The y’ello love affair
MTN remains the favourite holding in major funds
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 ERP.com 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 ERP.com 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
Anthony Sedgwick Looks for value
in specific companies. Daniël Malan