfindthis
issuethoughtprovokingand
informative.
Pleasefeelfreetosendme
yourcommentsorfeedback.
Youcanreachmeat
stephan.schalekamp@stanlib.com.
Regards,
STEPHANSCHALEKAMP
Editor
STAYING INFORMED
ABOUT THE MARKETS
AND YOUR INVESTMENT
IS IMPERATIVE.
5. VOLUME 04 | 2016 | 3
THEBIGFIVEFACTORS
RESTRAININGWORLD
GROWTH
BY KEVIN LINGS,
STANLIB CHIEF
ECONOMIST
INTRODUCTION
In the immediate aftermath
of the Global Financial
Crisis (GFC) in 2008/2009
the world’s major central
banks, including the United
States Federal Reserve
(FED), the European
Central Bank (ECB) and
the Bank of England
(BOE) provided extensive
monetary policy relief.
This primarily included a
sharp reduction in interest
rates coupled with the
introduction of extensive
Quantitative Easing (QE).
At the time, the FED cut
interest rates from 5.25% to a
record low of 0.25% within a
period of less than a year. ECB
eventually dropped interest
rates from 4.25% to 0.25%
and the BOE lowered interest
rates from 5.00% to 0.50%.
More recently the BOE has
reduced rates by a further
25bps to a new record low
of 0.25%. This was the first
time the major central banks
provided such a coordinated
and emphatic monetary
policy response to an
economic crisis. In total, the
FED has to-date introduced
an additional USD 3.6 trillion
in financial market liquidity.
The BOE, ECB and the Bank
of Japan (BOJ) followed suit
with additional QE.
Despite this unprecedented
monetary stimulus, world
economic growth remains
well below its long-term
average. Furthermore,
economic growth forecasts
have been revised lower on a
very regular basis, including
the IMF’s world economic
outlook that is updated
ECONOMIC
GROWTH
FORECASTS
HAVE BEEN
REVISED
LOWER
ON A VERY
REGULAR
BASIS,
INCLUDING
THE IMF’S
WORLD
ECONOMIC
OUTLOOK
THAT IS
UPDATED
QUARTERLY.
EURO-AREA, US, JAPAN AND UK OFFICIAL INTEREST RATES
UK
Euro-Area
US
Japan
Source: Bloomberg
% 6
5
6
5
6
5
5
07 08 09 10 11 12 13 14 15 16
WORLD TRADE VOLUMES
-22
-17
-12
-7
-2
3
8
13
18
23
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%y/y
Average 7.8%y/y
Average 1.2%y/y
Source: International Monetary Fund
6. VOLUME 04 | 2016 | 4
quarterly. For example,
over the period from 1995
to 2005 the US economy
achieved an average Gross
Domestic Product (GDP)
growth rate of around 3.5%,
spiking to over 4% on a
regular basis. Since 2009, US
GDP growth has averaged a
mere 1.5% p.a and is forecast
to grow at only 1.7% in 2016.
A similar argument can be
made for economic growth
in the United Kingdom as well
as the Euro-area.
Clearlytheextensiveand
prolongedmonetarypolicy
responsefromthemajor
centralbankshasnot
producedthereboundin
economicgrowthmost
analystsandcentralbankers
anticipated.Thisraisesakey
question,“whatisrestraining
worldgrowth?”Itisclearlynot
thelevelofinterestratesora
lackofliquidityinthefinancial
system.
After extensive research, it is
possible to identify at least
five major factors restraining
world growth.
1.
AN INCREASE IN
GLOBAL TRADE
PROTECTION
Many countries, including
the United States, United
Kingdom and Euro-area have
experienced a rise in right-
wing politics in recent years
and a clamor for increased
protectionism. This is partly
in response to the perceived
ill-effects associated with
globalisation, the escalation
of the migrant crisis in Europe
and the ongoing erosion of
manufacturing activity in
many developed markets.
The result is that the G20
countries, according to the
World Trade Organisation
(WTO) have more than
tripled their number of trade
restrictions since the GFC.
This, unsurprisingly, has
contributed enormously to
a slowdown in the rate of
growth of world trade. In fact
the volume of world trade
has slowed from a growth
rate of almost 8% in the years
prior to the GFC to a mere
1.5% in 2016. This would be
the slowest pace of growth
in global trade since the
financial crisis of 2009.
Historically strong trade
growth has been a sign of
strong economic growth, as
trade has provided a way for
developing and emerging
economies to grow quickly
and strong import growth
has been associated with
faster growth in developed
countries. While the benefits
of trade are clear, it is also
clear that the benefits have
to be shared more widely.
The slowdown in world
trade is very closely related
to the overall slowdown in
world economic growth.
Consequently, the increase
in trade protectionism has
contributed to the somewhat
sluggish and disappointing
global economic
environment.
2.
A LACK OF FIXED
INVESTMENT
ACTIVITY
In most developed
economies the cost of
capital is at a historical
low. This is partly reflected
in corporate bond yields,
but it is also reflected in
the cost of bank debt.
Despite this, the sharp pull-
back in fixed investment
that occurred during the
GFC has largely been
sustained in recent years;
including infrastructural
development by the public
sector. For example, over
the period from 1990 to
2008 fixed investment
activity in the developed
world amounted to an
average of 23.3% of GDP.
Since the GFC, this ratio has
dropped to an average of
only 20.3%.
