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.”