Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

Mo­men­tum Value, In­vestec Value Fund, Can­non Eq­uity, Ned­group In­vest­ments Value, RECM Eq­uity

You might think that ev­ery­one would claim to be a value in­vestor — “un­lock­ing value” is the essence of in­vest­ment. Ten years ago, when mem­o­ries of the boom were still fresh, few fund man­agers did not have value in­vest­ing as part of their phi­los­o­phy, even if they tem­pered this with phrases such as “prag­matic value” or “rel­a­tive value”. But over the past five years the num­ber of true value man­agers in SA has fallen to a hand­ful. The style has markedly un­der­per­formed the main­stream fund man­agers with, for ex­am­ple, the In­vestec Value fund mak­ing a nom­i­nal 0,3% re­turn in the 12 months to Fe­bru­ary com­pared with a 16,1% re­turn from the all share in­dex.

John Bic­card, manager of In­vestec Value fund and the doyen of value in­vest­ing, says value in­vest­ing in SA is now ridiculed, smaller value as­set man­agers are closing down and the larger play­ers have ex­pe­ri­enced sig­nif­i­cant out­flows.

“There is now the largest val­u­a­tion gap be­tween value and growth stocks ever and, thus, the great­est level of op­por­tu­nity. We are get­ting close to the end of the cy­cle and we now carry the high­est level of con­vic­tion we have ever held. We tend to be around when the cy­cle turns.”

But it is not easy: value man­agers keep los­ing clients be­cause the value sec­tors, as they see them, such as plat­inum and gold, con­tinue to un­der­per­form. And as the clients move, the value shares get sold.

John May­nard Keynes, the great econ­o­mist, said the mar­ket could re­main ir­ra­tional for longer than you could re­main sol­vent. And to a value in­vestor’s mind, it is ir­ra­tional for Naspers to trade on a PE of 110 and Aspen on 34 while An­glo sits on 14 and Pan Africa Re­sources on 13.

Un­for­tu­nately, the mar­ket has re­cently paid lit­tle at­ten­tion to the view that cheap shares de­serve to reprice. In­stead, ex­pen­sive shares such as Naspers and Aspen have been get­ting more ex­pen­sive and cheap shares, such as Lon­min and Aveng, are get­ting cheaper.

Sam Houlie, manager of the Mo­men­tum Value fund, says the mar­ket re­minds him of the 1997-1998 pe­riod when he was at Al­lan Gray and the firm (the lead­ing value/con­trar­ian manager of the day) came close to go­ing bust. “At that time the fi­nan­cial ser­vices and IT shares were the go-go stocks. The dif­fer­ence this time is that we have to con­cede that to­day’s ex­pen­sive shares, such as Aspen, Mr Price and SABMiller, are qual­ity com­pa­nies with great man­age­ment and com­pelling sto­ries. It is easy to see why they are the dar­lings of the mar­ket.”

But could there be a turn­around sim­i­lar to Au­gust 1998, when the ex­pen­sive shares tum­bled and value in­vest­ing came back for at least five years? It was a time when Al­lan Gray made a re­turn of more than 100% in a sin­gle year, while the more growth/mo­men­tum funds were of­ten down 40%.

A value fund would be the per­fect in­sur­ance pol­icy against such a mar­ket move which, af­ter all, would be no more than a re­ver­sion to the mean.

Value is poor among many of the large-cap in­dus­tri­als: the mid-cap sec­tor is an­other story. Can­non Eq­uity, for ex­am­ple, owns house builder Cal­gro M3 and mo­tor man­u­fac­turer Me­tair in its top 10. In­vestec Value owns shares such as Re­unert, Ton­gaat, Illovo, Ste­fanutti Stocks and Aveng.

In­vestec Value, Mo­men­tum Value, Can­non Eq­uity and RECM Eq­uity all have the char­ac­ter­is­tics of deep value funds.

We also look at a less purist fund, Ned­group In­vest­ments Value, run by Fo­ord As­set Man­age­ment. Co-port­fo­lio manager Brian Davey says he strug­gles to find value in gold and plat­inum mines. With un­rest on the mines it is hard to jus­tify in­vest­ing in the sec­tor from a risk-re­ward point of view.

The deep value man­agers would all dis­agree with Davey, es­pe­cially when it con­cerns pre­cious met­als. Bic­card says there is a deficit in plat­inum with pro­duc­tion lower than sales. The plat­inum mines are on a record low price to book, en­ter­prise value to rev­enue and price to re­place­ment ra­tios.

Bic­card’s view on gold shares is driven in part by val­u­a­tion but pri­mar­ily by his macroe­co­nomic view. In the long term quan­ti­ta­tive eas­ing will con­tinue and as cen­tral banks print money, it will be a cat­a­lyst for the sus­tained up­ward move­ment in the US dollar gold price.

The value funds are not all di­rectly com­pa­ra­ble. Mo­men­tum and In­vestec in­clude in­ter­na­tional shares; Fo­ord, Can­non and RECM are purely do­mes­tic. And un­til re­cently RECM played an as­set al­lo­ca­tion game in its fund, keep­ing up to 40% in cash. But un­der pres­sure from clients it has turned the fund into a fully in­vested do­mes­tic eq­uity fund.

There is now the largest val­u­a­tion gap be­tween value and growth stocks ever and, thus, the great­est level of op­por­tu­nity

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