Kabelo Rikhotso, the chief investment officer of South Africa’s largest pension fund manager, the Public Investment Corporation, says that if he could, he’d buy more banking and insurance stocks. But the PIC has hit its limit on financial stocks, so it has had to turn its attention to other undervalued sectors: in particular, industrial and resources shares.
This week, the PIC announced its financial results for the year to March, which showed its assets had climbed 3.6% to R2.69-trillion. More remarkably, since March its assets have risen another 11.5%, buoyed by optimism around South Africa’s new government, to cross R3-trillion for the first time. Rikhotso says the PIC is now betting on mining shares like Kumba Iron Ore, South32 and BHP to keep this momentum going.
Were he able to, Rikhotso would buy “cheap” banking stocks like Absa and FirstRand, but the Prudential Authority, which regulates financial services firms to ensure the stability of the financial system, has imposed limits on the PIC’s ability to buy banks and insurers.
This creates a “structurally underweight” position in financial stocks, he says, which means the PIC cannot own more of the shares than the benchmarks against which it is compared.
Yet, the financial sector’s stellar performance this year means the PIC might see a “slight underperformance” relative to the benchmark for the year through March 2025, he tells Currency. On the other hand, “our absolute return numbers are going to be phenomenal” following a 17% rally since March in the JSE’s all share index.
The PIC is now working on a new benchmark with the Government Employees Pension Fund (GEPF), the retirement fund for civil servants on whose behalf it manages R2.37-trillion, so that its performance is a fairer reflection of the limitations it faces.
This new benchmark would “potentially down-weight financials” and, as a result, increase resources and industrials. “The team is working on it. They’re going to take two to three months to conclude it,” he says.
The GNU injection
The civil servants on behalf of whom the PIC invests would be justified in describing its performance for the year to March as lacklustre. The GEPF’s investment return was a sluggish 5.3% – 0.3 percentage points below its benchmark – as listed shares and money markets underperformed relative to their yardsticks.
PIC CEO Abel Sithole is understandably focused on its performance since March and the hope of maintaining its R3-trillion in assets, particularly if President Cyril Ramaphosa’s new government of national unity (GNU) can stimulate GDP growth.
The GEPF isn’t the PIC’s only client: it also manages R146bn for the Unemployment Insurance Fund, R59bn for the Compensation Commissioner Fund, R51.33bn for the Compensation Commissioner Pension Fund and some other smaller funds.
Rikhotso says that last year, the PIC bought more property stocks to make up for the fact it couldn’t invest in more financial shares. This wasn’t a bad strategy, as listed real estate shares were the best performers in its past financial year.
Overall, last year was grim, marked by high interest rates and inflation, a weak rand and political uncertainty. But things have changed since March thanks to the GNU, adding to the momentum created by lower inflation and an interest rate cut last month.
“We’re quite excited,” Rikhotso says. “The mood in the country is very different today.”
Given this tailwind, Rikhotso says he’d keep buying financial shares if he could, especially when you consider metrics that tell you whether a stock is undervalued, like its price-earnings ratio (p:e).
“The banks are still cheap,” he says. “If you look at the likes of Absa, it’s still very cheap from a dividend yield point of view, from a price-to-book point of view, and from a p:e point of view. We still think there could be some legs in the likes of Absa.”
Absa is trading on a p:e of 7.2 with a dividend yield of 6.4%, marginally cheaper than Nedbank (a p:e of 8.4 with a divided yield of 5.4%), Standard Bank (a p:e of 9 and dividend yield of 4.9%), and Investec (a p:e of 7.4 and dividend yield of 4.9%).
This is despite all of these banks having risen notably since the new government was announced.
Too late to the party
The PIC’s strategy when it came to mining shares also saw it leave money on the table last year.
The PIC opted to buy gold – though not in the gold companies like AngloGold Ashanti, but rather in the form of exchange traded funds (ETFs) and exchange traded notes (ETNs), since mining companies are often hard to trade out of.
It seemed a smart move, as gold prices have risen 45% in a year to $2,672 an ounce at last count, driven by central bank purchases from China and Russia, the expectation of interest rate cuts that pushed the dollar weaker, and geopolitical tensions that contributed to people wanting to own physical assets.
Yet gold shares have done even better. Harmony Gold has risen 154% over the past year, Pan African Resources has gained 152%, and AngloGold Ashanti has climbed 63%. This means, on a comparative basis, that the PIC “got hammered”, Rikhotso says.
Now, it is faced with the dilemma of coming “to the party too late” – so it is neutral on Harmony and gold shares.
Instead, the PIC is picking companies like Kumba Iron Ore, of which it owns 2.92%, in the hopes that China’s recent stimulus measures will rekindle prices and stoke demand in the world’s second-largest economy.
“We still like South32 and obviously large groups like BHP,” he adds, though the PIC is still “worried” about coal producers. It owns 1.2% of South32 and 0.88% of BHP.
Bonds are still offering value despite the massive rally they’ve experienced this year, Rikhotso says.
Given that the PIC expects South Africa’s inflation to normalise at about 4.5%, the midpoint of the central bank’s 3%-6% target range, it believes South African bonds continue to offer solid value for long-term investors. That means a 20-year bond trading a yield of about 11.3%, for example, will still produce a real return of 6.8%, he points out.
“Almost the whole of SA Inc has been undervalued,” Rikhotso says. “It’s a once-in-a-lifetime opportunity.”