In conversation with Dave Foord
- We’re seeing currency and trade wars and are now moving into technology wars
- Governments have been too free and easy with this easy money and consequently, at Foord, we have been worried about hyperinflation
- There is massive expansion in valuations because interest rates have been coming down
Dave Foord, the founder of Foord Asset Management, has been managing internationally diversified portfolios for the last four decades and is an active part of Foord’s Cape Town and Singapore based investment teams.
Foord have been the portfolio managers for the Nedgroup Investments Stable Fund since its inception in 2007. They have produced unrivalled performance in the low equity sector, out-performing their peers by more than 2.5% per annum and are ranked number 1 in the sector out of 37 funds since inception.
Dave chats to Nedgroup Investments’ Head of Investments, Rob Johnson, about the events that have unfolded over the last nine months and what experiences have helped him to navigate the current situation.
With the benefit of hindsight, Covid-19 has to a large extent not met initial predictions. Governments, particularly in the west, listened to health authorities who predicted health care systems would be overwhelmed. What transpired was not as severe and governments’ reaction has been found wanting. What was in hindsight needed was urgent testing, isolation of those with the virus, building hospitals and training doctors and nurses. This would have cost less than 1% of the money that has been thrown at the problem – the scale of people who have lost jobs and business that will not survive is a travesty.
The big picture is that an economic war has been going on, which America has been winning. Their advantage has been their technology, which other countries have benefitted from. That technology has sucked money from other economies and taken it back to America who is not paying taxes in those other economies. Europe hasn’t really recovered properly from the global financial crisis so China is the only economy competing with America. We’re seeing currency and trade wars and are now moving into technology wars. It’s noteworthy that Intel is not competing with Samsung and TMSC (Taiwan Semiconductor). Europe is bouncing back from a low base and as they forge ahead with ESG, wind farms, solar and green energy alternatives, they are less dependent on Russian oil with lower energy prices as they go down the price curve. While Europe is on the rebound it can’t compete with America’s technology advantage. Emerging markets are struggling other than China.
Will QE result in hyperinflation?
Modern monetary theory is being labelled by some as the magic money tree, but this cheap money is causing major problems. The volume of money has enabled people to produce more and the easy access to that money by big corporates has increased production and supply. Because interest rates are so low, the cost of the capital comes through in the cost of the item, resulting in disinflationary forces. Inflation hasn’t picked up, but we think it has just been delayed. Governments have been too free and easy with this easy money and consequently, at Foord, we have been worried about hyperinflation, and not just inflation, for some time.
What about fiscal support and the resultant debt?
Some governments have got too much debt and won’t be able to fund it if interest rates go up. Powell announced that they were going to allow inflation to go above 2%. The Fed won’t do anything about this because the consequences of increasing interest rates are going to be dire for the economy. A strong economy is needed in order to get the taxation to meet the government funding. As a result, interest rates may be lower for much longer than we thought.
Market valuations and low interest rates
The asset markets have reacted to lower interest rates in different ways. The bond market was first, followed by property with equities the laggards. Compared to the interest rates on bonds, equities are cheap. Property hasn’t been a safe place to be as rentals have come under pressure and earnings have gone down. While some property sectors are doing well, such as logistics, the old school commercial and retail sectors are struggling.
We expect huge multiple expansions with equites, which is fine if the earnings are there. Private equities, such as plantation and infrastructure are being marketed to pension funds and insurance companies on cap rates using current interest rates. There is massive expansion in valuations because interest rates have been coming down. Listed equities haven’t come into that bubble yet.
The larger tech companies in China and the US are dominating and are expensive on certain valuations. Many of them are still growing and are in a winner take all battle. If you’re a tech company that’s going to be a winner and survive this, the share price will probably continue to go up. Governments get worried when anything starts to dominate the industry and will start to curtail the dominance of these companies, which will impact valuations. At the moment, the momentum is hugely in their favour with Chinese tech companies cheaper than others. We have Tencent and JD in the portfolio, both of which have runway to grow their earnings.
Stable Fund positioning
The Nedgroup Investments Stable Fund has 16% in Foord’s Global Equity Fund, which has been performing very well and 16% in the Foord International Fund. The Global Equity Fund has been fully invested through this period and is up 17% over the last 12 months where the global indexes were up about 7%. We achieved this by being low in oils and financials. With the Foord International Fund, we were worried about the fallout and the valuations. We had put protection, which was wasted as the market went down and came back up again. However, by having that protection, which was about 4% of the value of the Fund, we didn’t need to sell shares at the bottom to protect capital and in fact could do some nice buying at the bottom, buying commodity stocks and other cyclicals and have been able to sell some of the shares we didn’t want at 40% - 60% higher levels than if we’d sold them in the fall. The put protection gave us more flexibility and we’ve recouped our protection cost and lowered the volatility of the Fund.
Is gold still a good protection against inflation?
Gold is a nice diversifier and an insurance policy against hyperinflation. It’s been about 4% of our funds for quite some time for that reason. With the risk of hyperinflation increasing in my view, we’ve increased our gold weighting. The Stable Fund is about 9% directly or indirectly in gold or similar. I wouldn’t be surprised to see gold at 5 000.
What about energy?
Coal and oil are dinosaur industries and are going to be overtaken by new technology and new ESG. The oil industry is not where we want to be.
SA positions in the portfolio
We’ve been able to get a real yield on SA bonds and have a large position in the R186. We earned 9.3% from the R186 year to date or 14% annualised, so a big chunk of the portfolio has been safely achieving the mandate. I think we’re going to see interest rates go lower and may end up with return-free risk. About 34% of the portfolio is offshore with 4% of the Fund in SA businesses. We like international equities because of valuations and earnings prospects. We’re still low on property at 3%, in logistics. SA equities are coming more into line and we are picking up some SA stocks. The SA banks in particular are cheap. I worry about the Rand and with about 30% offshore, we need Rand protection. From my point of view, the Rand is going to 100 at some point in the future. Any SA stocks you have will have to compensate for a weak currency and that’s important in the way we build the portfolio. The weak rand comes back into inflation, which is part of our benchmark and what we concentrate on beating.
SA economic outlook
Our outlook now is unfortunately worse. The big assets that SA has in terms of its balance sheet, the fact that its debt is in rands and not dollars or foreign currency and the fact that the government pension fund is fully funded are all assets that are being whittled away by the government as it borrows more in dollars and starts to lose money in the government pension fund leading to a hollowing out of the economy. Most of the listed shares are foreign based or if still in SA are looking at ways to move offshore. The quality of management in SA has deteriorated quite markedly over the last four years in the companies we can invest in and the choice and number of companies is less, so I’m not that optimistic about the choices we have.
Foord’s investment approach
Rule number 1 is don’t lose money and rule number 2 is don’t forget rule no 1. Compounding needs positive numbers, not negative numbers and compounding is a powerful force. We would rather forego a potential upside to secure less downside. We don’t always get that right and Sasol is a case in point. Losing money is the main risk that we try to manage, which is not easy as we’ve seen with Covid-19. It’s a challenging game and that’s why we love it and try hard at it.