Moneyweb interview, Paul van Rensburg

MONEYWEB: Our guest market commentator this evening is Paul van Rensburg. He’s head of research at Futuregrowth Asset Management. Paul, I understand that you were lecturing at the University of Cape Town not too long ago. Everyone talks about the intense volatility that we have these days. The whole investment philosophy – do you think it has changed in what you are teaching at this point in time?

PAUL VAN RENSBURG: As you know, the markets are in constant change and in the research we try and identify those sort of salient facts that persist. But yes, definitely we are in the situation where certain characteristics tend to be associated with better performance than others, as is always the case. We can apply this type of research to the markets at the moment and identify what characteristics are associated with better performance. At the moment I think high dividend yield stocks tend to be rewarded pretty well. I would go for the smaller stocks rather than the larger, particularly in the industrial sector. I think that some of the larger stocks have larger betas and bigger responsiveness to the Dow, and I think the Dow is still not over its woes. With the shares with high momentum, that’s good price behaviour over the last 12 months, with growth those factors tend to be rewarded. As well as positive [indistinct] etc, which are more salient factors that tend to be associated with higher performance.

MONEYWEB: And there’s this big debate that always goes on about efficient markets and they say that our markets are always efficient in the end. I ‘m sure you’ve done a lot of research on the issue. What do you think? Are markets as efficient as people like to believe?

PAUL VAN RENSBURG: Yes, we’ve done a tremendous amount of testing. As one example, I recently supervised a guy’s doctorate, testing to see what characteristics are associated with outperformance. And I believe, if you look at the data, the reality is quite different from what we teach with higher betas and higher returns, as in the capital asset pricing model. People I don’t believe are rational and there are cases of over-reaction and mean reversion in the longer term. People tend to over-react, which results in momentum type of effects and that later leads them to value type of effects.

MONEYWEB: What do you mean by momentum and value effect? Start off with momentum effect – what does that mean?

PAUL VAN RENSBURG: Momentum effects would be, for example, the shares that have done well over the recent past and that continue to do well. And that would be measured by the past price performance for example in the last 12 months. So there is a habit that they tend to run, and that would be related to the over-reaction type of phenomenon.

MONEYWEB: Some people would also call it “herd investing”?

PAUL VAN RENSBURG: Oh yes, there’s definitely a herd effect. I mean, people see how their shares have done over the last while and, if they’ve done very poorly, will they tend to sell. And if they have done pretty well, they tend to carry on and invest more. Typically, the efficient market argument would say that, if there is an anomaly, the rapid reaction of investors should remove that. But you can imagine that if there is a price momentum effect – i.e. that shares that carry on running while trying to exploit that effect would merely exacerbate that effect. To a certain degree our research definitely shows that that exists. We have developed a quantitative investment process that tries to exploit simultaneously a number of these effects.

MONEYWEB: Are you getting it right?

PAUL VAN RENSBURG: Oh, yes. Our performance has been excellent. For two years we have been running a quantitative process. I must make the distinction between passive quantitative, which is essentially index-tracking, and active quantitative, which is actually trying to take best, based on these statistical models.

MONEYWEB: What are you benchmarking yourself against, to say that you are doing well?

PAUL VAN RENSBURG: We have various benchmarks, but generally, if the client gives us a benchmark, if we’ve outperformed that particular benchmark, then we will say we are doing well. And we generally measure whether we are going well by outperformance relative to the tracking error with regard to that benchmark. All funds that we’ve run under the quantitative process have outperformed with information ratios, that’s outperformance divided by tracking error of between 0.5 and 1.5.

MONEYWEB: Banking stocks – quite a few market commentators on this programme reckon that they are quite undervalued, time to pile into those. What’s your view on that?

PAUL VAN RENSBURG: People can see now the peak in interest rates and people have been punting banking stocks for a long time. Some of them like Absa might be a little undervalued, etc. With the strengthening of the rand, this is the right time of the cycle. But I reckon there’s better value and our model tells us to tilt elsewhere in the portfolio.

MONEYWEB: Like where?

PAUL VAN RENSBURG: At the moment, I would prefer stocks that have the characteristics that I mentioned earlier, this high dividend yield, small with good momentum, particularly in the industrial sector. After the crash in ’98, the small caps really got hammered and those survivors, particularly those ones that are starting to show some price strength, are still under-valued. And if I had to name some stocks, I would like shares – and we have really long positions in these shares – shares like Cashbuild, City Lodge, Group Five, Wilson Bayly, Rainbow had some good results, Omnia, Netcare, MediClinic, Hudaco. Those type of shares, they are the cheaper, high dividend yield, industrial-type shares. They’ve got the characteristics that the market is rewarding at this particular moment in time.

MONEYWEB: A long list of shares that Paul van Rensburg fancies. He’s the head of Research at Futuregrowth Asset Management.

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