Q&A with Piet Viljoen on performance fees, his bundle of twigs investment method and Magnus Heystek

In this question and answer session from BizNews Conference #4, Piet Viljoen discusses his investment portfolio method of tying a number of stocks together to create a stronger bundle. He gives his opinion on funds with performance fees and how his fund is faring in the local vs offshore investment competition with Magnus Heystek.

Excerpts from the question and answer session with Piet Viljoen at the BizNews Conference #4

Piet Viljoen on his ‘twigs in the bundle’ theory

The way I look at the portfolios I manage, I look at them like a bundle of twigs, where each individual stock can be quite brittle and can break quite easily. But if you tie these stocks together in a portfolio, it makes quite a strong bundle. And it’s important that when I name some stocks just now, don’t rush out and just buy these stocks because I think they’re cheap. I think they’re undervalued. But as I said, you know, stocks get cheap when diversity breaks down or when there’s a strong consensus. And the consensus might be right, might not be wrong. So I can be wrong on any of these stocks. But currently I think they are in my bundle of twigs. There’s a very strong element of what I call undervalued investment companies, investment holding companies, companies that have a long track record of outperforming the market, the net asset value growth that’s outperforming the market. In other words, their management has been able to invest the equity of the business in projects, companies, business endeavours, endeavours that are better than the market and they perform better in the market. But these stocks are trading at a big discount to net asset value. So net asset value grows faster than market, but you can buy it at a big discount. And I think that’s a fantastic situation for any investor to look at.

On performance fees

So this is something we thought about a lot, and we did away with our performance fees. We did have performance fees up until about seven years ago. And we got rid of them mainly because we just thought that it’s almost a form of double dipping. I mean, if you are managing money for a client and they’re paying you an ad valorem fee, a percentage fee on the essence you’re managing. If you do well in growing, in managing assets, your earnings will go up. You don’t need to have a performance fee on top of that. and we do think that a lot of the bigger investment firms have lost sight of the fiduciary responsibilities to their client because their eye is on the bottom line and growing that bottom line. And we think if you focus on the client over time, the client will look after you. And we’d rather do a better job for the client and have a business that probably grows slower, but delivers value because we think the investment industry as a whole has lost sight of what they’re there for. 

On the competition between himself and Magnus and if he is still largely weighted locally

So the bet was a five year bet of local vs offshore. Magnus picked some offshore funds and I think the counterpoint value fund, the fund I manage and that’s it. We’ve set it at five years and we’re not changing it or doing anything to it. Those are the two assets that are running against each other for a five year period. So in terms of that, I’m still very much a hundred percent South African. Each investor has his or her own risk profile. And I think it’d be very foolhardy to have all your assets in South Africa. I’m not a proponent of that. I think you should be diversified internationally. How much is up to each individual if your benchmark is zero. South Africa right now I probably have 10 to 20% in South Africa because the assets are so cheap. Other people have more, others might have less. But I think there’s a place for South African assets because what Rob was speaking about this morning is well known. I mean, the market has factored these things into the share prices. You know, if the ANC does something stupid tonight, that is not a surprise. That’s to be expected. And those things are in the share price of the share price are discounting continued governmental stupidity. what it’s not expecting is positive news, you know. So what Rob was speaking about this morning is not a reason not to invest. The only reason not to invest is assets are very expensive, like the oil in the US at the moment, so I’m very comfortable with the bet. I wouldn’t if I was given the opportunity to change my bet today, I wouldn’t change it. I’d keep it the same. I think locally they are very cheap and assets in the US are very, very expensive. So I’m very comfortable.

On if there’s anything worked into the South African asset prices of a transformation post 2024

I don’t think so. If I look at the opportunities available for investment in small and medium sized businesses on the stock exchange, they are pricing in continued slow economic growth, continued overregulation, continued red tape, continued empowerment schemes, and continued deployment. That’s what they’re discounting. That’s why you can buy great businesses like CMH is another fantastic business, one of the best on the stock exchange on a PE of five or six dividend yield of seven 8%. You can, actually, if you have a mortgage, you can actually borrow money on your mortgage. Don’t do this, but you can borrow money on your mortgage, take money out your mortgage and invest in a group of stocks. And the dividends will be higher than your interest rate on your mortgage. A group of small and medium sized companies. That’s how much bad stuff they are discounting. 

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