At the end of March, retirement fund portfolios reached a low point at which no balanced portfolio with international assets had managed to outperform inflation over 12 months.
There was pressure for fund managers to ditch equities altogether. Fund members with investment choice began to pile into money market funds and other safe havens.
But the balanced portfolio managers that make up the Alexander Forbes Large Manager Watch resisted and maintained their high portfolio weightings. In the domestic-only portfolios, the lowest equity weighting at the end of September, when asset allocation was last disclosed, was Metropolitan at 61,1%. But four managers are nudging the 75% maximum permitted exposure to equities - Sanlam Investment Management (SIM) with 74,1% in equities, Prudential with 73,2%, Old Mutual Asset Managers (OMAM) with 72,7% and Allan Gray with 71,3%.
SIM chief investment officer George Howard says he continues to be positive on SA equities. His reasons are that he expects further upward momentum in the global economic recovery, which should support dollar commodity prices; lower local interest rates are positive for local growth and equity valuations; and the current exceptional strength of the rand is unsustainable.
Conversely, he says bond yields are bottoming out and should start rising once the market starts pricing in higher inflation.
Quaystone, which was relatively bearish with a 59,5% equity holding at the end of June, has reversed sharply and pushed the weighting up to 71,2%, reducing cash from 17% to 4%.
Quaystone MD Anet Ahern says the house was concerned that the strong rand would lead to earnings surprises and depress the market. And lower inflation is not necessarily good news for domestic businesses such as retailers and food producers, she says.
"We have maintained a low exposure to resources but are buying shares that we consider to offer compelling value, particularly SABMiller, Sanlam and FirstRand. Breweries may have overpaid for Miller last year, but at the current share price it is priced at zero, giving us a free option on its turnaround."
Ahern admits that Quaystone has missed some of the market momentum but she says that is consistent with its defensive investment philosophy.
A high equity weighting has recently proved to be the right decision as the JSE all share index returned 7,9% in the third quarter and 9,7% in October.
Over one year to October the Large Manager Watch median of 9,8% is comfortably ahead of headline inflation of about 3,5%.
In the short term, Metropolitan has not suffered from its low equity position as it was third in the year to date with a 11,5% return. Equities head Alida Jordaan says many of the positions that hurt the house before, in media, telecommunications and platinum, worked well and compensated for the lower equity holding.
Metropolitan was light in gold for most the year but picked up some Gold Fields shares at R85 (now R89).
It has been a tough market for Investec, which is now sixth out of 10 over a year and seventh over three years. It has been successful at maintaining its client base but on November 1 Momentum Multimanagers (MMM) dropped Investec from its balanced portfolios.
MMM head Wayne McCurrie says it is nothing personal, but he considers Investec to be thinly stretched after losing key staff such as Piet Viljoen and Johan van der Merwe over the past 18 months. McCurrie argues that there are better prospects with other managers and Allan Gray, Sanlam, Coronation RMB and Prudential are the managers in its Fulcrum Balanced product.
But Investec's head of business development, Thabo Khojane, says the house no longer wants to be measured on rolling performance of less than three years. "And our three-year numbers will be above average once our disappointing performance in the fourth quarter of 2000 is out of the numbers."
From 1999 to 2002, the main determinant of performance was the investment style of the fund manager. The value managers, who buy shares at a discount to their intrinsic value and are not primarily concerned with earnings forecasts, have outperformed the growth and agnostic managers.
But over the past 12 months, while Allan Gray has maintained its strong lead in the domestic Large Manager Watch at 24,9%, it is still seven percentage points ahead of second-placed RMB and value manager Prudential is well behind with a 14,2% return.
In the wider domestic best investment view survey, the value managers' performance has varied from 17,4% at Oasis to 16,9% at African Harvest and 12,5% at Foord Asset Management.
African Harvest has merged its Growth and Value silos into a single investment team. Chief investment officer Rowan Williams-Short says investment style was a revolutionary concept eight years ago, but the thinking has moved to the other extreme, in which some people see growth and value shares as mutually exclusive parts of the market.
The value team will now be the core equity team. Saliegh Salaam and Matt Brenzel, the survivors of the growth team, will run a more aggressive specialist fund with a higher tracking error.
African Harvest equities head Simon Hudson-Peacock says there was a lot more common thinking between the value and growth teams than initially expected when the value team left Prudential in 1999.
The core house view has limited risk tolerance. Unlike Allan Gray, for example, it will not exclude Anglo American or Billiton entirely from the portfolio. "Excluding shares that make up more than 10% of the index each is a very aggressive bet."
The specialist product will try to add some returns by investing more deeply into small caps, and it will sometimes buy shares that might not qualify for the core product on valuation grounds but which are benefiting from market momentum.
Though they are both labelled value managers, African Harvest disagrees fundamentally with Allan Gray on gold shares.
Hudson-Peacock says gold companies are trading on the same margin as two years ago but the prices are three times as high.
Stanlib chief investment officer John Koel, who subscribes to a philosophy of growth at a reasonable price, says the gold price would need to rise to at least US$450/oz to justify current prices. Though Stanlib is still assuming the rand will get weaker, it has no gold shares in its house view portfolios.
In contrast, Allan Gray chief investment officer Stephen Mildenhall says gold shares look cheap on a normalised gold price and rand-dollar exchange rate. He argues that in the longer term the supply of gold is in decline. "And even if the dollar gold price increased sharply, production could not be increased overnight as there have been decades of underinvestment."
RMB chief investment officer Charles Booth says resources have been in an upswing for two years, so the cycle is already mature.
He says the strong rand has tended to mask the strong gains in resource share prices internationally. "The cycle looks tired unless demand from China continues to propel demand for oil and base metals in particular."
Though RMB remains underweight in resources, Booth says he prefers the diversified mining companies, Anglo American and BHP Billiton, to gold.
"The gold price is still well below the $800/oz it reached in 1980 and it has proved extremely difficult to predict the price ever since."
