Clyde Rossouw, an Actuary, and CFA Charter holder, is the portfolio manager responsible for leading the “quality” boutique at Investec Asset Management.

Clyde was appointed to run the Investec Opportunity Fund in 2003 after which he was appointed as portfolio manager to the Investec Cautious Managed Fund. In our view, Clyde is best described as asset management’s “safe pair of hands”, and here he provides us with his view on how he invests in today’s low growth environment.

In December 2008, as the world was gripped by the onset of the great recession, US 10 year bond yields fell to 2.12%, a low not seen for more than 70 years.

At that time very few grasped the deflationary risks the world was facing, apart from perhaps central bankers studying the Great Depression. Now, more than eight years on, despite higher stock markets, we still have a term lending rate to the US government of 2.03%.

Why have yields remained so low, when the world is in recovery mode?

This question has been perplexing economists and has occupied the brightest minds. Part of the riddle might be better understood if the message from the current commodity price landscape is considered, with oil prices at levels last seen in 2008. We believe low commodity prices and low bond yields confirm depressed levels of economic activity at a macro level, and also unfortunately significant intrinsic business model risk at the asset level.

Commodity companies compete only on price. They are currently not generating sufficient cashflow to cover their capital spending plans to maintain assets. This requires them to either shrink their operations or to cut costs. Sometimes cutting high cost mines produces diseconomies of scale, as in the platinum sector, where declining smelting throughput raises unit costs.

Most commodity companies are acting rationally at a micro level, but this behaviour in aggregate is lowering the overall cost curves at a macro level without improving firm-relative prospects.

Highly financially leveraged businesses require further equity funding or face closure or business rescue. Cutting production has devastating social and governmental impact and is considered a last resort. This all means the down cycle will last longer than previously expected if higher demand does not return. Barriers to exit are high. Despite years of relative underperformance from Resource shares, we do not think there is substantial opportunity to invest yet.

Low bond yields at first seem uninspiring, but the experience in Japan serves as an example where bonds have proved to be great investments because people continuously overestimated inflation. We know that the default risk of the US government is very low. Hence the fact that investors are prepared to commit substantial finances to US Treasuries suggests a very low expectation for inflation and an anaemic expectation for growth, or a mistrust of alternative investments.

“In a world bereft of growth opportunities, growth is priced at a premium” CLYDE ROSSOUW | Co-Head Quality

What should an asset allocator do?

If the hurdle rate is so low, and the Federal Reserve is unwilling to raise interest rates from near zero, should one consider investing in growth assets if there is no meaningful growth?

We believe quality businesses are more likely to produce consistent levels of growth during times of economic uncertainty. Quality equities:

Provide compelling value

Analysing global capital flows highlights that there has not been much new investment in Quality equity strategies over the past twelve months. This encourages us. Despite our funds delivering strong performance, we still see compelling value in owning a portfolio of businesses on a free cash flow yield in excess of 5.7%, growing high single digits, with no leverage, and paying out 75% of the cash produced.*

We accept that part of the perceived valuation anomaly of equities yielding more than bonds is due to the fact that people worry about the pricing power of businesses when low cost of capital and technological disruption slow terminal growth assumptions through increased obsolescence and competition. This raises the equity risk premia demanded above risk free rates.

Manage their businesses for different trading environments

Stable cash generating businesses in consolidated industries have the ability to manage their price structures better than other industries, in our view. They also have the ability to cut costs through optimising distribution and marketing, paving the way for higher incremental margins in a central scenario, or at worst protecting their cash flows in a worse economic outcome .

Are likely to become more active in M&A

South African Breweries is a good example. Our South African strategies have enjoyed a value uplift from the proposal from Anheuser-Busch InBev. But if one looks at the deal multiples paid on this acquisition, it would suggest our portfolio of well positioned assets are around 50% below fair value on similar terms. We would expect more such corporate deals to occur.


Good businesses are more expensive than they have been in the past, but ironically far more valuable in today’s world. The reason for this is simple. In a world bereft of growth opportunities, growth is priced at a premium. Normal cycles produce an abundance of economic growth, which is good for the performance of average businesses. Normal economic cycles create opportunities for higher earnings for all companies and operational and financial leverage can improve returns materially.

This cycle is far from normal and requires differentiated thinking to achieve meaningful returns, not a reliance on what has worked in the past.

*This is based on the Investec Global Franchise strategy, as at 30.09.15.