This three percentage point
reduction in fixed investment
activity amounts to a
staggering USD 1.3 trillion less
fixed investment activity at
2016 prices. A similar trend
has occurred in the Euro-
area.
Without a relatively strong rise
in fixed investment spending,
including infrastructural
development, it is hard for
most economies to generate
a vibrant and sustained
increase in employment that
leads to much more vibrant
economic growth across a
broad range of economic
sectors.
3.
DEPENDENCY RATIOS
IN DEVELOPED
MARKETS
Globally, life expectancy has
been trending higher for a
number of decades and was
recently recorded at just over
70 years having been as low
as 45 years shortly after the
Second World War. This is
understandable given regular
breakthroughs in medicine as
well as a general increase in
access to modern medicine.
Onitsown,theriseinlife
expectancywouldnot
necessarilybeexpected
torestrainglobalgrowth.
However,crucially,there
hasbeenaremarkable
shiftindependencyratios,
especiallyinthedeveloped
world.Forexample,theyouth
dependencyratio(thatisthe
numberofdependents,aged
zeroto14asapercentageof
thetotalpopulationaged15
to64)hasfallensharplyfrom
around48%in1960toaround
26%in2016.Thishasoccurred,
primarily,becausethebirth
ratehasfallenin-linewiththe
growthinaveragehousehold
incomes.Incontrast,the
elderlydependencyratio
(thatisthenumberof
dependentsovertheageof
65asapercentageofthetotal
population,aged15to64),has
risensharplyfromamere14%
in1960to25%in2016.
This change in the
composition of the total
dependency ratio in the
developed world is having a
DEVELOPED MARKETS FIXED INVESTMENT AS % OF GDP
17
18
19
20
21
22
23
24
25
26
27
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
% of GDP
Ave 1990 - 2008
Ave 2009 - 2015
Source: International Monetary Fund
7. VOLUME 04 | 2016 | 5
profound impact on global
growth. This includes the
lack of young entrants to
the labour market coupled
with the need to divert
an increasing amount of
resources into supporting
the elderly population. The
net result is a change in the
composition of economic
growth (for example more
spending on healthcare) as
well as an overall restraint
on growth given that older
people use credit much more
sparingly compared with
newly employed younger
people.
4.
THE REBALANCING
OF THE CHINESE
ECONOMY
Chinaisinthe processof
rebalancingitseconomy.
ThisimpliesthatChinais
endeavouringtoshiftthe
composition of itseconomy
awayfromfixedinvestment
activityandtowardsa
greaterroleforhousehold
consumption, including
theconsumptionofboth
goodsandservices.This
fundamental shiftin structure
oftheChineseeconomyis
alreadywelladvancedand
isexpectedtocontinuefor
many years.
WhilethegrowthinChinese
householdconsumption
willbewidelyapplauded
internationally,theslowdown
intherateofgrowthin
fixedinvestmentactivityis
havinga profoundimpacton
manyemergingeconomies,
especiallycommodity
producers.Thisisbecause
theslowdowninfixed
investmentactivity (coupled
witha relativelyrapidrisein
thecostofmanufacturing
productioninChina)hasled
toamoderationintherateof
growthofindustrialactivity
andasharpfall-offinimport
demand–especiallythe
importationofcommodities.
Thenetresulthasbeen
lowercommodityprices,
whichhasunderminedthe
economicperformanceof
manyemergingeconomies,
includingSouthAfrica.
Theprocessofrebalancing
theChineseeconomyisvital
foritssustainedeconomic
success. IfChinaisable
tosuccessfullytransition
fromaninvestmentbased
economyintoaneconomy
thathasahealthymixofboth
consumptionandinvestment
itwilleasilybecomethe
largesteconomyintheword.
However,givenhowimportant
China’seconomicgrowth
hasbeentocommodity
producersinrecentyears,
China’seconomicrebalancing
DEVELOPED MARKETS AGE DEPENDENCY RATIO
(Ratio of Working age Population to Non-Working age Population)
Source: US Census Bureau
Age 65+ as % of working age (rhs)
Age less than 16 as %
of working age (lhs)
10
12
14
16
18
20
22
24
26
20
24
28
32
36
40
44
48
52
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
CHINA IMPORTS
-40
-30
-20
-10
0
10
20
30
40
50
60
70
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
% y/y, 3-month moving average, USD
Source: National Bureau of Statistics of China
THERE HAS
BEEN A
REMARKABLE
SHIFT IN
DEPENDENCY
RATIOS,
ESPECIALLY
IN THE
DEVELOPED
WORLD. FOR
EXAMPLE,
THE YOUTH
DEPENDENCY
RATIO HAS
FALLEN
SHARPLY
FROM
AROUND 48%
IN 1960 TO
AROUND 26%
IN 2016. IN
CONTRAST,
THE ELDERLY
DEPENDENCY
RATIO
HAS RISEN
SHARPLY
FROM A MERE
14% IN 1960
TO 25% IN
2016.
8. VOLUME 04 | 2016 | 6
China’s
economic
rebalancing is
undermining
world
economic
growth in the
short-term,
especially
emerging
economies.
of respondents
think that there is a
86%
Source: World Economic Forum
in the world
today
leadership
crisis
isunderminingworld
economicgrowthintheshort-
term,especiallyemerging
economies.
5.
A GLOBAL LACK OF
CONFIDENCE
The level of economic
sentiment, measured on a
global basis, is noticeably
lower now compared with
the level of confidence that
prevailed prior to the GFC.
