Guy Czartoryski is the Head of Research, Coronation Asset Management, an award-winning research and market strategist, with deep sell-side and buy-side experience in emerging and frontier markets, equity and fixed income. In this interview with Hope Moses Ashike, he discusses Coronation Asset Management’s recent report titled “Equities for a Superior Return” He also gives insight on the unbeatable combinations for higher Return on Equity (ROE) in companies.
Tell us a bit about yourself and your experience in the Nigerian financial market?
I have covered the Nigerian financial markets since 2009 and I have lived and worked in Nigeria since 2013. I also have worked for Coronation Asset Management for four years. Before covering Nigeria, I had a career covering emerging market equities with Deutsche Bank, UBS and HSBC. We at Coronation Research are very honoured to receive the Investment Research House of the Year award at BusinessDay’s Banks and Other Financial Institutions’ awards on 13 November 2021. We accepted the award on behalf of our company and we see it as setting a standard for ourselves to maintain, and even improve, going forward.
Nigeria is a fascinating financial market with a huge amount of energy, innovation and resilience. The economic landscape changes quickly and financial operators are very quick to adapt. Since 2009 we have written about the recovery from the global financial crisis; the rise and fall of the consumer; crashes in oil prices; several currency crises; and, of course, the Covid-19 pandemic. In the research department we are fascinated by the ability of Nigerian companies to ride out these problems. We ask whether companies in other parts of the world could prosper under the same conditions.
Coronation Asset Management released a recent report titled “Equities for a Superior Return” which explained how investors can overcome the challenge of high inflation through investment in equities. How relevant is this report to Investors, banks and the economy at large?
Your question addresses the key issue facing investors today. From the beginning of 2011 through to the end of 2019, investors in Nigeria could receive a yield on a risk-free Nigerian Treasury Bill (T-bill) that was two-and-a-half percentage points above the rate of inflation, on average. If you think about it, what was happening was a transfer of wealth from the public sector to the private sector. The pension funds and mutual funds grew. Then the monetary authorities decided to put a stop to it, and for the past two years it has not been possible to beat inflation just by holding T-bills.
How can we characterize the way Nigerian investors reacted?
The answer is: “They took on risk.” They were active in the equity market (which appreciated by 50 percent in 2020 and is up this year); they bought fixed income mutual funds; they took on real estate and foreign currency holdings (which have always been popular); and, controversially, they took on crypto-currencies. Institutional investors broadened the range of assets they owned and took on managed portfolios such as credit solutions.
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Some of the solutions that investors took are long-term solutions, others are short-term trading solutions, but all of them involve risk. Risk management is now key to both individual investors and to institutional investors. We at Coronation are dedicated to measuring risk, quantifying risk, implementing risk management and presenting it to our clients.
The author of this report, Adebayo Adebanjo, and the rest of our team asked this question: “What is the long-term solution for equites? Are equities for short-term trading, or are there equities that will reward their holders over the long term?” We had already set out the ground rules in a publication called ‘Navigating the Capital Markets’ in July 2020 in which we established that Nigerian companies need to have an internal rate of return, in this case a Return on Equity (RoE), of 20.5 percent per annum in order to beat the effects of long-term inflation. So, we looked for NGX Exchange-listed companies with that sustainable RoE or 20.5 percent, or better. These reports are available on our website.
Findings from the report showed investment in equities of 10 listed companies produced average annual return of 24.7 percent from 2016 till date, which is far above the 14.26 average annual inflation rates during the same period. What is the implication of this?
The implication is that a small number of equities provide the kind of returns that investors require, but that investors need to be patient and consider the total return, which means receiving dividends from their companies and reinvesting those dividends into the same stocks, year after year. And it means being patient when it comes to volatility and not trading in and out of positions, which is too difficult to get right most of the time. And it means counting the compound annual growth rate (CAGR) of an investment over time, rather than over three months, six months or even a year.
Our list of 10 equities is not exhaustive, so there may be more companies among the many listed on the NGX Exchange that do the job. And there are some equities with long-term RoE slightly below 20.5 percent that also give good total returns. Access Bank shares, for example, gave a total return with a compound annual growth rate of 23.3 percent over the measured period, which certainly gave a good inflation-adjusted return.
For many investors, the equity market remains a speculative arena with high volatility (the NGX All-Share Index rose 50.0 percent in 2020) and risk. Could you please give more insight into why investors should have little to fear now?
It would be a mistake to imagine that there is little to fear. The key to risk management is to quantify and weigh up the risks very carefully, then assess one’s own risk appetite and duration of one’s investment and invest accordingly. So, there are different solutions for different investors who have different aims.
For investors with a medium term (let’s say two to three years) or long term (let’s say five years and more) investment outlook, it is very important to distinguish volatility from risk. If you are too scared of volatility then you might sell when things are going badly, which could mean that you fail to get the full benefit of your investment over the medium and long term. The prices of fixed income bonds and of equities change every day and your stockbroker and your asset manager cannot stop that from happening.
With equity Mutual Funds now at a low base level, your report believes it possible that such funds may experience a reversal in their fortunes in the coming months. What are your reasons?
Equity Mutual Funds now make up a very small portion of the overall funds under management of the Mutual Fund industry, and this proportion has declined over the years. However, nothing in the financial world stays the way it is for very long. If there are at least some equities that deliver a good return and investment managers are able to reflect this in the performance of their funds, with a reasonable prospect that these returns can be sustained, then we may see a revival in equity Mutual Funds.
From your findings, what is responsible for the improvement in Return on Equity (ROE) of some selected companies in over 10 years?
This is a key question for a research-based business like ours. As I have just mentioned, nothing in finance stays the same for long. For our report we found NGX Exchange-listed equities that have a long-term return on equity (RoE) of 20.5 percent or more. Those with high returns may see their returns fall. Those with low returns may see their returns improve. This is what we mean when we say that past investment performance is not a guide to the future. So, the report will keep us busy because we will be looking to predict how things are going to change.
The reasons for high returns are strong management, good market position, and alignment of management with the interests of shareholders. It is an unbeatable combination. Readers of our report, which is available on our website, will find that our selection of 10 companies is sector-agnostic and that the companies have produced good returns throughout the economic cycle. We measured their average RoE over the period from 2010 to the present day, taking a 10-year average and the average over the past three years.
What other key information do you want to spotlight from the report?
We also highlight that, over the period which we measured, the long-term total return of the hypothetical portfolio of our 10 equities would have given a sufficient compound annual growth rate to have given a positive return in equivalent US dollar terms. In other words, in the long run, if you are beating inflation by a good margin then you obtain a positive return in equivalent US dollar terms. This does not hold true in individual years when the Naira exchange rate moves significantly, but over the long term this can be shown to be the case.
