Financial Mail - Investors Monthly - - Analysis: Value Funds -

Mo­men­tum Value’s Sam Houlie used to work with In­vestec’s John Bic­card and their port­fo­lios have much in com­mon — even if some of the names are dif­fer­ent. Al­most 18% of the fund is made up by An­glo Plat­inum and Im­plats. Half is ex­posed to An­glo Amer­i­can, pre­cious met­als and tobacco. The only non-re­source coun­ters in the top 10 are Reinet/Bri­tish Amer­i­can Tobacco and Ad­cock In­gram. The dan­ger for value man­agers is to be taken into value traps, which seem cheap, but they are cheap for a rea­son. The most dam­ag­ing of th­ese re­cently has been African Bank, which Mo­men­tum held as a cheaper proxy for the banks, un­der­es­ti­mat­ing the spe­cific risk of the share. It ac­counted for 10% of the fund value when the Re­serve Bank wrote off the en­tire eq­uity of the busi­ness.

Houlie will carry the dis­as­ter of his African Bank hold­ing in his track record for years to come. It was writ­ten down to zero on one day back in Au­gust. Houlie says the value cy­cle has been longer than pre­vi­ously, partly be­cause of the role played by for­eign­ers as well as in­dex man­agers which put more cap­i­tal into the large, liq­uid end of the mar­ket. The move from value has been wors­ened in the short term by the fact that value man­agers (of which In­vestec Value and RECM are the largest) have been los­ing as­sets and th­ese as­sets are then pulled out of value shares and re­de­ployed in the rest of the mar­ket.

Houlie has found pock­ets of value on the industrial board; in the unloved con­struc­tion sec­tor, where he owns Aveng and WBHO; as well as industrial ma­chin­ery, where Torre In­dus­tries (pre­vi­ously SA French) has been a hit. But he has avoided fi­nan­cials, even though he be­lieves banks are not sig­nif­i­cantly over­val­ued. He even says MTN is “look­ing in­ter­est­ing again”. He was an in­vestor in Telkom dur­ing 2013.

Houlie has avoided Sa­sol for the past three years. His main con­tention was that the sta­tis­ti­cally cheap val­u­a­tion ig­nored the high level of earn­ings and the in­crease in US dollar debt on the bal­ance sheet.

The sud­den and steep decline in the dollar oil price has ex­posed th­ese vul­ner­a­bil­i­ties. “We could start build­ing a po­si­tion in Sa­sol once we feel that th­ese is­sues are ad­e­quately dis­counted.”

Houlie has nib­bled on a few new shares so far this year, in­clud­ing Bar­loworld and Sovereign.

Houlie in­vests in two in­ter­na­tional eq­uity funds, the Global Fran­chise and Global Con­trar­ian fund, which ac­count for 6% of the port­fo­lio. They have achieved a 15% re­turn in dol­lars. The con­trar­ian fund mir­rors the phi­los­o­phy of the do­mes­tic value fund. The fran­chise fund (mod­elled on the In­vestec Global Fran­chise fund) fo­cuses on high-qual­ity busi­nesses, usu­ally with strong brands such as Lo­ril­lard (maker of New­port cig­a­rettes), and Fair­fax Fi­nan­cial Hold­ings run by Prem Watsa, who is con­sid­ered to be the Canadian War­ren Buf­fett.

Mo­men­tum Value has just 22 shares with a fur­ther 44 held in the two global funds. Houlie says the fund is more clearly de­fined by what it doesn’t own than by what it does own. There are none of the old favourites such as Naspers, SABMiller or Richemont. It will never be an SA Inc port­fo­lio but one day it will be light in re­sources, as Houlie was in his port­fo­lios at In­vestec back in 2008.

The fund has a price to book of one and a nor­malised PE of 10 com­pared with 2,8 times and a 19 PE for the All Share In­dex.

Houlie is adamant that value in­vest­ing will come back into vogue again and mean re­ver­sion will en­able the fund to re­cover some of the rel­a­tive losses it has in­curred.

“The cur­rent cy­cle is far from over and we re­main op­ti­mistic that our value-con­scious ap­proach will be vin­di­cated when mea­sured over the full cy­cle.”

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