For example the Sentix
index, which measures
confidence levels in the
major economies, averaged
an index level of 25 prior
to the GFC. Since the GFC,
the indicator has averaged
around eight index points.
There are a wide range of
factors that help to explain
the lower average level of
economic sentiment. This
includes a crisis of leadership,
especially political leadership.
In fact, according to the
World Economic Forum’s
Global Leadership Index for
2015, 86% of respondents
think there is a leadership
crisis in the world. There are
also numerous research
reports highlighting the
growing wealth divide in the
world, as well as rising levels
of corruption. Transparency
International highlighted
in their 2015 report on
corruption that more than six
billion live in a country that is
considered highly corrupt.
The combination of increased
corruption, a growing wealth
divide and a lack of effective
leadership has clearly
combined to undermine
economic sentiment on a
global scale. Lower levels
of confidence are typically
associated with an increased
reluctance to undertake large
purchases (for example the
purchase of a house), but also
a reluctance by the business
sector to invest in additional
machinery and equipment.
CONCLUSION
Eight years after the GFC, it is
evident that although central
banks were very effective in
responding to the financial
crisis, the key factors holding
back the world economy
today are largely unrelated to
the level of interest rates or
the amount of QE on offer.
Instead, there needs to be
a renewed focus on other
critical policy measures
such as trade, competition,
labour, industrial and
fiscal policy. This includes
the development of vital
economic infrastructure.
Under current
circumstances, all of these
policy areas have the
potential to lift world growth
much more effectively than
further monetary stimulus.
GLOBAL ECONOMIC SENTIMENT (SENTIX INDEX)
Sentix global confidence index
-50
-40
-30
-20
-10
0
10
20
30
40
50
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016Confidence prior to financial crisis
Confidence post financial crisis
Source:Sentix
9. VOLUME 04 | 2016 | 7
DIVERSIFICATION
IS NOT THE “BE ALL
AND END ALL” OF
RISK MANAGEMENT
FINANCIAL ADVISERS
NEED TO CHOOSE A
FUND MANAGER WHO
UNDERSTANDS THE
REAL CHALLENGES TO
RISK MITIGATION.
Most investors in South Africa
use asset allocation as the
primary way to manage risk.
An investor’s allocation to
equities, bonds, property
and cash (including offshore)
goes towards determining
their risk profile, namely low,
medium or high-risk investor.
However, if the global financial
crisis made one thing clear, it
is that diversification across
asset classes alone is no
longer sufficient for mitigating
investment risk – especially
over the short-term.
The theory behind asset class
diversification stems from
the idea that asset classes are
affected by different macro-
economic drivers. They,
therefore, respond to those
macro-economic drivers in
different ways at different
times. In other words, the
main asset classes are
uncorrelated, or at the very
least have a low correlation to
one another over the medium
to long-term.
When investors diversify
their portfolios across asset
classes they are looking for a
balance of good returns from
growth assets (equities) with
portfolio protection (from
bonds or property) when
growth assets perform poorly.
It is the classic “don’t put all
your eggs in one basket” line.
However, as we have seen
over the last two decades
or so, global markets have
not been kind to investors. In
an effort to adjust to a new
investment environment -
one where quantitative easing
is a mainstay, interest rates
are close to zero in global
markets for five years or
more and where the search
for yield is increasingly
difficult - capital allocators
(fund managers and private
investors) are seeking new
ways of mitigating, managing
and embracing risks.
Anewwayoflookingat
portfolioriskisrequired.That
involvesbreakingdownequity,
bond,property,cashand
evenoffshoreriskstolook
atitssub-componentsand
characteristicstogetabetter
understandingoftheoverall
risksbeingcarriedinaportfolio.
Whataretherealrisks,where
dotheylie,andhowdothey
behaveduringnormalbulland
bearmarketcycles,aswellas
timesofextremestress?
To achieve true portfolio
diversification and some
degree of risk mitigation,
investors should be looking
at many different return
sources. In doing so, you have
to understand the granular
risks within asset classes and
search for the small areas of
risk-premia that are mispriced
and could become a source
of returns, diversification or
downside risk protection.
SO WHAT IS THE
SOLUTION?
The solution lies in how
risk is viewed, understood,
measured and managed in a
portfolio, which comes down
to the type of fund manager
an investor chooses and how
adaptive that manager can
be when risks, or even the
perception of risks, change.
Individual or pension
fund investors invested in
outcome-based portfolio
solutions with specific return
objectives and time horizons,
should be particularly diligent
at ensuring they are invested
with a fund manager who is
thinking abou t risk in the right
way.
Country risk, for example,
can affect an investor’s
equity, property as well as
fixed income exposures in a
positive or negative way.
In South Africa, a large portion
of our property and equity
market is now made up of
counters with a high degree
of offshore exposure. As the
rand weakened through 2015,
South African equities held up
surprisingly well.
“The best way
to control risk
is to diversify,
but we need
to do it more
intelligently.”
Post-Crises
Investment
Management
Mark Kritzman
BY MARIUS
OBERHOLZER,
HEAD OF ABSOLUTE
RETURN STRATEGIES
10. VOLUME 04 | 2016 | 8
Conversely, rand strength
could have a negative impact
on equity returns for the
same reason (rand hedge
stocks make up a large
portion of the Top 40 JSE
listed companies). With a
stronger rand, an investor’s
direct offshore assets do
not perform as well as they
should on a comparative
basis. In this case, geographic
equity diversification may not
help to protect an investment
portfolio in the way an
investor intended it to.
