Jan Mouton, superstar fund manager – apple didn’t fall far from PSG founder’s tree

PSG founder Jannie Mouton is not just one of South Africa's great entrepreneurs. He's also a pretty decent sire, having produced sons who have excelled in their chosen fields. His namesake, Jan Mouton, had his aptitude for the share market developed by Dad in the best possible way – first through a profit sharing arrangement as a schoolboy, then when he was given the responsibility to manage what is now one of SA's best [performing unit trusts, the PSG Flexible Fund. A R100 000 investment in the fund when Jan took over ten years back is now worth almost R550 000. In this special podcast, Jan, a Cambridge graduate, talks about his investment philosophy, his favourite shares and why he's a Warren Buffett fan. – AH.ALEC HOGG: One of the SA top Fund Managers, Jan Mouton, who has for the last ten years been running the PSG Flexible Fund…that's because it's only been going for ten years, Jan..JAN MOUTON: Yes, I took over the management of the PSG Flexible Fund on the 1st November 2004, so I've been running that Fund for ten years. Before that, I actually ran a hedge fund for a year-and-a-half. I've been in the investment world for almost 12 years now and I've seen a great Bear Market and a great Bull Market, so I think that a ten-year track record does help you a lot in understanding the market. We really believe we are better fund managers now than ten years ago..ALEC HOGG: You're an interesting man, given your background and your training, and of course, your heritage with your father and your who are well known in the investment community. Let's just go back into your education – going to Cambridge University….JAN MOUTON: Yes, when I was in Matric, we visited the UK as a family and we went to Cambridge. I told my father it looks like a great place to study, so I made plans over the years to go to Cambridge. I did my accounting degree at Stellenbosch University, did my Articles at PricewaterhouseCoopers, obtained my CA, and after that I went to Cambridge. I studied an M Phil in finance. What was very interesting in that course is basically, the first half of the year they taught us all the academic theory with regard to financial markets and in the second half they taught us all the empirical evidence, which shows that academic theory doesn't work that well. For example, we looked at studies that showed that if you sort the market from low PE stocks to high PE stocks, and that low PE stocks generally outperform high PE stocks. Small market cap shares outperform large market cap shares and a various number of other research we looked at, which showed you that the markets are not that efficient. We actually use that as building blocks in the construction of the PSG Flexible Fund..ALEC HOGG: That's interesting because that's a policy – market inefficiency – which Warren Buffett has been promoting for years. I remember talking to your father Jannie Mouton – one of our great entrepreneurs in South Africa – and he said when he visited the Berkshire Hathaway AGM, it changed his mind on a lot of things. Are you much of a Warren Buffett fan?.JAN MOUTON: Yes. I'm a big fan. I haven't been to Omaha yet, but some of my colleagues have been. Actually, investing in Berkshire Hathaway was the first direct offshore investment that the PSG Flexible Fund made. In October 2006, we invested in Berkshire Hathaway. Everybody was just talking about what a great investor Buffett was and one day, in 2006, I just took the annual report and started reading it. I started to do a valuation on the company and actually found that the value at which Berkshire Hathaway was trading at, and taking into consideration Warren Buffett's fantastic track record, it is actually a very good buy and we moved quite quickly to put about ten percent of the PSG Flexible Fund into Berkshire..ALEC HOGG: Are you still there?.JAN MOUTON: Yes, we're still invested. It's now the third largest investment in the Flexible Fund. Over the years, he's just given us joy..ALEC HOGG: It's interesting to notice that your brother Piet went into the business itself, and you rather made a decision to go into the investment side of it. What shaped your thoughts there?.JAN MOUTON: I was always very interested in the stock market. Before Jannie started PSG, he was a stockbroker and while I was at school, we spent a lot of time talking about shares. We actually ran a little investment club (he and I) together, where he funded the operation. I did some ideas and I would then get ten percent of the profits but only take five percent of the losses, so I was investing in the stock market at school already with him. Since then, the stock market has always been a passion of mine and I think that's very important. If you want to be a fund manager, you have to be passionate about the markets and basically, never switch off. When there was an opportunity at PSG to take over the PSG Flexible Fund ten years ago, when we took over the fund there was R3m in the fund. I liquidated the hedge fund, convinced all the clients to move into the unit trust fund (the PSG Flexible Fund), so we basically started off with R40m of clients' money in 2004 and we're currently sitting at R5.8bn of client funds..ALEC HOGG: That's an extraordinary story and you're still