It’s not a great time for the mining sector in South Africa, nor for the broader commodity market. And it’s also not a great time for financial institutions worldwide. So where does one look when wanting to invest in equities? The answer is industrials and this week’s fund of the week does just that.
Industrials make up roughly 50% of all companies listed on the JSE, with a combined market cap of around 35%. What’s more, many of the industrial sectors are poorly correlated to the JSE All Share Index which creates the opportunity to generate investment returns materially different from those of the broader index. Research done by Stanlib on returns from the three broad sectors some time ago, confirms that the opportunity to add value through stock picking is higher in the industrial area than financials or resources. Industrials therefore offer a greater variety of stocks to pick from as well as diversity of returns.
The outperforming funds of the last ten years have all featured small cap companies but as the global economy remains in a precarious position the risks involved in small cap investing cannot be overlooked. Shares of smaller cap companies are far more volatile than those of larger industrial companies.
An industrial fund typically invests in larger companies which may be a safer haven for investors if the profit cycle peaks and begins to turn down. Smaller companies are often less resilient under these conditions because they are not diversified, often do business only in South Africa, and may not have the market dominance of a larger company.
In an economic upturn, smaller cap companies, especially if they are former mid or large caps, often emerge from near bankruptcy with high debt levels and high fixed cost bases. Profits are very sensitive to growth in revenues as the economy begins to recover. This is when earnings growth is phenomenal and far exceeds that of the large caps
The Stanlib Industrial R fund was launched in April 1992 and has an impressive ten-year track record. The securities included consist of ordinary shares from the industrial sectors of approved exchanges and when appropriate, other securities (including non-equity securities and preference shares).
By investing in companies with a proven track record and solid management team, the fund has delivered a 26.51% annualised return over the last decade.
Good business models tend to remain good for many years, often for decades. Even good companies go through tough times because the economy treats them harshly or because management have made some poor decisions.
But over the long term a good business model tends to generate high returns more consistently.
The fund’s principle holdings include:
British American Tobacco
Aspen Pharmacare Holdings
Mr Price Group
The Bidvest Group
Until next week,