The y’ello love af­fair

MTN re­mains the favourite hold­ing in ma­jor funds

Finweek English Edition - - Companies & markets - BELINDA AN­DER­SON be­lin­daa@fin­

THOUGH FUND MAN­AGERS agree it’s not the stock pick­ers’ haven of early 2003 when the mar­ket turned, most also seem to con­verge on where in the in­for­ma­tion & com­mu­ni­ca­tions tech­nol­ogy (ICT) sec­tor they’re keep­ing a chunk of their clients’ money – and that’s in MTN.

Fin­week picked a hand­ful of key funds in the gen­eral eq­uity uni­verse for ease of ref­er­ence, with the aim of see­ing what had changed be­tween when the mar­ket bot­tomed and now.

At the end of De­cem­ber 2006, MTN was the top hold­ing in nu­mer­ous unit trusts, in­clud­ing the Al­lan Gray Eq­uity Fund, the RMB Eq­uity Fund, and the Old Mu­tual In­vestors’ Fund, and was among the top 10 hold­ings in the In­vestec Eq­uity Fund. Few in­sti­tu­tions were as ag­gres­sively in­vested in MTN in early 2003, al­though most started build­ing up a po­si­tion in the stock dur­ing that year when it be­came clear Nige­ria was go­ing to be a huge suc­cess.

Th­ese in­sti­tu­tions have long been fans of the tele­coms group and con­tinue to be­lieve the po­ten­tial re­ward out­weighs the risk of op­er­at­ing in po­lit­i­cally un­sta­ble mar­kets such as Iran and Su­dan.

But, as for the rest of the ICT sec­tor, it’s a bit of a mixed bag.

An­thony Sedg­wick, a fund man­ager from Polaris Cap­i­tal, which man­ages the Ned­bank Rain­maker Fund, says that from a val­u­a­tion per­spec­tive, the rat­ing of the mar­ket was a lot lower in early 2003 than it is now. Since then, there’s been a huge rerat­ing.

But, Sedg­wick says that though the mar­ket did per­form well again last year, there wasn’t a sig­nif­i­cant rerat­ing in val­u­a­tions pri­mar­ily due to strong earn­ings growth. How­ever, de­spite a wide­spread sense that the econ­omy re­mains ro­bust and con­fi­dence is high, Sedg­wick says a fur­ther rerat­ing can’t be con­fi­dently jus­ti­fied. He doesn’t fore­see an almighty crack, but cau­tions: “It’s not as mouth­wa­ter­ing as be­fore.”

Polaris Fund Man­agers – as with other in­sti­tu­tions – tends not to pick spe­cific sec­tors. It looks for value in spe­cific com­pa­nies. But gen­er­ally speak­ing, when the mar­ket turned, the Rain­maker Fund was over­weight in ICT shares and con­tin­ues to hold a num­ber of se­lect coun­ters.

The fund did well out of Aplitec and con­tin­ues to hold its share in the trust set up to re­tain South African in­vestors when it delisted from the JSE and listed on the Nas­daq. Sedg­wick says the only pity is that it’s not able to in­crease its stake in the com­pany (it now ac­counts for 2,8% of the fund). It also did well out of lo­gis­tics com­pany United Sys­tems Tech­nolo­gies and Soft­line, both of which have since delisted.

Rain­maker also holds shares in MTN, al­though it never went into it as ag­gres- sively as other man­agers did and ad­mits this hurt (2,5% of the fund cur­rently). Sedg­wick says MTN is a great com­pany, though there’s a lot of risk. Rain­maker also holds Bytes (1,1%), Telkom (2%), and Al­tech (2,5%) shares.

Sedg­wick says the mar­ket gen­er­ally isn’t show­ing sig­nif­i­cant di­ver­gences in val­u­a­tion – the only sec­tor that re­ally has a lot of blue sky built in is con­struc­tion, in the run-up to 2010. On the op­po­site end of the val­u­a­tion spec­trum, there are iso­lated ex­am­ples of com­pa­nies on sin­gledigit p:es for spe­cific rea­sons, such as Grindrod, and Telkom.

Asked if he thought the mar­ket’s scep­ti­cism about Telkom was jus­ti­fied, Sedg­wick said in some re­spects it was, al­though the com­pany con­tin­ued to have strong cash flows and with so much neg­a­tiv­ity built in, it could sur­prise the mar­ket. But there was a dif­fer­ent man­age­ment team – one that did not in­spire the con­fi­dence that the in­vest­ment com­mu­nity had in the pre­vi­ous lead­er­ship.

