Momentum Value, Investec Value Fund, Cannon Equity, Nedgroup Investments Value, RECM Equity
You might think that everyone would claim to be a value investor — “unlocking value” is the essence of investment. Ten years ago, when memories of the dot.com boom were still fresh, few fund managers did not have value investing as part of their philosophy, even if they tempered this with phrases such as “pragmatic value” or “relative value”. But over the past five years the number of true value managers in SA has fallen to a handful. The style has markedly underperformed the mainstream fund managers with, for example, the Investec Value fund making a nominal 0,3% return in the 12 months to February compared with a 16,1% return from the all share index.
John Biccard, manager of Investec Value fund and the doyen of value investing, says value investing in SA is now ridiculed, smaller value asset managers are closing down and the larger players have experienced significant outflows.
“There is now the largest valuation gap between value and growth stocks ever and, thus, the greatest level of opportunity. We are getting close to the end of the cycle and we now carry the highest level of conviction we have ever held. We tend to be around when the cycle turns.”
But it is not easy: value managers keep losing clients because the value sectors, as they see them, such as platinum and gold, continue to underperform. And as the clients move, the value shares get sold.
John Maynard Keynes, the great economist, said the market could remain irrational for longer than you could remain solvent. And to a value investor’s mind, it is irrational for Naspers to trade on a PE of 110 and Aspen on 34 while Anglo sits on 14 and Pan Africa Resources on 13.
Unfortunately, the market has recently paid little attention to the view that cheap shares deserve to reprice. Instead, expensive shares such as Naspers and Aspen have been getting more expensive and cheap shares, such as Lonmin and Aveng, are getting cheaper.
Sam Houlie, manager of the Momentum Value fund, says the market reminds him of the 1997-1998 period when he was at Allan Gray and the firm (the leading value/contrarian manager of the day) came close to going bust. “At that time the financial services and IT shares were the go-go stocks. The difference this time is that we have to concede that today’s expensive shares, such as Aspen, Mr Price and SABMiller, are quality companies with great management and compelling stories. It is easy to see why they are the darlings of the market.”
But could there be a turnaround similar to August 1998, when the expensive shares tumbled and value investing came back for at least five years? It was a time when Allan Gray made a return of more than 100% in a single year, while the more growth/momentum funds were often down 40%.
A value fund would be the perfect insurance policy against such a market move which, after all, would be no more than a reversion to the mean.
Value is poor among many of the large-cap industrials: the mid-cap sector is another story. Cannon Equity, for example, owns house builder Calgro M3 and motor manufacturer Metair in its top 10. Investec Value owns shares such as Reunert, Tongaat, Illovo, Stefanutti Stocks and Aveng.
Investec Value, Momentum Value, Cannon Equity and RECM Equity all have the characteristics of deep value funds.
We also look at a less purist fund, Nedgroup Investments Value, run by Foord Asset Management. Co-portfolio manager Brian Davey says he struggles to find value in gold and platinum mines. With unrest on the mines it is hard to justify investing in the sector from a risk-reward point of view.
The deep value managers would all disagree with Davey, especially when it concerns precious metals. Biccard says there is a deficit in platinum with production lower than sales. The platinum mines are on a record low price to book, enterprise value to revenue and price to replacement ratios.
Biccard’s view on gold shares is driven in part by valuation but primarily by his macroeconomic view. In the long term quantitative easing will continue and as central banks print money, it will be a catalyst for the sustained upward movement in the US dollar gold price.
The value funds are not all directly comparable. Momentum and Investec include international shares; Foord, Cannon and RECM are purely domestic. And until recently RECM played an asset allocation game in its fund, keeping up to 40% in cash. But under pressure from clients it has turned the fund into a fully invested domestic equity fund.
There is now the largest valuation gap between value and growth stocks ever and, thus, the greatest level of opportunity