Financial Mail - Investors Monthly - - Analysis: Value Funds -

RECM has had a tough year, with a neg­a­tive 4,5% re­turn in the 12 months to Fe­bru­ary. The fund has a re­sources bias, and the sec­tor ac­counts for 42% of the fund but it also has 40% in in­dus­tri­als, 42% in re­sources and 18% in fi­nan­cials. Jan van Niek­erk, chief in­vest­ment of­fi­cer of RECM, says that seven years ago re­source stocks made up 50% of the SA mar­ket, they were also the most ex­pen­sive with a price to book ra­tio of four times. RECM, as one of the most or­tho­dox value man­agers, had only a small weight­ing to­wards re­sources. It proved to be the cor­rect de­ci­sion as re­sources un­der­per­formed woe­fully — it was clear that the ex­pec­ta­tions of a su­per­cy­cle based on growth in China were greatly ex­ag­ger­ated.

Now re­sources are down to less than a quar­ter of the SA mar­ket and it is the cheap­est sec­tor with a price to book of 1,5. RECM owns ArcelorMit­tal SA, which has a mar­ket cap of R11bn but a re­place­ment cost of more than R100bn.

RECM is now over­weight in re­sources and while it is un­der­weight in in­dus­tri­als which make up 56% of the in­dex, they still make up 40% of the fund. But the two themes which dom­i­nate the port­fo­lio are plat­inum (An­glo Plat­inum, An­glo Amer­i­can, Im­plats and Lon­min) as well as gam­bling (Sun In­ter­na­tional and HCI). Van Niek­erk echoes Bic­card and says there has been limited in­vest­ment in the plat­inum sec­tor and at this rate pro­duc­tion will fall off a cliff in 2020 — es­pe­cially as there will be greatly in­creased de­mand for cat­alytic con­vert­ers. He says the house is light­en­ing Sun In­ter­na­tional as it is scep­ti­cal about the deal to take over ri­val Peer­mont, and the share price has al­ready repriced on the back of the new man­age­ment team.

But RECM has also been build­ing po­si­tions in smaller cap in­dus­tri­als such as re­tail­ers JD Group and Iliad. Van Niek­erk says even though the lo­cal econ­omy is go­ing through a tough spot purely do­mes­tic in­dus­tri­als such as York­cor and As­tra­pak are still un­der­priced.

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