The point is that investors
need to ensure their fund
manager is thinking about
risks at a granular level and
are considering scenarios in
which certain risk premia will
impact a portfolio positively
or negatively.
STANLIB Absolute Returns’
thinking about asset classes
is that they are simply neat
labels. In our portfolio
construction process,
we seek to break down
each asset class into its
component parts to try to
isolate the embedded risks
(or real drivers of returns).
Webelievethisisbecoming
evermoreimportantgiventhe
extreme nature of valuations
withinsomeassetclasses.
By having a better
understanding of what risk
factors we are exposing our
portfolios to and highlighting
where we may be duplicating
the same risk factors, we aim
to avoid fooling ourselves into
thinking our portfolios might
be highly diversified when in
fact the underlying assets
may be highly correlated.
However, we also believe
that this approach is not a
panacea to all portfolio risk.
The important aspect is to be
flexible, to consistently define
and redefine risk and respond
accordingly.
Being aware of the embedded
risks in assets and portfolios
is a superior way of building
more sustainable return
profiles in portfolios over
the medium to long-term.
However, the only way to
truly protect portfolios
from adverse outcomes in
the shorter-term is through
outright hedging strategies.
The question then becomes,
what do you want to hedge?
Do you hedge equities,
property or fixed income
exposure, or is a better
solution having specific
hedges in place for adverse
outcomes in currencies,
investor’s inflation
expectations, short and long-
term interest rate changes,
political regime shifts,
currency changes, political
risk or even capital flows.
Our Absolute Return
approach is simple.
If we understand the
overwhelming risk/return
factors that are embedded
into our portfolios, we are
in a position to seek out
truly uncorrelated assets,
which allow us to improve
diversification and reduce
portfolio risks. We combine
these with specific tail
hedges for unknowable or
very low probability events.
We then test our portfolios
for stressed situations
and shock events to prove
that we have constructed
a portfolio that can take
advantage of the inevitable
opportunities that are
thrown up during times of
market tension.
THE ONLY WAY TO TRULY PROTECT
PORTFOLIOS FROM ADVERSE OUTCOMES IN
THE SHORTER-TERM IS THROUGH OUTRIGHT
HEDGING STRATEGIES.
11. VOLUME 04 | 2016 | 9
AS AT OCTOBER 2016,
WE WILL BE MOVING
ALL OUR EQUITY FUNDS
INTO ONE GENERAL
EQUITY FRANCHISE.
Herman van Velze, our Head
of Investments will head up
the general Equity Franchise.
I managed to catch up with
him about his views on the
franchise. Herman spoke to
STANDPOINT about how he
sees the world of investing
and shared some of the
lessons he has learned as
well as his thoughts on the
markets and growth outlook
going forward.
This is what he had to say.
TELL ME A LITTLE
ABOUT THE GENERAL
EQUITY TEAM?
“As the Head of the Equity
Franchise, I will be working
closely with Theo Botha
and Ndina Rabali who bring
a wealth of experience to
the team. Theo and Ndina
are both highly numerate,
individualistic and are able to
make decisions quickly and
accurately. This is a critical
skill-set for us. Theo has
been in the business for 20
years and has been an equity
analyst and portfolio manager
for our Industrial Fund. Ndina
also started as an equity
analyst for financial services
and has more recently
branched into a generalist
role looking specifically at our
platinum stocks.
I have a resources
background and have spent
some time in private equity
to gain some alternative
exposure to traditional
equity share investing.
We are defining the
investment case for each
asset and are keen to start
sharing our thinking with
clients in the coming months.
Ourintentionistofocuson
deliveringonourinvestment
promisetoourclients
andcreateanenergetic
environmentwhereour
investmentprofessionalscan
thrive.”
WHAT DOES THE
TEAM FOCUS ON
WHEN INVESTING IN
EQUITIES?
“We are in the business
of creating wealth for
our clients over the long-
term and so we are very
selective when we choose
shares for our portfolios.
To grow wealth over the
long-term, we need to look
for companies offering
growth opportunities for our
clients. That is why we seek
businesses that continue
to grow their competitive
position or have maintained
their dominance over
long periods and through
different market cycles.
Generally speaking, growth
companies have a track
record of higher-than-
average earnings growth and
their share prices tend to
reflect this.
This is only one side of the
story, we are also very aware
that we need to understand
the traditional investment
metrics like for example
earnings and the unintended
consequences when
constructing portfolios. This
ensures that the portfolio
manager is well aware of
what needs to happen in the
portfolio to gain the edge we
seek. It in a way simplifies
investing in equities as we
narrow down the investment
universe to the actual
portfolio holdings."
CAN YOU GIVE ME AN
EXAMPLE OF A TREND
THAT YOU WOULD
LOOK AT?
“There are many, one of
the recent trends is that
research shows us that on
average people buy sixty
items of clothing a year. If
you have been invested in
retail shares then you would
have seen positive returns
for the last five years or more
but most recently we have
seen research that indicates
that people are buying less
items of clothing a year. This
trend could have an impact
on retail companies and we
would factor this into our
thinking when we consider
investing in retail shares.
Thistrendwouldthenalso
leadtootherquestions,like
INVESTING IN
STANLIB EQUITY
BY ERICA STUART,
CONTENT
STRATEGIST
BY HERMAN VAN
VELZE, HEAD OF
EQUITY FRANCHISE
12. VOLUME 04 | 2016 | 10
whatarepeople spending
theirmoneyon,and will
consumer-spendingtrends
haveanimpactonother
sectors?
