You're listening to Strictly Business Podcast with Lindsay Williams. Welcome, and today we are in conversation with Gail Daniel, Portfolio Manager for the 91 Managed Fund. What a time to be a Portfolio Manager, Gail, but we'll get to the contemporary matters in a moment. Let's look back a little bit, though. The Managed Fund had a fairly difficult Q2 and Q3 of 2024, but a strong recovery, thank goodness, since then. What were the reasons for...
The underperformance, first of all, get that out of the way, and now the recent outperformance. Good morning, Lindsay, and thank you for the call. The fund underperformed in Q2 and Q3, basically on the back of what is looking more and more like a fairy tale of the GNU. So the local market anticipated a big rebound in GDP growth, a big rebound in earnings, took the shares up ahead of it.
but particularly the small and mid-cap shares, which is quite hard for a large fund to buy, and where the market, you know, kind of has a fixation to the extent they create other indices like the SWICs, you know, anything but the large cap shares. And then that faded. Despite GDP growth came in, I think it was 0.6 or 0.7 last year, sub 1%, basically half of what the market was looking for at its height.
And the earnings revisions didn't come through, to spot In some cases, particularly in the consumer sector, where we were very underweight, enormous tailwinds in terms of the two-part no-load shedding, interest rate cuts, low inflation, yet, you know, still with GDP per capita not growing in South Africa, the consumer has struggled.
And as the growth fantasy kind of unwound, so the shares gave back a lot of that growth, we started doing a bit better, And then we benefited from... the initial Trump rally and we benefited from the resurgence in Europe in Q1 on the offshore side and of course the RAND has been a bit weaker since almost touching 17 I think in October we're now sitting at about mid-19s and that helps the fund as the fund has more offshore and peers.
Now, the phrase U.S. exceptionalism, Gail, has sort of crept into our vocabulary, hasn't it? And yeah, it was an exceptional country. It still is or still has the potential to be exceptional, just not quite as exceptional as it was a while ago. Is it over or is this just a pause, do you think? Well, I think for now it's a pause.
And if we look at what was exceptional about the U.S., and it is exceptional in quite a few ways, you know, it has incredibly deep financial markets, it's an incredible internal market, it's very gifted. naturally with resources and geography. But they also had a Fed that was exceptional, very quick to cut. Cut when unemployment was 4% and in Q3 when growth was still very strong. And a Fed, a treasury, which was prepared to have a deficit running close to 7% on 4% unemployment.
So that generated this exceptional growth. And now in a move which actually... is also reasonably exceptional, is that you have a political system, which is an election cycle of four years, attempting to pull back the deficit and being prepared to risk growth. Now, you know, it's very tricky. It's walking a tightrope. It remains to be seen what happens there. So I can definitely oppose there in terms of US exceptionalism. But then if we extend the question, where else is exceptional?
And I don't think China is exceptional. It's taking more and more debt to generate less and less growth. But the area that has been rudely awakened by Trump is definitely Europe. And I think you're going to see exceptional fiscal stimulus finally coming out, because Europe has to now put down its own defense after having for 80 years or so had the luxury of the U.S. paying for their defense so they could roll out. their lovely social system.
And I think we will see exceptional fiscal stimulus in certain areas in Europe. So the funds had more Europe than it used to, and we kind of just picked it up from the bottom up, cheaper shares, good earnings growth. Yes, living in Europe as I am, it really does seem that the Trump factor, the recent Trump factor, has galvanised Europe. We'll see if it plays out anyway. Now, what about South Africa? You have been unattended. apologetically negative on the outlook for South Africa for some time.
You remain underweight SA equities and bonds relative to your peers, but recent developments around the budget and GNU, they've probably sort of embedded that feeling that you have. Well. I think it's probably more apt to call it a GNDU, a government of this unison. And it really does appear that the ANCDA relationship is broken. And, you know, maybe the GNU continues, the ANC as we speak is trying to negotiate, it looks like a different one.
But if you look at substance over form, I mean, what has the GNU generated? Has it generated faster economic growth? No, not yet. Has it generated increased investment? It was supposed to come, but with what's going on with the budget, it's looking increasingly unlikely. So I think we, you know, we're not even through on the budget. There's another vote that needs to come. All this is resulting in forecasts for GDP growth and earnings on local shares being cut.
And GDP growth, which analysts were forecasting excess. 2% for 2025 at the start of the year. You know, we were already at forecasts coming in 1.2, 1.4%, and you can easily make the case for sub-1%. I think it's directly impacting on confidence and this hope and this dream that everyone had that the DA and the ANC were so different and they could get together, and because they were different, it would work, has kind of been shown up just. to be completely unrealistic.
So I think it's going to be very difficult for us here. You know, this is before you bring in the rapidly changing world of geopolitics, but very difficult for us to get growth surprises. To the upside, currency's been weakening and we're vulnerable there. So I just, those earnings forecasts didn't come through last year and they're not coming through now. And I'm afraid I cannot get excited. about the South African economy.
Yeah, a lot of people would say, well, you're being unpatriotic, but of course that's absolute nonsense. You're being realistic. Right, I'm compelled to talk about current market movements, and I must say that since we started this podcast, market movements may have changed because Trump has said something or someone else has said something. But have you changed your asset allocation given the recent turmoil?
