8 EXECUTIVES YOU CAN TRUST TO DELIVER SUPERIOR INVESTMENT RETURNS
In a country where the national savings rate is effectively zero, if you ever want an ice-breaker for a dinner conversation that’s sure to be it. Invariably the discussion will quickly turn to an underperforming unit trust or retirement product or, if you have a more sophisticated audience, then maybe there will be some mention of a stockbroker who’s made some good calls for somebody at the table.
But that still doesn’t answer the original question. And because businesses are actually run by people and not paper shufflers in suits, Finweek set out to find eight business “kingpins” our readers could entrust their capital to over the next few years and see an investment return.
“We pay great attention to management teams who focus on economic returns rather than targets such as ‘turnover of R15bn by 2013’ or ‘in the Top 40 by 2012’,” says Simon Fillmore, of Independent Securities. Fillmore adds: “Simplistically speaking, economic returns measure the income statement profitability versus the balance sheet cost of those returns and checks whether management is achieving return in excess of cost of capital.”
Right, that sounds good. But what does it mean for readers trying to make an informed investment decision and trying and make some money from it? Our answer: Let’s build a portfolio on which investors can strip out all the noise of the next big thing and run with a group of simple, crisply run businesses that offer decent long-term returns.
When we initially kicked around the concept of so-called “intrapreneurs” we felt there had to be some clear guidelines about what readers were getting and how those players would make it on to the list. For that reason we chose to exclude investment holding companies (PSG, Pallinghurst, Remgro and Reinet), private equity (Paladin and Brait) players and listed investment vehicles, such as Foord Compass and the RE:CM and Calibre option.
Those will normally trade at a discount to their net asset value due to their “holding company” nature. We also didn’t like
the idea of suits making money from other people’s hard work by taking away management fees.
Highly regarded small cap analyst Shawn Stockigt, of Stanlib, says the past few years have thrown up some interesting tests of management skills. He uses the example of the construction sector. “Companies such as Wilson Bayley Holmes - Ovcon, Stefanutti Stocks and Ceramic Holdings have so far showed the strength of their management teams,” says Stockigt. “Nick Booth and the team at Ceramics have stood out, keeping costs down and continuing to generate decent cash flows – even paying out a 1500c/share special dividend in an environment where others are scrambling for cash and fighting off rights issues.”
Other businesses singled out by Stockigt include Cashbuild and City Lodge for their ability to survive a variety of different business climates.
An important distinction that needs to be made: it isn’t always about backing an entrepreneur but rather a CE who understands how to make the business – and your investment – sweat for a return. Good examples of that would be Kevin Hedderwick at Famous Brands, Ivan Clark at Grindrod and Michael Jordaan at First National Bank.
For example, a R10 000 investment with Hedderwick in June 2006 would now be worth R44 000, excluding dividends, which would then be contributing another R1 550/year. In other words, on dividends alone you’d be making an extra 15% on your original investment.
That was another key issue for us: If there wasn’t a dividend being paid to shareholders then there had to be a really good reason why not.
Can Clark extract the same value from his investment in small cap paint company ChemSpec that he did at Grindrod? It’s an important question, because in our humble opinion Clark could be the game-changer for that company. For an investor who gets in at 38c his financial well-being could be forever changed if ChemSpec could replicate the returns of the shipping group.
The insurance sector also throws up some interesting debates. Who is the better business leader: Julian Roberts (for his work in turning around Old Mutual), Bruce Hemphill (for weathering the storm at Liberty Holdings) or Adrian Gore (for taking the bull by the horns and turning Discovery into a market leader)?
Adrian Saville, of Cannon Asset Managers and a lecturer at the Gordon Institute of Business Science, says he wasn’t sure he agreed with Old Mutual fitting the mould but agreed it was important to understand the role a CE or chairman can play in selecting a company in which they invest. Saville says there are three pillars on which a company’s management can be judged: the ability to absorb market conditions, be agile when opportunities present themselves and, most importantly, senior management prepared to learn from its mistakes.
In the case of Old Mutual, Saville believes while it scores on the absorption front it’s proven less than agile through the crisis.
Similarly interesting debates are thrown up in the mining sector.
Magda Wierzycka, of multi-manage- ment investment firm Sygnia, points to Cynthia Carroll at Anglo American. “She has faced horrendous criticism and publicity over the decisions she has made: for example, cutting dividends in 2009 when the commodities downturn hit the market and cost-cutting across the business. And yet she’s stuck to her guns and pulled Anglo through.”
Other names to crop up include Mark Bristow, Bernard Swanepoel and Mark Cutifani. Bristow heads Randgold Resources, one of the few gold miners with genuine profits and growth prospects. That’s significant at a time when there’s plenty of talk but limited return for shareholders in gold producers.
Swanepoel is the ex-CEO of gold mining heavyweight Harmony and, depending on who you talk to, he’s either the ultimate “Mr Fixit” who’s going to unlock great value at Village Main Reef, in conjunction with its Simmer & Jack transaction, or it will simply be more bluster. Cutifani heads AngloGold Ashanti. The acid test ultimately was if those individuals were dropped into another business could they make a material change to the culture of the new company and make it run simpler and smarter while delivering returns for shareholders.
“Ego” was a word brought up on occasion and many felt CEs had learnt some humbling lessons due to the global financial crisis, particularly those operating smaller businesses.
Warren Dick, of Investorcentre.co.za, cites BHP Billiton’s Marius Kloppers’ ability to walk away from high-profile deals when necessary. “I appreciated the discipline he demonstrated, because in the example of the hostile takeover of Rio the timing was clearly wrong as the global financial crisis came into play. BHP had the gumption to realise that and walk away from the deal, saying ‘the risks to shareholder value would increase to unacceptable levels’.”
Our portfolio won’t have you swinging for the fences in terms of investment return, but we’re pretty confident you’ll have some simple businesses with worldclass leaders looking after your capital.