In South Africa, we have a
café culture where people
spend a lot of time in
restaurants and malls, so
should we be looking more
closely at property trends or
be identifying new players in
the market, like for example
Famous Brands.
You would have seen the
headlines recently with
the announcement that
Anheuser-Busch Inbev, won
approval for its USD100
billion-plus takeover of rival
SABMiller PLC. Shareholders
from both companies voted
overwhelmingly in favour
of the acquisition, one of
the largest in corporate
history. The stalwart SAB
Miller falls out of the JSE
equity indices and investors
will have the opportunity
to consider investing in the
Anheuser Busch InBev and
begin trading as a combined
company on 11 October this
year. This in its own right will
provide an opportunity to
build a position in the world’s
largest brewing company.
HOW DO YOU
REACT TO ALL THE
VOLATILITY IN THE
MARKET?
To manage other people’s
money, one needs to be
level-headed with an even
temperament, which I am
and I have surrounded
myself with a team who
has the same disposition.
We believe that investing
and creating wealth for our
clients is not a short-term
event and in the end the
most important thing that
really matters is that we
deliver on our investment
promise to our clients.
We therefore manage our
clients’ money over the long-
term and do not react to
short-term shocks and news
headlines. We stay the course
and continue to manage
the customer experience.
To do this, communication
is critical. We can never
under-estimate why people
invest and so consistency
in messaging and a clear
investment story is key for us.
In the low growth
environment we find
ourselves in currently,
despite the volatility, equities
still have the potential to
deliver good outcomes for
clients. It is important to
remember that the volatility
in the markets remains
heightened and does not
reflect the slow economic
drivers. Sectors and
companies are still healthy
with excellent balance
sheets and a willingness to
commit capital for either
M&M activity or expansion.
The recent spate of capital
raising events is good proof
of what the mood is on the
ground. People just do not
stop dreaming. There are
still opportunities; dividend
yields in South Africa are
quite attractive because
corporates are not spending
money. And despite
confidence being low, trading
volumes on the JSE are still
increasing. This is proving to
be an attractive exchange for
foreign listings.
IF WE WERE TO SIT
DOWN AGAIN NEXT
YEAR, WHAT WOULD
YOU LIKE TO HAVE
ACHIEVED?
“I was reading an article in
Time magazine a couple
of days ago and the article
explained that people
are empathetic by nature
rather than numerate. This
resonated with me. When
you manage someone’s
money, they want to believe
that you are doing the right
thing for them and they buy
into a compelling investment
story. In a year from today,
the equity team would be
most pleased if our thinking
about investments is
understood by our clients
and that we are delivering on
our promise to investors.”
HERMAN, ON A MORE
PERSONAL NOTE,
WHY HAVE YOU
DECIDED TO TAKE ON
THIS NEW ROLE?
This question makes Herman
smile and he answers in
that calm manner that he
has, “Over my more than
20 years in the industry,
I have been fortunate to
spend a lot of that time with
STANLIB. I joined STANLIB
in 1995 as a research analyst
and since then I have held
the positions of Head of
Research, Portfolio Manager,
Head of Balanced Funds
and most recently Head of
Investments.
I have been managing
money since 1995 and have
managed diverse teams of
investment professionals
and seen market cycles. This
new role will allow me to use
all my experience to focus
on managing money, which
has always been my true
passion. I am looking forward
to this new challenge and am
grateful that I have a strong
team working with me.”
In South Africa,
we have a café
culture where
people spend
a lot of time in
restaurants and
malls, so should
we be looking
more closely
at property
trends or be
identifying
new players
in the market,
like for example
Famous Brands.
13. VOLUME 04 | 2016 | 11
CURRO SHARE PRICE AND PE
Curro share - LHS Curro PE - RHS Source: I-Net
7,000 300
250
200
150
100
50
0
-50
-100
6,000
5,000
4,000
3,000
2,000
1,000
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Jun-16
Dec-15
0
STOCKPICK:
CURRO–
ATHEMATICGROWTH
OPPORTUNITY
CURROISAN
EDUCATION PROVIDER
THATWASSTARTEDIN
1998BY THECURRENT
CEO DR. CHRISVAN
DER MERWE.
They develop, acquire and
manage independent schools
in South Africa. Today Curro
comprises 47 campuses with
110 schools serving 42,000
learners, across South Africa
and recently expanded into
Namibia. The company’s
vision is to develop 80
campuses or 210 schools
by 2020. They also provide
tertiary and educator training
which is becoming another
pillar for the investment
thesis.
Webelievethatthereisa
structuralgrowthstoryforthe
SouthAfricanprivateschools
educationsector;asthereare
approximately25,000schools
withonlyabout500being
independent.
Giventhechallengesthat
governmentschoolsface
andthecriticalneedfor
qualityeducation,webelieve
Currohasagoodinvestment
case.Finallywebelievethat
schoolingwilltakepriorityin
ahouseholdbudget,offering
somedefensivequalitytoa
stronggrowthvector.
HISTORICAL SHARE
PRICE PERFORMANCE
The share price performance
of Curro is reflecting the
superior growth potential
of this business, with a 45%
Compound Annual Growth
Rate (CAGR) capital gain over
the past five years. It is clear
from the chart below that
the growth in earnings is far
exceeding the 45% (CAGR)
gain in the share price (the
Price to Earnings ratio (PE)
declines over the period).
