Anchor Capital’s Peter Armitage: SA investments set for a comeback
In a recent interview, Peter Armitage, CEO of Anchor Capital, discussed the potential for recovery in South Africa's investment landscape, emphasizing the resilience of local companies, especially in resources and technology. He noted the urgent need for reforms in education to address the acute shortage of accountants. Armitage also highlighted the growing appeal of Johannesburg Stock Exchange-listed companies, suggesting that sound investment strategies can lead to significant returns. Additionally, he cautioned investors about the implications of increased regulatory scrutiny on cryptocurrency, underscoring the importance of compliance and tax awareness.
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Highlight from the Interview
In a recent interview, Peter Armitage, CEO of Anchor Capital, shared insights into the current state and future prospects of South Africa's investment landscape. He emphasized the resilience of local companies, particularly in sectors like resources and technology, as critical to driving economic recovery. Armitage highlighted the need for urgent reforms in education, specifically addressing the shortage of qualified accountants, which hampers the country's growth potential.
Discussing the Johannesburg Stock Exchange (JSE), he expressed optimism about the attractiveness of JSE-listed companies, suggesting that strategic investments could yield substantial returns. Armitage urged investors to adopt a long-term view, emphasizing that while short-term volatility might be unsettling, the underlying fundamentals of many companies remain strong.
Furthermore, he addressed the growing regulatory scrutiny surrounding cryptocurrencies, stressing the importance of compliance and tax awareness for investors in this space. He warned that the increasing focus on regulation could impact the broader market dynamics for digital assets. Armitage's insights painted a picture of cautious optimism, urging both investors and policymakers to focus on sustainable growth and the importance of adapting to the evolving economic landscape. Overall, he underscored the potential for significant opportunities in South Africa's investment market despite existing challenges.
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Edited transcript of the Interview
00:00:09:20 – 00:00:27:03
Alec Hogg
Peter Armitage and I go back many, many years. I suppose we shouldn't be saying things like that, Peter, but at least we haven't gone completely gray. Because age seems to be, nowadays. Yeah. You've got a bit of color left in your head. I think you're a lot younger than you are, but…
00:00:27:05 – 00:00:44:16
Alec Hogg
How's it going at Anchor? Before we get into everything, yeah, you've started the company, you've listed it. It's a big operation now. But are you finding that the expansion that was promised in the early days is fulfilling itself still?
00:00:44:18 – 00:01:09:18
Peter Armitage
Yeah, we're very proud of what we've got. I mean, from a point of view, we've got about 400 staff. We've got about 134 billion rand in assets, and, you know, what's exciting is we've been in the process of merging with Credo, which is a 110 billion rand UK wealth manager that actually comes from some South Africans who started it about 25 years ago.
00:01:09:23 – 00:01:21:15
Peter Armitage
So, you know, it gets us to a nice critical mass. And obviously, everybody's happy at the moment. Every asset class is delivering good returns. It's been great to, you know, get double-digit returns.
00:01:21:20 – 00:01:43:15
Alec Hogg
Well, you certainly are bringing together two best-of-breed operators. I know the Credo guys very well — Deon Gouws, Jared Conn — and they are out of the top drawer, as are you guys at Anchor. So, you know, one plus one might, in this case, make three. Congrats on that, Pete. When does it go through?
00:01:43:17 – 00:01:52:02
Peter Armitage
We've got all the approvals, and we're actually in the final stages this week, completing the transfer of funds and everything like that.
00:01:52:04 – 00:02:27:15
Alec Hogg
Excellent, excellent. Well, something interesting to kick off this, hopefully, regular chat is about your profession—chartered accountancy. There was a comment yesterday made by the head of KPMG in the United States, saying that he's fretting because there aren't enough young people coming into accountancy. He's urging the accounting profession to make it easier for people to get into the profession.
75% of CPAs— they're not CAs, as we call you here, but CPAs— are nearing retirement, and young people are not coming into the profession. In that context, there was an announcement on SENS today that shows it's not just in America where accountants seem to be in short supply. Here's the financial director of Old Mutual, and if you know the guy, his name's Casper Trask. I haven't met him, but he hit retirement age in April this year. They told us last year that he was going to be leaving in April this year, then they came out and said, "Oops, we haven't been able to find a replacement, so we're extending it to April 2025." Today they announced that actually, they're extending it now to April 2027.
00:02:27:17 – 00:03:19:07
Alec Hogg
I mean, what's the significance of this?
