In tough, volatile economic times, why do equity markets offer an attractive option for investors? For the past five years the global macroeconomic environment has been characterised by low economic growth, low inflation and low interest rates. Analysts put emphasis on the current information and extrapolate this into the future, and the result is large discrepancies in valuations of shares. So how do investors seek out mispriced quality? The PSG Asset Management team consistently applies a process that sees them identify that mispriced quality, buy with a margin of safety and take a long term view on the markets. As the market pitches opportunities to buy mispriced value, the PSG team is ready to exploit the situation, identifying a diversified spread of high quality names that offer yields at a healthy premium to anticipated long term levels of inflation. David O’Sullivan spoke to Greg Hopkins, the Chief Investment Officer at PSG Asset Management about the equity markets, the economic outlook for South Africa, and the successful methodology used by the PSG Asset Management team. – David O’Sullivan
Greg, well thanks very much for your time, Co-fund Manager of the PSG Equity Fund, let’s start by talking about equity markets?
The equity markets are effectively a list of exchanges, so this is where shares are bought and sold and they represent holdings in underlying businesses and these are companies that you will be familiar with and sometimes companies that you’re not, there is a broad range of companies listed on the South African Stock Exchange, over 300 and then many thousands on global stock exchanges.
When you’re buying a piece of paper which is a share certificate and it’s a share traded on an exchange, you’re actually buying an underlying piece of the business, so you become a business owner, which is very, very exciting about the equity markets, you can sit in your office or you can be in the gym or what have you, but you own a piece of the business and the company that you have a shareholding in, they’re effectively working for you. If you view it that way, the rest of the discussions that we have will become quite simple.
Why is the equity market a good place to be as opposed to any other market, why not go into the bond market, for example?
Well, there are actually good opportunities in all the markets that we invest in, so bond markets, particularly in South Africa at the moment and equity markets, but over the long-term, anecdotal evidence has shown that equities have outperformed. They are seen as more risky and there’s a view that if things are more risky you need to actually get a higher return, but over time equity markets do compound, which means that they do grow at a faster rate than the other markets. That creates an opportunity for long-term investors. If you pick the right companies, companies that will grow over the long-term, you will be able to create more wealth if you’re investing in the equity markets.
How do you pick these companies? I’m going to rely on you to do it for me by investing in your fund, but how do you do that, how do you exploit the equity market?
Well, there are a number of investors, or a number of people in the world who are looking at investing in the stock market, so the markets are generally regarded as quite efficient, which means that they normally, a lot of the information that is seen in the newspapers is generally priced in quite quickly, but we at PSG Asset Management have a very simple process that we follow to try and get the odds in our favour to be able to outperform the general markets so we can actually create more wealth for our investors than if you were just to buy the average index. Our process is a very simple one. We call it our “three Ms”, so we’re looking for businesses with a very strong moat. If you go back to medieval times, a moat was a wall of water around a castle to protect that castle.
…read the full interview at BizNews
