Piet Viljoen, star fund manager from RECM, was in studio with Alec Hogg to discuss news coming out of the markets in the form of company results. Alec and Piet focus on Nedbank’s results and the current position of ArcelorMittal in the market from the perspective of value investing in shares to extract maximum value in tough times. They also discuss the potential concern and inherent risk the Ebola virus poses to markets, and whether or not this concern should be included in market analyses. – LF
ALEC HOGG: Let’s find out how the markets are trading today. Piet Viljoen from RECM is in our studios in Cape Town. Piet, as always, good to have you. Before we get into the markets, we did hear earlier in the week that Clem Sunter is quite concerned about the impact that Ebola will have. So much so, that he’s added to it to one of his six risk factors. From your perspective, is it getting to that level yet, where you might start integrating it into your investment thoughts?
PIET VILJOEN: No, I don’t think so. Normally, if such a thing were to get out of hand…by then, it’s too late to integrate into your risk. The way we deal with risk is by trying to pay a low enough price for the asset, which we want to acquire that all the known and more importantly, unknown risks out there are covered by the low price we’re paying. The risky stuff that happens are generally things you don’t know about. Now we had this warning about Ebola and I’m sure the medical fraternity is looking at it and thinking of ways to combat it. I’d be surprised if it gets really out of hand.
ALEC HOGG: I hope you’re right, Piet. From your perspective, when you look at risk, one of the risks is that everybody agrees with you. At the moment, you’re becoming increasingly isolated, which paradoxically, I guess would be a good thing from where you’re standing.
PIET VILJOEN: Yes, these are the times that we as value investors live for. We thrive in these types of environments because these are the environments in which we can acquire really good assets at low prices, since people are so negative about them and so negative about the whole process of value investing. For us, these are exciting times. We love these times.
ALEC HOGG: When you hear someone like Magnus Heystek saying that you’ve underperformed the market since inception, does that make you even more excited about the prospect or does this have a knock-on effect?
PIET VILJOEN: That’s quite a general statement. One of our funds has underperformed the market since inception, and that is our South African Equity Fund. It has been going through a tough time in the past two to three years. If you had measured that fund four years ago, just after the financial crisis, it was the top performing equity fund in South Africa at that time. These things swing in roundabouts and we accept the fact that people will criticise us when we are going through the tough times that we as value investors invariably, and regularly, go through. What we do know is the outcome, over time, of these bad periods such as the one we’re going through now, plus the good periods when everybody else is losing money. If you put those altogether, we tend to do fairly well and our clients are quite happy with that outcome.
ALEC HOGG: Piet, I mentioned in the introduction that in your previous incarnation, you focused on lot on the banking sector so no doubt, you might have had a chance to look at Nedbank’s results today. They’re very strong, due to some strategic initiatives that they took. I have Mike Brown, the Chief Executive of Nedbank next to me. We’re going to talk to him in just a moment. From your perspective though, is it a stock that’s now starting to offer value?
PIET VILJOEN: Oh, so Mike is there next to you. I shouldn’t say anything bad, should I?
ALEC HOGG: Well, he is one of your clients, I believe, so I think you manage one – the Nedgroup Fund.
PIET VILJOEN: That’s correct, yes. Seriously, though, we think Nedbank (or Mike) has done a fantastic job in turning Nedbank’s fortunes around. You will recall, when Mike took over Nedbank had been going through some tough times and I think he and his colleagues have done a fantastic job there. At one point, we actually owned Nedbank shares – being value investors. When good businesses go through tough times; that’s when we tend to get involved. At these prices today, the market recognises the good work Mike and his team have done. It’s in the price and we don’t think there’s excess value for us as value investors, so we’re not invested in the company right now, but the results were good. I haven’t read through them in any detail. That will happen in the next week or two. It’s not something that we do immediately at all times.
ALEC HOGG: I would presume though, that you’ve looked at the ArcelorMittal results in detail, given that you’ve been buying those very aggressively. They were out just the other day. We had Paul O’Flaherty in the studio. He looks like a really good appointment on first blush.
PIET VILJOEN: I must say, I read the transcript of his interview with you (I think on this show), and it came across very well. He said they face certain problems and we know these problems. Historically, iron ore prices have been quite high and steel prices have been quite low because of the economic cycle, but these dynamics are busy changing. It takes a while to come through in the numbers, but iron ore numbers are going down and economic activity – globally – is starting to pick up. More cars are being sold, so the demand for steel is picking up again. It’s not unreasonable to expect margins in the steel business to start expanding again over the next three to five years. At the moment, ArcelorMittal is so cheap that you’re not paying for any upside at all and if something good happens, I think that you can make a lot of money out of it.
ALEC HOGG: Piet, did you make hay the day after the results were released, when the share price dropped seven percent?
PIET VILJOEN: I’m not even aware of it. I don’t have prices on my screen. I don’t know what’s going on, on a daily basis in the market. We have a big position in ArcelorMittal. Whether we can add one or two shares when it’s down a bit is not going to make a difference to our clients at all.