having as much fun today as when you first started?.JAN MOUTON: Yes. We're a much bigger team now. When we started ten years ago, it was one of my colleagues, Paul Bosman, and I. He's still with us. He currently manages the PSG Balanced Fund. We're a much bigger team now. We have a marketing team that supports us as well as a large admin team that helps us. It's great having a team behind you. We're currently having success across the whole business. All our funds are doing very well, relative to the competition and the inflows have been strong..ALEC HOGG: Ten years ago, if you put R100, 000 into the PSG Flexible Fund, that would be worth nearly R550, 000 today. That's quite an achievement over that period so you clearly have your own ideas about how to invest. You managed to miss the Abil disaster. What were some of the other near misses?.JAN MOUTON: Going into the financial crisis of 2008/2009, we had sold all our Resources exposures before the Crash of 2008 hit and that really helped us a lot. In addition, we didn't have many financial shares, going into that crisis. So those two things did help us. Our foreign investments…at that stage, we were already investing in foreign shares. We learned a lot during the financial crisis about how volatile investing offshore can be. Luckily, the poor performance of the offshore investments was cancelled, to an extent, by Rand weakness. It's very good that we now have about eight years of direct foreign investment experience. We believe it's a very good way for clients to diversify their risks. There are many things that you can't predict in the world and having exposure to good companies all across the globe does help you diversify against those things you just can't predict..ALEC HOGG: But you do keep your portfolio very concentrated – only 35 shares in all..JAN MOUTON: Yes. Thirty-five shares and the top ten holdings represent about 47 percent of the entire portfolio. The portfolio is currently 71 percent in equity and 29 percent in cash. So the top ten is by far, the largest part of the portfolio. The PSG Flexible Fund is in the flexible unit trust category, which means that in terms of our mandate, we can vary our equity exposure between 0 and 100 percent. We vary our equity exposure based on opportunity. If we can find many undervalued shares, we have a high equity exposure and if there isn't much opportunity, we have a larger part of the fund in cash..ALEC HOGG: So that would tell us that with 29 percent in cash you're a little concerned about the level of markets generally..JAN MOUTON: Yes. If you look now, we've had a five-and-a-half year bull market since the market bottomed in March 2009. We are finding less and less opportunity, but the 71 percent that we do have in equity…we're still, very comfortable that those shares are at attractive valuations. If you look over time, our average asset allocation was 75 percent equity/25 percent cash, which is in line with our benchmark CPI plus…inflation plus six percent. You can't run 100 percent in equity with inflation plus benchmark. Then you're taking too much risk, relative to that benchmark. One hundred percent equity benchmark is more 'inflation plus eight' type of investment strategy, so we're also pleased that we took the right risk, considering our benchmark over the ten-year period..ALEC HOGG: Jan, people can go and have a look at your portfolio online, but just to close off this conversation; you have some rather well performing shares in the group. PSG…clearly, Steinhoff is not in the group, but you're very close to Markus Jooste (the Mouton family) and then the Curro and Capitec operations… Are you forced to put money into those or how do you approach them?.JAN MOUTON: We're not forced to put money into PSG and PSG-related companies. Myself, having a potential conflict of interest with regard to those investments, I have no input on the investment decision into those companies at our investment committee meetings. I actually have to recuse myself with regard to the investment decisions, with regard to PSG and PSG-related companies..ALEC HOGG: So do you hold any in your portfolio?.JAN MOUTON: We do hold Capitec. That's our second largest investment in the PSG Flexible Fund and we do hold a little bit of PSG Group. PSG Group is about point-eight percent of the Fund..ALEC HOGG: So you've given us your second and your third biggest holdings – being Capitec and Berkshire Hathaway. What's number one?.JAN MOUTON: Number one is Steinhoff. Steinhoff has been a top holding for us for many years, especially during the last two years where Steinhoff has really contributed very strongly to the returns of the fund, even though we've been holding that share for (probably) seven years. We got most of our returns over the last two years and we still think it's a fantastic opportunity. You're buying Steinhoff at a PE of 11.5 on earnings that were made in tough times in Europe. Most of their earnings – about 90 percent – comes from Europe and Europe is currently a tough place, so a low PE on tough time earnings. It can, most likely, just get better from here..ALEC HOGG: Jan Mouton is the Portfolio Manager of the PSG Flexible Fund.

Jan Mouton, superstar fund manager – apple didn’t fall far from PSG founder’s tree

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