In this interview on CNBC Africa Power Lunch following up on research by Cannon Asset Management, Mark van der Walt emphasised how three stocks – Naspers, Richemont and SAB – have produced half the “market’s” returns over the past year. Leave those out of the portfolio, as some active money management professionals did, and you were guaranteed to tumble down performance tables. Another interesting point he raised was how the truly aggressive active managers have become an endangered species. – AH
To watch this CNBC Power Lunch video click here
ALEC HOGG: There has been a rise in the number of money management boutiques, globally and domestically. With this increase investors are facing the question of, does size really matter. Joining us now to answer that question is Mark van der Walt from Cannon Asset Management. You put out a research report today Mark, to say that the smaller you are, the better you could do as an investor. Indeed, Warren Buffett’s often said that, as well. Size can be an anchor to growth.
MARK V D WALT: Absolutely, and in fact the relationship is an inverse relationship, so small managers tend to have an alpha advantage, particularly in the early part of their life stage. However, that really depends on the makeup of the manager, and how they evolve as a business.
ALEC HOGG: Why?
MARK V D WALT: Well, if the money management business remains independent, if they remain owner managed, if they maintain their asset base as a small asset base and don’t become a mega manager, they are able to play in a much wider space in the market and maintain that alpha advantage.
ALEC HOGG: Intuitively, you would believe that is the case, but do you have any research that points to the fact that smaller asset managers can outperform?
MARK V D WALT: Absolutely, there’s research coming out of Australia, research in the US, some research coming out of South Africa as well – although the research from South Africa tends to be more style-orientated in that. In that context, when size is combined with a particular style – and here Alec, I am talking my own book – when it’s combined with a deep value philosophy, that alpha advantage is actually amplified, so the research I’m referring to is research coming out of Stern University in New York. There’s research coming out of Russell Investments – my former employer from years back – which does suggest – and very compelling evidence – that this alpha advantage can be up to 2.5 percent above the big managers.
ALEC HOGG: But I guess there has to be a cut off. Is there an optimum in-between?
MARK V D WALT: That depends on the market. Within the South African context and within Cannon, we have a number in mind under current conditions, that we believe we would maintain our alpha advantage over the long term.
ALEC HOGG: What number would that be?
MARK V D WALT: Between R20bn and R30bn… That would suit our particular style, which is deep value. Above that, our ability to go down the cap scale becomes a bit of a problem, because of liquidity and the smaller cap space.
ALEC HOGG: We’ve seen with Coronation for instance, that they capped some of their funds. Piet Viljoen at Regarding Capital Management did the same thing when he felt there was just too much money coming in at one point. I don’t think he has that problem at the moment. No value manager seems to have that problem right now. It’s almost as if it’s a popularity contest…
MARK V D WALT: Absolutely, I mean we’d love the problem of being able to cap our portfolios. As I mentioned, we do know the number where it would present a potential problem in the portfolios that we run. That number is between R20bn and R30bn. The market will move, so by the time we’re at R20bn the market might have grown.
ALEC HOGG: Why is it that money keeps flooding in – really – to Allan Gray and Coronation?
MARK V D WALT: I think brand sells. There are momentum players in the market. People chase performance. Those managers have done very well. There has been an alpha drought in the value space and in the smaller space. If you look at the ALSI since January last year, the ALSI is up roughly 65 percent – and that’s price movement. That’s not including dividend. Three stocks in that have actually accounted for roughly 50 percent of that move.
ALEC HOGG: So if you weren’t in those three stocks…
MARK V D WALT: You’ve lost 50 percent of your return.
ALEC HOGG: The stocks are…
MARK V D WALT: Naspers, Richemont, and SAB. So you have to look at who’s buying those stocks. It tends to be the bigger managers because they have nowhere else to employ that capital. It’s foreign buyers, buying into that, its people chasing performance – performance does sell in the market. The caveat: past performance is no guide to the future. A lot of investor behaviour research suggests that people don’t believe that. People don’t follow that.
ALEC HOGG: The story of Specialised Outsourcing was a long time ago. It was in the late ‘90s, but it should be a clarion call to remember that performance sometimes comes at a cost.
MARK V D WALT: Absolutely, and these big stocks that have been in favour, enjoying momentum and a very strong run…when investors desert them, it can be nasty. It can be bloody.
ALEC HOGG: And the other story about active managers: clearly, if you want to outperform most managers, just track the index. How do you, as an active manager, manage to compete and outperform?
MARK V D WALT: Well, I think it was John Templeton who said ‘in order to beat an index, you have to be different to the index’. The research from the States, and the similar research in SA, looks at a measure called ‘active share’. An active share, very simply, looks at how different your portfolio is to the index, so it measures the overlap. Therefore, an active share of zero means you’re a pure index player. An active share of 100 means you don’t own anything in the portfolio that is in the index. In the US – since 1998 through to 2009, the number of truly active managers (those are managers that are running portfolios with an active share of above 80 percent), has fallen from 60% of the universe, to 19%. That’s a significant fall.
ALEC HOGG: It’s not surprising though, because I suppose that’s the way that you just stay in business – stay in the crowd. If you want to be an outlier, sometimes you get killed.
MARK V D WALT: Absolutely and there has been massive consolidation in the investment industry – globally – so the bigger managers have gotten bigger and they’re in the business of asset gathering and maintaining their asset base, and not necessarily delivering higher alpha. I’m not saying they can’t deliver alpha, but it’s not the alpha premium – which I would like to think – investors are after.
