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.