Al­lan Gray doesn’t hold any Telkom shares. Not that it’s the ul­ti­mate ar­biter of value, but the in­sti­tu­tion has been known to spot value so fans of its in­vest­ment phi­los­o­phy would do well to take note.

Al­lan Gray fund man­ager Dun­can Ar­tus says that in the broader tech­nol­ogy sphere it has some Di­data, Datatec and Busi­ness Con­nex­ion shares in its unit trust port­fo­lios. But the sec­tor is very small, so it would be dif­fi­cult to make a dent in a large port­fo­lio, even if a spe­cific counter out­per­formed sig­nif­i­cantly.

Like Polaris, Al­lan Gray pre­vi­ously also did well out of Aplitec. It also be­lieved in Fron­tRange, which turned around ear­lier than most re­cov­er­ing ICT shares and was bought out by US private eq­uity in­vestors. But back­ing Spescom for a turn­around was a very small bet that hasn’t paid off.

Ar­tus says that Al­lan Gray’s hold­ing some ICT shares in­di­cates its be­lief that there’s value in the sec­tor, though ev­ery­thing has gone up a lot. But he adds that

even though a share might be of­fer­ing ab­so­lute value at some point, it must be looked at rel­a­tive to the rest of the mar­ket.

In the gen­eral com­ment on the Al­lan Gray Eq­uity Fund in April 2003, when the mar­ket was turn­ing, it said: “It is dif­fi­cult to find shares that are very ex­pen­sive…we are find­ing an in­creas­ing num­ber of in­trigu­ing in­vest­ment op­por­tu­ni­ties.”

This com­pares with the latest fund facts sheet, in which it cau­tions that ex­pec­ta­tions should be tem­pered.

Ar­tus says Al­lan Gray is in­creas­ing its ex­po­sure to fi­nan­cial shares, a sec­tor it be­lieves should out­per­form from here.

Re­gard­ing other IT com­pa­nies, Ar­tus says rev­enues have not grown sig­nif­i­cantly. How­ever, given that busi­nesses are gen­er­ally run­ning at full ca­pac­ity, they’ll have to spend money on re­plac­ing their equip­ment and in­fra­struc­ture: “If there is a lot of in­vest­ment in the econ­omy, hope­fully IT will catch a rea­son­able por­tion of that spend­ing,” he says.

But while some fund man­agers owned se­lect ICT shares at the start of the uptick and con­tinue to hold some, oth­ers hardly climbed on board the sec­tor at all.

Niche as­set man­age­ment com­pany RE: CM, founded by for­mer In­vestec fund man­ager Piet Viljoen in 2003, has a very lim­ited ex­po­sure to the sec­tor. In the broader tech­nol­ogy uni­verse it holds only Dat­aPro and shares on be­half of clients. And th­ese hold­ings, while ma­te­rial in the con­text of the com­pa­nies’ share­hold­ings, don’t ac­count for a sig­nif­i­cant por­tion of the funds it man­ages.

Fund man­ager Daniël Malan, who worked with Viljoen at In­vestec and joined RE:CM in Oc­to­ber 2003, says the two did a lot of work on the sec­tor while at their for­mer em­ployer, and bought sig­nif­i­cant stakes in Datatec, Aplitec and for clients. Malan says RE:CM’s phi­los­o­phy is to look for stock-spe­cific value, rather than to make a call on a par­tic­u­lar sec­tor. Datatec was a glar­ing ex­am­ple of a clas­sic deep-value in­vest­ment idea a few years ago, when it was trad­ing at a 50% dis­count to the com­pany’s net as­sets.

It and many other ICT com­pa­nies were re­ally cheap at that stage, but this is no longer the case. In fact, Malan says, they also don’t see much value in the broad mar­ket in­dex at the mo­ment.

In the elec­tron­ics sec­tor, RE:CM did have sub­stan­tial in­vest­ments in both Re­unert and Al­tech, but sold out about a year ago be­cause it be­lieved th­ese had reached fair value. They tend to build in a sen­si­ble mar­gin of safety and of­ten sell too early, he said. He con­cedes it missed out on Telkom’s ini­tial big run af­ter the list­ing.

It's not as mouth­wa­ter­ing

as be­fore.

An­thony Sedg­wick Looks for value

in spe­cific com­pa­nies. Daniël Malan

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