Generating index-beating returns year after year is an impressive feat, and one that few asset managers manage to accomplish. But Sanlam’s SIM Industrial Fund, under the management of Andrew Kingston, has posted returns of over 20% a year for five years. In this interview, Kingston talks about his underlying investment strategy, and explains where those returns came from. Of course, such a great performance isn’t easy to maintain – what goes up must come down – and Kingston also discusses how he’s hoping to keep returns high. – FD
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ALEC HOGG: The industrial sector has been the best performing sector on the JSE since the crisis of 2008. Well, that’s not anything new to you. What might be, however, is the way that the Sanlam Investment – SIM Industrial Fund – has been performing. Andrew Kingston, portfolio manager of the SIM Industrial Fund joins us from the Sanlam offices in Cape Town. I was quite astonished, Andrew, looking through the performance figures to see that you posted 27 percent per year with dividends reinvested over the last five years. Now you know as well as anybody else, that that kind of a record cannot be sustained indefinitely. Are you starting to get nervous?
ANDREW KINGSTON: The return that’s been generated must be seen in the context of interest rates that came down quite dramatically over that period. There were also many international shares, which expanded into new markets and there was just a general broad re-rating of industrial shares. It does concern us. Obviously, the industrial shares have been the best performing area of the market – as you say – for the last five years. However, you need to contextualise the performance of those shares where resource shares have been particularly weak post the sell-down, the commodity cycle in 2008/2009. The structural issues around the financial area of the market post-Lehman’s and the banking crisis globally… So yes, industrial shares have performed very well, but in the context of two other areas of the market, they’ve had their own specific issues.
ALEC HOGG: Andrew, looking through your portfolio as at the end of June – that’s the last numbers that I have – you had nearly 40 percent of your investments in just four shares: Naspers, SAB Miller, British American Tobacco, and Richmont. Now they’ve been fantastic performers – all four of those – but isn’t that a little overexposure?
ANDREW KINGSTON: You need to see the industrial index in its context. It’s a very concentrated area of the market. If you look at the index, the J257 as an example, the top four shares make up over 50 percent of the index. While we don’t profess to be index trackers, we do take notice of the index and it does influence our weightings in the portfolio. The nature of these large shares is such that they are really large in the context of some medium to small companies on the local BORS. The likes of the food manufacturers/food retailers…while those businesses are reasonable in size, they’re obviously not significant when compared to the likes of a big global company like Richmont, British American Tobacco, Naspers, MTN, or South African Breweries
ALEC HOGG: Before we move onto them – because I’d love to get your insights into Kevin Hedderwick’s company, the man we spoke to a few moments ago (Famous Brands), but to have more than one in every eight rand in your portfolio invested in a single stock in Naspers…  I guess you’re watching Koos Becker’s health very carefully.
ANDREW KINGSTON: Naspers has been one of those shares where we have an over-index weight and we have a high degree of confidence in Koos Becker to deliver. It has been an exceptional performance over the last three years, particularly Ten Cents performance, but there has also been increased traction on the classified Internet site. If you go back to the value attributable to the Internet, assets outside Ten Cents and Mallory was fairly small and today – probably a little bit more significant. We see a lot of opportunity for that in the future and I think that’s one area perhaps, where the market hasn’t gotten its head around it properly.
ALEC HOGG: It’s a special situation – one bronco that you’re riding for all that its worth. SAB Miller is interesting, though. That is a global company. It’s very well known around the world and yet its rating just seems to get higher and higher, despite moderate growth and growth projections. Isn’t there a time, Andrew that people are going to change their minds on this one?
ANDREW KINGSTON: Definitely, but I think you need to see what they’ve done over the last ten years. From a small South African base, to become a global player of size across a number of markets. SAB has benefited from the structural re-rating of many consumer stocks internationally, so yes, we are a little bit concerned about the rating, but you need to see it in the context of much lower interest rates internationally. There’s a high level of persistency in SAB’s business. Beer is a product, which could be considered a staple product in some markets. When you look at the rating of SAB in Rands, there’s also an impact with currency, so I think when you translate the earnings back you’ll see over time that the rating will come down quite significantly, so you need to see it in that context.
ALEC HOGG: I have no doubt that it was a staple in Durban on Saturday night. I’m not so sure about Cape Town, though. Andrew, reading through your commentary to the last quarter, it was interesting to see that you’re very much kind of ‘buy and hold’. No changes at all to the portfolio in the quarter to the end of June – have you been a little more active in the September quarter and thereafter?
ANDREW KINGSTON: If you go back, previously we were reasonably active but the Fund generally has a low level of turnover. We’re generally quite confident in the portfolio. There hasn’t been any dramatic change. If you look at the broad environment economically, there haven’t been major changes. Interest rates have been very benign. The macro environment has generally been supportive over the last six months, so we haven’t really felt the need to take major profits in any of our bets. We still have the upside in quite a few of them, so the Fund has been relatively inactive but it just needs to be seen in light of the opportunities available as well. There has been a general narrowing of returns in the market so we don’t really feel it necessary just to trade for the sake of it.
ALEC HOGG: You have your structure right. What about offshore – do you have the capacity in your portfolio to take money abroad?
ANDREW KINGSTON: The Fund can invest offshore, but we do feel our competency is really in the local market, so the Fund has a small position in Berkshire Hathaway. The view is that we’d really rather leave it to the best manager. We like Warren Buffet and his philosophy. It’s not a major bet in the Fund, but it’s just a bit of diversification. We think there’s enough international exposure available in the local market if you look at all the global stocks, and even if you look at some of the local stocks and how they’ve internationalised their business both in Africa and into new international markets.
ALEC HOGG: We’re talking about foreigners. The investment from offshore into South African Industrials has no doubt played a part in this re-rating we’ve seen.
ANDREW KINGSTON: That’s true. If you look internationally five years ago, the global investors were generally underweight in measuring markets and particularly in South Africa, so there’s been a broad up weighting of emerging markets and South Africa has obviously been a beneficiary of that, too. Some of that is cyclical and some of it is structural. I think the big underweight that the global investors found themselves in five years ago was probably narrowed, but in the context of South Africa versus other emerging markets, South African has recently gone a little out of favour. Obviously, the big current account deficit has been an issue there and some concern on the currency side and the sort of modest economic growth that South Africa is currently experiencing.
ALEC HOGG: Thanks to Andrew Kingston, he’s portfolio manager of the SIM Industrial Fund.