The stock’s PE ratio is the
most controversial aspect
of the investment case as it
relates to its valuation. We
will unpack this in more detail
later in the article.
DRIVERS OF CURRO’S
PERFORMANCE
We believe that this is one
of the few thematic growth
stories in South Africa.
Significant room for
growth
There are approximately
25,000 government schools
in South Africa with about
500 independent schools,
offering a significant growth
vector for fee paying private
schools supplying excellent
educational outcomes.
Positive margins
The educational inflation rate
is above the consumer price
index inflation rate, allowing
margins to remain strong
over time.
Scalable business model
Due to the fact that the
capital cost for Curro’s new
BY VAUGHAN
HENKEL, STANLIB
INVESTMENT
STRATEGIST
We believe
that Curro
represents
a very good
entry point into
the high growth
Educational
sector in South
Africa.
14. VOLUME 04 | 2016 | 12
schools is incurred up-
front and the full teacher
complement must be
allocated, each additional
learner incurs almost no
further cost (up to a limit of
25 learners per class). This
creates positive operational
gearing.
Corporate actions
Further growth may be
derived from corporate
action consolidating a
number of schools into the
Curro brand. In addition
there is an opportunity for
Curro to expand outside
South Africa and into tertiary
education.
Risks
Include government
intervention and the brand
health, both of which we
monitor closely.
To date the execution of the
build and purchase model
of the company has been
exemplary, to the extent
that 69 of the 80 campuses
for 2020 (161 schools) have
already been confirmed with
land and planning already
largely complete.
We use a four pillar research
process as a framework for
evaluating companies as
investment vehicles. All our
buy and sell decisions start
with this process. The four
pillars are:
Moat - the ability to keep
competitors at bay
Stewardship - the
competency and track
record of the management
team
Uncertainty - historical
volatility of the company’s
share price and returns
Valuation - the relationship
between the current share
price and the estimated
intrinsic value of the stock
Moat - We believe that Curro
has a narrow moat due to the
combination of two factors;
its geographic footprint and
switching costs. Once a
private school is established
and performing, competitors
are unwilling to invest in the
same catchment area. The
switching cost from a private
school back to a government
school is high, especially
when fees are comparable
(which they are). Curro holds
a significant competitive
advantage by targeting the
middle income community.
Stewardship - This is
another area of competitive
advantage, as the same
management team led by
Dr. Chris Van der Merwe has
been in place since 1998.
PSG via its 55% shareholding
offers financial acumen to
the already operationally
effective management team.
Uncertainty - Given the
early stage of the market
opportunity, the uncertainty
level must be viewed as high;
but our preference is clearly
for large opportunities
such as this. This allows for
mistakes to be made while
investment returns still
remain intact.
Valuation - This is the most
contentious area for Curro.
Although we have various
methods of calculating the
intrinsic value of a stock, we
can illustrate the core thesis
via the simple argument
below.
ThecommonlyusedPE
indicatesthatCurrois
expensiveonatrailingPEof
118x.HoweverifCurroisable
togrowitsearningsat50%per
yearfor5yearsandtheALSI
growsat6%peryear(ALSIis
ata23xPEnow),Curro’sstock
willbecheaperthanthemarket
bythattime.Thekeyfactoris
whetherCurrocancontinue
togrowatthatrate.Webelieve
thatthegrowthwillcontinue,
duetotheafore-mentioned
largemarketopportunity,
significantmarginexpansion
andconsolidationpotential.
CONCLUSION
We believe that Curro
represents a very good
entry point into the high
growth educational sector
in South Africa. The
combination of the market
opportunity, moat of its
network, margin expansion
and well documented
execution make it a BUY for
two STANLIB franchises.
The risks cannot be ignored
and include government
regulation and brand risk
from its many points of
consumer contact.
CURRO SCHOOLS
Source: Curro
Our products
CURRO
Schools 3 300
Ave Fees (R)
(per month)
Ages
(yrs)
Max class
size Curricular
3 - 18
3 - 18
5 - 18
0 - 5
18+
4 800
1 600
2 700
3 300
CURRO
Select
Schools
CURRO
Castle Nursery
Schools
EMBURY
CURRO
Academy
Schools
MERIDIAN
Schools
25
25
35
25
70
Balanced
Balanced
Academic
Balanced
Academic
PIPELINE (CONFIRMED)
Source: Curro
53
123
+11
+22
47
110
+6
+13
64
145
+5
+16
69
161
69
161
Campuses
Schools
2016 2017 2018 2019 2020
15. VOLUME 04 | 2016 | 13
RISKSSHOULD
REWARDNOT
DETRACT
BY RENATE
POTGIETER,
PORTFOLIO
MANAGER, STANLIB
MULTI-MANAGER
WHEN INVESTING,
CLIENTS SHOULD
ONLY TAKE
“REWARDED” RISKS
AS THESE REPRESENT
THE FUNDAMENTAL
OBJECTIVES OF
INVESTING. There is no
benefit to taking unrewarded
risks and as such clients
should minimise these as far
as possible.
An important unrewarded
risk that investors face is that
their investment outcome
does not match their
expectations. This source of
risk arises when the investor
and the investment product
are not aligned. There are two
aspects to consider in order
to minimise this risk. Firstly
the client objective, covering
whether this is appropriately
set, communicated
and understood, and
secondly, the subsequent
design, construction, and
management of the portfolio
looking to achieve the stated
objective.