Peter Armitage
Yeah, I think with big organizations, it's really difficult to find somebody to take over the role. Institutional memory is critical, especially being a listed company nowadays. You know, I've been there—it's a hell of a burden. If you've got somebody who's doing the job well and they want to carry on doing it, you know, I think those old days of replacing the CEO or CFO every five years, it's just too short a time period. You build up institutional memory. Tying into what the US guy was saying, a lot of South African chartered accountants have gone offshore, and there's a big demand for them because they're considered of high quality.
I know of some practices here that we do business with—accounting firms with rooms full of people servicing and doing audits from South Africa for American firms. The cost and quality are right, and obviously, the attitude towards doing work online has changed dramatically in the last five years.
00:03:19:09 – 00:04:23:19
Alec Hogg
It's so interesting. I suppose you would recommend it to a young person nowadays, if they were looking to go into a certain area. Accountancy is certainly one place where they wouldn't be making a mistake.
Peter Armitage
Yeah, another interesting aspect for a young person is, look, it obviously gives you all the business basics. But a lot of people who want to end up at least having an overseas experience or immigrating from South Africa, typically, the accounting firms have been a good way to do it. They'll give you an internship or, after your articles, they'll give you some work overseas. So, you know, that's the way we use a lot of our guys—they'll go and do their articles in the US or post-articles in the US, and then they'll end up staying. I've heard some murmurings that the UK might be closing off some of those opportunities. UK firms might not be allowed to bring South Africans in as easily as they used to.
00:04:23:20 – 00:05:03:10
Peter Armitage
South Africans going to the UK used to be quite routine to get your work visa. So, some of those loopholes—or not loopholes, but rules—might close. That might keep a few more young chartered accountants in South Africa. But I think the job itself has become a lot less attractive because it's become, you know, much more about compliance. Every week, there's something new.
00:05:49:20 – 00:06:13:16
Peter Armitage
And, you know, this amendment… accounting isn't what it used to be, as they say. Now, if you look at an income statement or a balance sheet, I'm not really sure what it means anymore. It certainly doesn't mean what it used to. You have to make all sorts of adjustments and straight-lining. Globally, the rules have gotten a lot stricter, and here in South Africa as well.
00:06:13:18 – 00:06:38:20
Peter Armitage
Certainly, post-Steinhoff, my experience with auditors—when we were still a listed business—is that the audit intensity increased significantly. Auditors have become much more liable for signing off on things. So, like a lot of jobs related to compliance, over the last ten years, especially the last five years, global regulators have really tightened up on things.
00:06:38:22 – 00:07:05:11
Alec Hogg
Something else that's changed in the investment field or the financial field in South Africa is the companies listed on the stock exchange here. It was interesting to see an announcement from Mondi PLC today, which we used to know many years ago as an Anglo American subsidiary. It was listed on the JSE.
00:07:05:11 – 00:07:35:14
Alec Hogg
Of course, it's spread its wings now. It's a 12 billion rand deal—a €650 million deal—and it's just so far removed from the interest area of South African investors because it's now an offshore company. Very little attention is being paid to that. It's quite sad, in a way, that we have these global companies now, no longer really influenced by South Africa, that still dominate much of the JSE.
00:07:35:15 – 00:07:55:12
Alec Hogg
In your time, do you spend a lot of time looking at SA Inc. companies, given that they are the ones who should be benefiting from the improvement we're all hoping for?
00:07:55:14 – 00:08:24:11
Peter Armitage
Yeah, I think SA Inc.—depending on how you categorize it—makes up about 50% of the JSE. Banks are about 25%, so banks account for half of it. If you take out insurance, the more traditional non-financial services SA Inc. companies probably represent around 20% of the market. We're not one of those enormous asset managers like Coronation.
00:08:24:11 – 00:08:44:05
Peter Armitage
So, we focus our efforts on areas that we think are interesting. For the last ten years, looking at construction companies in South Africa has been a bit of a waste of time—they all just went down, delisted, and went bankrupt. But as the South African situation has changed, we started spending a lot of time—about a year ago—looking at SA Inc. companies. Their valuations were very low.
00:08:44:05 – 00:09:18:20
Peter Armitage
It became clear that if there was some kind of trigger to unlock GDP and subsequent earnings growth, there could be big opportunities. You know, in the US, you're paying a 28x multiple for a company, whereas for South African companies, you're paying an average of 10 or 11 times. So, you're paying half the price. If they can get their earnings growth coming through, there's been good money made. This year, for the first time at Anchor in seven or eight years, we've been more positive on SA assets than global assets, largely based on price and valuation.
