The valuation-driven contrarian

M&G Investments believes that the consistent application of its philosophy and process will lead to sustainable investment performance for its clients over time. Blue Chip speaks to portfolio manager Yusuf Mowlana.

Hedge fund trader analyzing real time stocks on monitors

What prompted you to choose a career in investments?

I was fortunate to be exposed to the stock market at an early age by a close family member. Learning about PE ratios, dividend yields and earnings growth was a good start to understanding investments. The appeal of being able to grow my savings prompted me to open a brokerage account at university while completing my accounting and finance studies. While at university, I read a number of investment-related books which cemented the idea that a career in investments would be an interesting one to pursue as it is intellectually stimulating and I felt it suited my temperament.

Portrait of Yusuf Mowlana, Portfolio Manager, M&G Investments
Yusuf Mowlana, Portfolio Manager, M&G Investments

How would you describe M&G’s investment philosophy?

Valuation-driven contrarian. The best returns can potentially be had from buying investments where one has a different view compared to the market. To be a successful contrarian, one has to be both different to the market and better. To guard against the risk of being wrong and the downside risk to a portfolio, an investment idea would need to also make sense on its valuation metrics.

The M&G Equity Fund you co-manage has won several industry awards and was nominated as the Morningstar Best SA Equity Fund in 2022. What is the secret to your success?

The last three years has been a period of significant valuation dislocation within equity markets, with the JSE being no different. We were able to uncover and exploit opportunities in large, liquid stocks such MTN, Glencore and Sasol where our assessment of the fundamentals was vastly different to what was reflected in the share prices of these companies, and in more neglected areas of the market.

The valuation gap or dispersion between the most expensive and the cheapest stocks in the market was at extremes. This was true even within specific sectors and across them. This valuation dispersion proved to be fertile ground for stock-picking in companies where the fundamentals were at odds with the valuations at which the companies changed hands on the stock market.

What in your opinion are the best characteristics to look for in a company in the current environment for an investor to be successful?

Regardless of the market environment at any particular point in time, the best companies generally have strong pricing power, can reinvest their earnings at high rates of return on capital without the use of excessive leverage and have management teams which act rationally when making capital allocation decisions. An investor wouldn’t want to overpay for these characteristics in case one’s assessment of the durability of these characteristics proves to be incorrect.

The JSE is not a proxy for the economy at all.

What impact do you believe the woes at Eskom will have on South African equity returns over the next decade?

A range of outcomes is possible. On the one hand, if the government were to fully liberalise the electricity sector, the ingenuity of the private sector could be unleashed such that the problems at Eskom need not be problems for the economy as a whole, as they are now. On the other hand, a continuation of the current situation would mean an environment in which the country would struggle to grow real GDP.

Importantly for South African investors, the JSE is not a proxy for the economy at all. Approximately only one-quarter of revenue earned by JSE-listed companies is earned in South Africa. Problems at Eskom would likely affect domestic-focused company returns adversely, but it is by no means a guarantee that equity market returns as a whole will be poor.

Financial planners often must deal with clients who are extremely pessimistic about South Africa and investing in local assets. What is your message to these financial planners?

South Africa isn’t the only country in the world with significant political, social and economic challenges to overcome. While it is important to ensure that your client holdings are sufficiently diversified, the South African market provides one with access to a number of global companies which offer the same diversification benefits one would seek by investing offshore. The most compelling argument in favour of South African assets currently (both equities and bonds) is that they are inexpensive, with South African-focused companies trading on single-digit price-to-earnings ratios. This arguably provides one with adequate downside protection for the risks.

What key lessons would you share from your experience with a young investment analyst starting their first job?

The learning process never stops. The most experienced and prominent investors ensure that they continue learning. Therefore, ensure that you read widely when it comes to investment literature and news. Secondly, it is important to maintain a flexible mindset. This manifests in being able to change your mind on an investment when your assessment of the facts, or the facts themselves, change.

What implications, if any, will Artificial Intelligence have on your job and investor outcomes going forward?

Artificial Intelligence (AI) will likely play a role in augmenting human judgement and input into the investment process. Whether it can completely supplant human involvement is a matter of debate as the AI is likely only to be as good as the dataset it has access to, and potentially the algorithm written by a human or another computer.
Interestingly, the M&G Global Equity Fund is run on an AI model, combined with human judgement, and has been successful in generating outperformance.

What do you like most about your job?

Being able to make a tangible difference to the lives of clients saving for retirement is a great motivator. It is a privilege to be trusted by clients enough to look after their savings and to do so in an intellectually challenging job.

What frustrates you the most about your job?

Being “wrong” on a company despite having done appropriate work to ensure that one had assessed all the risks and pitfalls. Investing is not necessarily deterministic, as events outside of one’s control and “unknown unknowns” may affect outcomes adversely – think of the Covid pandemic or the war in Ukraine as recent examples. This is, however, entirely part of the job and is what can make the job interesting.

What is one thing you would change in the investment industry to improve outcomes for clients?

I am not sure there is an easy way to achieve it, but it would be to guard against clients switching out of investments at a point of poor performance, as this has the potential to destroy a great deal of value.