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“As an asset class, equities in South Africa are certainly on the expensive side in terms of their own history. Although we are not in bubble territory yet, the market is currently trading at a price-earnings multiple of 17 – it seldom trades at these high levels. However, within any basket, one will always find assets that are attractive. The trick is to find those shares that are cheap and sell those that become too expensive,” he says.

Van der Merwe says SPI has, over the past year, started migrating from ‘cut diamond’ shares – shares with a strong profit record but which are expensive – to ‘rough diamonds’ trading at low levels and which have less certainty in terms of future profits. “Our focus on price has certainly paid off. The rough diamonds we have invested in, such as BHP Billiton, Steinhoff and Wilson Bayly Holmes, which have gone up by more than 38% over the past year, compared to cut diamonds such as Shoprite, SAB and BAT which as a basket went up by only 6.8%.”

He says the resources sector is one area SPI has focused on over the past year. “Mining shares are unloved at the moment, but we think their valuation is quite attractive. Relative to industrials, mining shares are now trading at levels last seen in 1998. The timing on these rough diamonds is always difficult, but we have started to add mining shares in a responsible way.”

With regards to other asset classes, Van der Merwe says it may be prudent to increase cash levels given the risks currently associated with financial markets worldwide. “Our main exposure remains equities, but as a short-term strategy we have recalibrated our asset allocation to include some cash. The equity market is always volatile and may correct itself within the next five years. Having cash increases optionality to buy back assets at better prices compared to their prices when the market is expensive.”

Sanlam Private Investments CEO Daniël Kriel says SPI has had an ‘exceptional past year’, with assets under management in the South African business now more than R100 billion. “Our wealth management unit, which we started only two-and-a-half years ago, has become profitable, and our offshore investments in our new global equity capability now stand at more than R1 billion. In terms of investment performance, our house view portfolio experienced outperformance of 800 basis points on the all-share index benchmark,” he concludes.

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