JOHANNESBURG (ResourceInvestor.com) -- Classic Business Day continues comparing opinions in a series of interviews designed to determine if the future belongs to the bulls or the bears. Here's a chat with Piet Viljoen from Regarding Capital Management.
LINDSAY WILLIAMS: Piet Viljoen from Regarding Capital Management recently published research he'd done suggesting that the market in the longer term - over the next 10 years I think it was - wasn't quite as bullish as a lot of people might like to believe. Piet, I've lost that research - can you help out?
PIET VILJOEN: I think you summarised it correctly.
LINDSAY WILLIAMS: So what are you predicting over the next 10 years, and why?
PIET VILJOEN: I'd hesitate to choose the word predict, but our assumptions are based on probably below-average real returns from the market over the next ten years.
LINDSAY WILLIAMS: What sort of percentages are we talking about?
PIET VILJOEN: We are guessing around 2% real, which will probably give you in the region of 5% to 8% nominal - depending on where you pitch the inflation rate.
LINDSAY WILLIAMS: That's against the last two years where we've seen 40% if you take the all share index as you bench mark - why so bearish, or why less bullish?
PIET VILJOEN: It's based on very simple mathematics, which tends to work out that way - returns are basically very easily defined by taking your initial dividend yield, adding to that the growth in dividends you'll get from the next ten years - which is over the long term pretty accurately described by the growth in GDP. Company earnings growth grows along with GDP, or is very much in line with that, and dividend growth reflects earnings growth - so you can simplify that whole equation by saying dividend growth over the next ten years will be in the region of whatever GDP growth does.
LINDSAY WILLIAMS: This is going to change the lives of a lot of people - not just fund managers, not just stock brokers - but also the man in the street. We've been used too much better - how do we adjust to this? Should we be looking at our asset allocation models quite seriously?
PIET VILJOEN: I think there are two things investors should be doing - the first thing is the higher the market goes in the short-term the lower they should adjust their long-term expectations. That's just very simple maths. The second thing they should be doing is probably aiming less to hit a six, and more trying to conserve capital - not hitting for the fences the whole time, but being more conservative. I guess in summary we think the market is not going to do very much over the next ten years - having said that, we do think it's going to do not very much in a very interesting way - which means that in the short-term the market can do anything. It can go up a lot, go down a lot - or it could do nothing - we just don't know in the short term.
LINDSAY WILLIAMS: I was talking to another fund manager who said we might get 10% in the very short term in the market, but he's saying exactly the same as you - that the easy money if there is such a thing has been made, and to be very careful. Should we be putting structures into place - should we be using derivatives - or should we just be saying: "If we're 80% exposed to equities we should take that down to 40% or 50%?"
PIET VILJOEN: Yes, I think that's probably sensible. I think any fund manager managing a balanced fund should probably be taking down the equity exposure in this environment. I think a conservative stance is probably called for. It's interesting that you say the easy money has been made - if you look back three years ago people were exceedingly bearish on the environment. Right now you have exactly the opposite - so I guess you should be doing the opposite of what you were doing three years ago. Three years ago you should have been buying - you should be doing the opposite right now given this whole very positive environment we're in.
LINDSAY WILLIAMS: Have you started selling yet, without going into too much detail?
PIET VILJOEN: We have been reducing our equity weighting in our balanced funds for some time now - with the benefit of hindsight probably prematurely, but you can't time these things. We're just doing what we think is the sensible thing with our clients' money.