Well, I was... reasonably heavy in equities towards the end of the first quarter, but I did take it down, fortunately, ahead of the tariffs. As you say, the situation is incredibly fluid. It's bouncing around all over the place. And at the moment, I was sitting where I would consider neutral equities, neutral risk assets, but more offshore than onshore, obviously.
I'm going to keep the on show I mean, the offshore, as long as I can in terms of the mandate and the regulations, I don't see any reason for the RAND to be strong in this environment. And I think the environment is going to remain very difficult and very choppy. And countries are going to have to pick. Are you with the U.S. or are you not with the U.S.? And I think in terms of geographical asset allocation, the countries and the companies that... Pick the U.S.
We'll do better simply because the U.S. is the biggest buyer, and that is a market you're going to need to sell it to. Obviously, such times present opportunities. Everyone's saying, oh, woe is me. Look at the market. It's down 7%, down 6%. Then it's up 8% or, in the best-ex case in the recent bounce back, up 13% in one day, one of the biggest moves in history. But in adversity comes asset allocation opportunity, Gail. Are you seeing that? Yes, a bit.
Yes, and it's one of the strengths of the fund because the offshore is big in the managed land and you can move that around very, very quickly. And I do. So, for instance, last night when the Trump tariffs were announced, I've been underweight NASDAQ. I bought in. It was up seven when I bought in. Didn't feel too good. Felt a bit better when it closed up 12. But, you know, you have to. It is a very fluid situation.
The market was oversold in due advance, but I don't think we're going from here back into a long-term bull market. I think it will be more difficult. If you look at the course as a whole, you have gone overweight European and UK equities and underweight US equities. So there was a balancing act going on there. What drove the change in geographical allocation? You have sort of answered that in previous answers, but just reiterate, geographical allocation, why?
Oh. I mean, the one thing about the UK is when you go there and you speak to four people in the lift, you're semi-suicidal by the time you get out the lift because they really are pessimistic about the outlook there. And the outlook for growth is somewhat muted, but they do have some very good businesses. For instance, Next, the clothing company, which was trading at a discount to our clothing shares in South Africa at the time with better growth.
They've got some banks there which trade cheaper than our banks with better growth. So it was completely a bottom-up decision that that market has reasonable growth. at an attractive price. And the same kind of story drove one into some of the European banks because where our banks who don't actually cover their cost of capital, such as APSA, trade on 0.9 times book, in Europe, if a company's ROE is below its cost of capital, it trades on 0.4 book.
So our market is not as cheap as people like to think it is. and a lot of people People in South Africa just look at the market of what is the PE relative to historic PE, and they don't really look at it compared to the global ratings. So that's one of the things I found attractive in Europe. And then Rheinmetall, which I have taken a few profits on because I think it was like 120% here today.
But we actually got into that last year, September, October, because before Trump went in, denatored Europe, it had good growth at a very reasonable PE. So, and particularly relative to the US because the US was getting more expensive. Now, the interesting thing with the US shares is that some of them, like booking and Netflix, you know, trade at cheaper multiples and clicks. Now, I don't think those businesses are comparable. So, when I get the opportunity to buy there again, I certainly will.
Okay, final question, which sort of wraps things up. I hope it will anyway to our satisfaction. Managed strategy continues to be a differentiated offering relative to the peers in the sector. That's one of the great things about your fund. What do you think will be your next move in asset allocation? Again, you've answered it to a certain extent.
Are you sometimes tempted, Gail, to get back from work and sit down and watch a bit of business television and say, you know what, I'd rather just sit on the fence? I want to reallocate here and there and everywhere, but it might be wrong in 48 hours. Do you ever get tempted to do that? Or are you planning your next move? I'm not tempted to sit on the fence. I will buy South Africa when the growth rate, if the growth rate picks up properly and the share values are attractive at the time.
And I look forward to doing it. that. I just cannot see the current political environment being conducive to that. And I'm not a natural fence sitter. And I think some of the things that go on in the industry are absolute career protection over investment returns. And at certain things, for instance, certain indices and the creation of them are just completely self-serving. not actually economically sound.
So no, when I'm watching TV or the business news, looking through the business channels, I don't get tempted to do that. Okay, and for now, the week around went to all-time record lows, or very close to it, in the last week or so before this podcast. And the SA sell-off now definitely helping you, isn't it? Yes. It does help me when the rand is weaker. And you know what people forget is that the rand has been very weak against the euro.
Because the rand is sold off against the dollar, it's sold off a lot more against the euro in part. I've been underweighted. I said bonds, they've done badly. I think we're at risk from sanctions from the US. We're at risk that the numbers that the Treasury have put into the budget are just plain wrong. They're looking for 1%, 1.8% growth this year. They're fighting about that. Every day they fight about that, that growth rate's going down and the hole is getting bigger.
So, you know, I'm not tempted there. Gail, thank you very much for your great analysis, as always. Gail Daniel is a portfolio manager responsible for the 91 Managed Fund. The views and opinions expressed in these podcasts are those of Lindsay Williams and various contributors and do not reflect the policy, position or opinion of any other agency, organisation, employer or company associated with StrictlyBusinessPodcast.com.
Assumptions made on the analyses are not reflective of the position of any other entity other than the speaker or the author. And since we are critically thinking human beings, these views are always subject to change, revision, and revision. and rethinking at any time. Please do not hold us to them in perpetuity.