Consistency in volatility
Rezco’s decision to maintain cash at the high level of 60% turned out to be correct. The All Share index shed another 8.2% over July with the fund also realizing a dip in performance. Declines in the resource sector and a strong Rand which adversely affected our offshore exposure combined to bring about the pullback. However despite these movements the Value Trend fund has retained the top position in it’s class over the one two and three years to July 2008. Over three years it comes in at No. 11 out of all 427 equity related Unit Trusts. Equally important to us is that Rezco Value Trend continues to have the lowest volatility out of the best 50 funds over the same period. The fund has achieved a return of 26.8% per annum which is much above the median return in the sector of 14.5% over the same period.
Finding true value
Local economy shares are at really low valuation levels and this has sparked a tremendous rally in the prices of these counters.
The dilemma that we face is what constitutes great value. If we look at the ratio of earnings to share prices, current levels normally would constitute extra-ordinary value. The difficulty in this equation is determining the normalized earnings.
If one takes Standard Bank as a proxy for the banking industry, from 1985 to 1996 earnings grew at the same amount as the overall economy. From 1995 to 2008 their earnings grew at double the rate of the economy. It is clear that the economy has been in a period of extra-ordinary profit over the past 6 years. During times of high growth the banks will grow at a multiple of the economy. During recessionary times the reverse can be true. This is true of most companies. It is clear that many South African companies’ margins have been in the super-profit zone for the past couple of years. The question we must ask ourselves is, “Where will margins settle in a more normal environment?”
A further problem we face is that international markets have gone from a period of incredible liquidity, to a worldwide liquidity crunch. We believe that the effects of this on both economic and market conditions could be severe.
Counter-balancing this is investment truism that one needs to buy when sentiment is at the most negative.
We do not believe that conditions are at the most negative yet and have remained 70% in cash. We are however ready to deploy this cash as and when we feel that the risk reward balance is in favour of equities.
The rough seas continue
The Month of July continued to produce much volatility with the credit crisis still very much in the forefront of investor’s minds. There was a rally amongst the financial shares which offer tempting value. However the broader markets continued with their negative bias as they grapple with questions about commodity prices, liquidity issues and global economic growth. Rezco Value Trend continues to seek to realise its goal of protecting investor’s capital whilst striving to deliver out performance and an absolute return.