Can you describe your portfolio of equity investments?
Largely diversified. However, as a consequence of the strategy mentioned below, my long-term equity portfolio has over time become skewed towards Kumba, Exxaro, Old Mutual Group and Santam. Such stocks are significant niche players, and offer high dividend streams. Relative to the indices I also have underweighted positions in other high-cap stocks such as Richemont, Naspers and SABMiller.
How did you select these companies and what do you look for as an investor?
Firstly, my equity investments have to be understood in the context of a broader portfolio that includes bonds and other asset classes both here and abroad. While I do mix the asset allocation to suit evolving economic conditions – for instance, I may hedge or lever my exposures in my short-term portfolio – at the moment I have 65% of my South African portfolio in JSE equities.
My principle view is to buy stocks for the long term: in essence, I buy with a view to never selling and indeed seldom do. I therefore look for stocks which have long-term staying power over a number of criteria. A second aspect of my strategy is compounding: I always reinvest dividends into the same stock – but often delay the re-investment to take advantage of price movements through the next reporting quarter.
Over the long-term the compounding strategy works well but does have the effect of skewing the portfolio towards higher-yielding equities. With a long-term view, given the long-term bull market that we have experienced when there is a significant price mark down, diversified quality tends to recover swiftly. In addition I always keep a certain percentage of this portfolio liquid in order to take advantage of such opportunities (and to take advantage of specific corporate actions).
As to choosing specific stocks, I look for companies that already have a demonstrated dominance of their niche (rather than promises of growth), and have consistent positive price momentum. Having chosen a company based on its fundamentals I then estimate a value line using my own criteria and time my purchase when the market value approximates that valuation. Should a stock not reach a price that I perceive as acceptable, I do not buy.
What returns have you had to date?
Over the past decade my returns have been in excess of 24% a year, though I do not anticipate such high returns in the near future. As a consequence of taking a long-term view it becomes unnecessary to calculate the returns per stock: I simply look at the net asset value of the portfolio adjusted by cash-flows. As I am continuously in the market I can make adjustments whenever necessary.
When one takes a long-term view, you need to view the market from a very different perspective. Over extended periods of time equity markets tend to go up and up – but the investor should be aware that over 40% of the return on long-term portfolios comes from dividends and corporate actions.
Short of an existential crisis and subject to volatility, the macro-economic environment and the interest rate set-up ensures that South African equities should remain attractive for the next few years.
With a good stock selection and by carefully managing dividend flows, one is able to outperform quoted non-total return indices such as the JSE ALSI40. Additional corporate actions such as splits, M&A, in specie dividends and special dividends, when well managed, offer a significant boost to returns.
Hedging is a key decision that needs to be constantly re-evaluated and is a vital weapon in the armory. In 2008 I hedged too early and missed a lot of the upside when I judged that the market had got ahead of itself. Initially it seemed like an expensive mistake – but when the markets cracked the decision was proven correct. In that respect long-term portfolios are a little like piloting an oil tanker!
Who is Mark Wilkes?
Mark Wilkes was among the first traders to take the South African RPE exams (MIFM number 01) and traded bond futures on the first day of futures trading in South Africa. He has traded equities and equity derivatives for several years on the floor of the JSE and traded independently across multiple markets for a number of years.
His main areas of interest are firstly, macro fund management perspectives dealing with the inter-relationships between currencies, commodities and key market indices internationally, and secondly, principal South African equities and ZAR based assets. The combination of these two complement both the spread and CFD offerings made by GT247.
Wilkes has a broad and deep knowledge of the South African market and will always have a trading view responding to current market developments backed up by technical considerations.