In this article we will identify
these risks and help investors
to understand them and how
we can mitigate them.
START WITH
THE END
IN MIND
The first step in our
investment process is
product specification and
the setting of appropriate
portfolio objectives. In other
words, start with the end
in mind. This is crucial as
the entire solution stems
from this specification.
This is equally true whether
building a bespoke solution
for a client, where the client’s
customised objective is
of primary concern, or in
building a more general
solution for investors to
select.
If the solution is not aligned
to investors’ requirements
and expectations, it is
irrelevant whether it
performs well or not (in
fact, performing well has
no meaning). The risk
is therefore that either
the product is poorly
communicated to clients
(leading to misunderstanding
from clients), or that the
client has communicated
their needs poorly (leading to
misunderstanding from us).
Aprimarytooltomitigatethis
riskisclearcommunication,in
simplelanguagethatclientswill
understand.Assuch,weneed
toassistclientstorecognise
howproductsbehaveandwhat
theycanexpectfromthemin
variousmarketenvironments.
My favourite test is to
ask whether my sister, a
physiotherapist with no
investment training and
limited knowledge, would
understand the information
provided. We need to make
the information real, for
example if as an investor
you believe that you need
to take on equity risk, you
need to understand that
over time this could result
in higher returns than the
other conventional asset
classes, but as a riskier asset
class, it can also result in
your investment halving
which is what happend
during the Global Financial
Crisis in 2008, or worse as in
the great depression of the
1920s and 30s.
We as a Multi-Manager
are in the position to
provide clients with
greater understanding of
how a particular product
may behave in different
environments (such as
market corrections or
extended bull markets)
because we spend our time
understanding this. We
deploy this understanding
within our own solutions to
create more certainty for
investors than if they were
to invest in just one of these
managers randomly.
ARE YOU GETTING
WHAT YOU THINK
YOU ARE?
Another important aspect
of client objective risk is
an understanding of what
the client’s investment is
measured against, i.e. the
benchmark. We believe that
what is “on the tin” should
represent what is “in the tin”.
For example the STANLIB
Multi-Manager Global Equity
Fund benchmark is the
MSCI All Country Investable
Markets Index, which
incorporates developed
markets, emerging markets
and small capitalisation
stocks, as opposed to the
MSCI World Index which
only represents developed
markets.
If the
solution is
not aligned
to investors’
requirements
and
expectations,
it is irrelevant
whether it
performs well
or not (in fact,
performing
well has no
meaning).
16. VOLUME 04 | 2016 | 14
By benchmarking our fund
appropriately, investors are
able to decide whether they
want to take on the risks
associated with emerging
markets or small caps, or
not. We also believe an
appropriate benchmark
representative of the fund’s
investment universe enables
investors to better assess
the portfolio performance
as it minimises the amount
of off benchmark holdings
(holding a stock that is not
in the benchmark). This
thereby minimises the
amount of market return
(beta) being shown as fund
manager skill (alpha) – this
is particularly important
if performance fees are
charged. An appropriate
benchmark further assists
in minimising the risk of the
client’s expectation being
unaligned to the solution.
SEEING THE WHITES
OF OUR CLIENTS EYES
Another risk mitigation tool
to better align the client’s
needs and expectations
to the solution is through
detailed conversations with
the client during meetings,
or during the product
specification stage for
customised solutions.
We believe in looking at as
many possible variables
to describe the portfolio
to ensure that what we
understand the client’s
needs to be, is actually
what the client is looking
for. For example, in addition
to the benchmark, we can
indicate the typical degree
in variation of the returns
(volatility range associated
with the product), by how
much the product and
benchmark can differ
(the tracking error to the
benchmark), as well as the
typical asset allocation or
sector allocation ranges
(for example the maximum
exposure to credit in a bond
fund).
KNOWWHAT
YOUAREPAYING
The risk of the expectation
and outcome not being
aligned can also arise when
considering the fees paid
by clients. This risk is not
whether the fee charged is
appropriate or not, but rather
whether the fee paid is in line
with client expectations. For
example if a client invests
in a product which charges
performance fees, and the
product outperforms the
benchmark which results
in an additional 4% of
performance fees being paid,
was this expected?
Was the client aware that
the potential performance
fee payable could be this
high, and is he/she paying
for actual performance
received, or was the fee
based on past performance
that the client did not
enjoy because they only
recently invested in the
fund? This again brings
me to my argument that
communication from
product providers needs to
be clear so that clients are
able to make an informed
decision on whether they are
happy to pay the fees being
charged and potentially for
past performance that they
will not be enjoying.
PORTFOLIO DESIGN,
CONSTRUCTION,
AND ONGOING
MANAGEMENT
Once we have gone through
the portfolio specification
process, there remains
the risk that the portfolio
does not meet the stated
objective. To ensure that
the final solution performs
in line with expectations,
we spend considerable
time in understanding the
active managers we may use
as well as any operational
risks that arise when placing
money with a specific
manager. Reducing the
buy list to the managers
we allocate money to is a
complex process which
takes numerous factors
into account, while client
objective is top of mind.
We begin by analysing the
market and establishing what
the key drivers of returns
are and whether any natural
tailwinds exist given the
client objective. With this
knowledge we assess the
alpha potential of our buy list
managers by understanding
their skill given the
investment universe and the
identified tailwinds.
We then construct a
framework to build a
well-diversified portfolio
which allows for manager
independence and flexibility,
while ensuring the overall
portfolio has exposure to the
key drivers identified.
The final strategic manager
allocation is determined to
create a well-diversified,
balanced portfolio that
reflects the identified
market, manager and
portfolio factors. For
example we think for a
global equity fund the
underlying managers
should be given global
mandates. We believe this
to be a more efficient way
to invest when compared
to regional mandates as
global mandates provide
managers with the widest
possible investment
universe covering all sectors,
geographies and currencies,
allowing them to invest in the
best opportunities available
globally.
To avoid the risk of any one
manager dominating the
portfolio, we set a maximum
exposure to a manager. To
allow for the different skills
that each manager brings
to the portfolio, we may set
different benchmarks to
the underlying managers
to be able to assess
them appropriately and
leverage their unique skills.
We will then ensure that
the combination of the
different managers and
17. VOLUME 04 | 2016 | 15
their benchmarks remains
reflective of the client's
objective we have set out to
achieve.
Prior to finalising our
portfolio, we review
the proposed solution
considering multiple aspects.
For example, we evaluate
the underlying holdings
through time, testing
for any concentrations
or unintended biases.
We will also look at past
performance to understand
how the managers and the
multi-managed solution
perform in different market
environments, such as during
the global financial crisis.
Once the portfolio is
constructed it is important
to keep assessing whether
it continues to meet the
client’s objective given any
changes in the environment
as well as changes within
managers. This portfolio
review process provides
an important feedback
loop into the product
specification. This is
primarily assessed through
our close relationships with
managers, the reporting we
receive from them as well
as the strength of our entire
investment team’s view.
We are firm believers in the
power of collective wisdom,
and through rigorous
internal debate ensure that
we remain objective about
our managers. Managers’
current holdings and
performance are inputs
into this process. When
assessing performance we
are careful not to overreact
to short-term performance
(unless it is completely
different to what we would
have expected), and
specifically, not to react
to underperformance by
managers which we assess
to be good. Our governance
structure (and committees)
requires thoughtful
consideration of portfolios
and a robust thesis for any
proposed changes. If we
have done our work well
upfront, we better have a
good reason for changing it.
SUMMARY
Astheinvestment
environmentandclients’
objectivesareeverchanging,
wedoalloftheaboveona
continuousbasistoensure
thattheproductremains
appropriateforourclients.
Wecontinuetocommunicate
clearlythroughpresentations
andfactsheets,sothatclients
remaininformedonwhatto
expectandhowthingshave
changedwithtime.
If any new information
is garnered from client
interactions or the
environment in which we
invest and our underlying
managers that is relevant
for how we construct the
portfolio, we re-optimise
the solution to ensure this
additional information
is incorporated into the
solution and communicate
this to our investors.
However, as mentioned,
we remain diligent in our
evaluation of manager
performance and the drivers
thereof to avoid overreacting
to any underperformance by
good managers.
Investment risks are multi-
faceted and as such require
dedicated focus to all
aspects. A portfolio manager
has to account for all risks
envisaged to ensure the
product delivers in line with
its objectives and client
expectations.
As we have stressed in
this article, the clients’
investment outcomes are
continuously top of mind.
We strive to understand
and communicate the
complex investment world
into information that
clients understand, thereby
empowering clients to invest
wisely.
AS THE INVESTMENT ENVIRONMENT AND CLIENTS’
OBJECTIVES ARE EVER CHANGING, WE DO ALL TO ENSURE
THAT THE PRODUCT REMAINS APPROPRIATE FOR OUR
CLIENTS
18. VOLUME 04 | 2016 | 16
ThereareseveralwaystocontactusatSTANLIB.
OurheadofficeisinMelroseArch,Johannesburg,wherewehave
awalk-ininvestmentcentre,oryoucancallusoruseouronlineservices:
CONTACT US
ONSTANLIBONLINEYOUCAN:
• Viewyourhistoryoftransactions
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JOHANNESBURG(HEADOFFICE)
Physicaladdress: 17MelroseBoulevard,MelroseArch, 2196
Postaladdress: POBox202,MelroseArch,2076
Switchboard: +27(0)114486000
CallCentre: 0860123003(SAonly)
Financial Adviser: 0860104418(SAonly)
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GPScoordinates: S26.1347°,E28.0686°
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RegisternowforSTANLIBOnlineaself-serviceportalthatgivesyou
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Forasimplifiedregistrationprocessthatisjustaclickaway,goto
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ToaccessSTANLIBOnlineandSTANLIBMobile,youneedtobea
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ANDSTANLIBMOBILE
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IfyouareaStandardBankclient,youcanlinkyourSTANLIBunit
trusttoyourStandardBankATMcard.EverytimeyouusetheATM,
youcanviewyourstatement,buyadditionalunitsinyourunittrust
andswitchbetweenunittrustfundsinyouraccount.
HOWTOLINKYOURATMCARD
TOYOURSTANLIBINVESTMENT
CompletetheUnitTrustATMLinkingForm(availableonourwebsite
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If you would like to email the editor,
you can contact him on:
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PLEASE
CONTACT YOUR
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ALTERNATIVELY
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19. Money
doesn’t sleep.
Neither do we.
While you eventually need to rest and recharge
your batteries, the markets never do. It’s why our
investment professionals take an in-depth look
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