00:09:18:20 – 00:09:39:15
Peter Armitage
Global prospects, especially in America, are excellent, but you're paying a premium for those prospects. Things don't come cheap when they're looking good. Whereas, in South Africa, things were looking quite dire, and people didn't care about valuations. So, we went on a blitz just before the election, doing analyst visits with 30 South African companies that we thought could benefit from the updated environment.
00:09:39:20 – 00:10:06:01
Peter Armitage
We found a handful of companies that we wouldn't have invested in over the last five or six years that have performed very well. We think they'll continue to do so.
00:10:06:03 – 00:10:18:13
Alec Hogg
Can you share any of those names with us?
00:10:18:15 – 00:10:50:14
Peter Armitage
You know, the smaller companies, besides the bellwethers and top 40s—companies like Southern Sun, Lewis—we think are interesting. We've been investing in them as smaller companies, more in the non-mining space. Famous Brands is another. These are high-quality businesses with long track records that were simply stuck because South Africa wasn't growing.
00:10:50:16 – 00:11:13:19
Peter Armitage
The interesting part is that the government of national unity may look so clever because, besides the improvements in confidence levels they're creating, they'll almost coincidentally benefit from other factors. For example, load shedding is moving away, and the economic cycle is shifting. Interest rates have just started coming down, which is a big boost.
00:11:13:21 – 00:11:46:22
Peter Armitage
The two-pot retirement system will push 50 to 100 billion rand into consumers' pockets. So, they've got all these factors that can really help them. They're in a good position if they can get it right. And obviously, all of us as fund managers are cheering them on, hoping that the worrying headlines we've seen every few weeks about tensions—probably continuing until the end of this initial term of the new government—are just part of the growing-up process.
00:11:47:00 – 00:11:53:12
Alec Hogg
Please, don't score own goals because, for a change, you've actually got the wind behind you.
00:11:53:14 – 00:12:12:02
Peter Armitage
Absolutely, and on many fronts, yes. I think SA looks interesting and still quite cheap, even though there's been a fair bounce. The foreigners haven't really come big into the local market yet. The bond market, yes, but not the equity market en masse.
00:12:12:04 – 00:12:44:09
Peter Armitage
I think they're waiting to see. Obviously, with government changes, interest rates will come down, but people's day-to-day lives haven't really changed yet. Still, the prospect statements are a lot better. Interest rates coming down has a real impact on investor confidence, and it's flowing through to how people spend and invest in capital expenditures. There's a lot of noise about infrastructure, and some of it will come through. Other parts need to continue to build confidence.
00:12:44:11 – 00:13:17:04
Peter Armitage
Look at the currency. It was at 19.50 a few months ago, and now it's down to around 17.00. That's probably the key question clients are asking us: Is the rand going to strengthen further, say to 16, or weaken to 20 over the next 12 months? Six months ago, no one would have dreamed of asking that.
00:13:17:06 – 00:13:44:09
Peter Armitage
That's dramatic. If you think about 10% swings in the currency, like what happened in 2007, South Africans have effectively become 15% richer in global terms. We always encourage our clients to see themselves as global investors, and for the first time in many years, investing in rands in South Africa has been profitable.
00:13:44:11 – 00:14:12:21
Alec Hogg
I was interested in what you said about WeBuyCars. I had a conversation with Walter Aylett last week, and his clients own more than 5% of that company. But what's of interest today is AfriMat. The trading update showed that profits will be down by 75% to 85% for the six months to the end of August. The share price dropped from 66.5 to 62.5 briefly, then immediately rebounded.
00:14:12:23 – 00:14:37:06
Alec Hogg
So, I guess people like you, who've done your work on AfriMat, would have seen that although this is their worst six months as a listed company, you can still see through the noise.
00:14:37:08 – 00:14:55:02
Peter Armitage
Yes, I think they've been quite good at communicating. We've been heavily invested in AfriMat, and our clients have made a lot of money. It's been a fantastic share to hold. We communicate often with management, and they signal things well to the market. They've got good investor relations.
00:14:55:02 – 00:15:21:06
Peter Armitage
AfriMat's story has been about a fantastic management team that's managed to get assets that other people have lost interest in or haven't focused on, and they've really extracted value. The previous six months saw a very high average iron ore price, but the global price has since dropped. However, they've got a lot of projects coming online.
00:15:21:07 – 00:15:42:16
Peter Armitage
A year ago, their production was at 100, and in two or three years, it's going to be at 300. There are a lot of projects in the pipeline and a lot of value being created, which isn't yet reflected in earnings.
00:15:42:18 – 00:16:05:19
Peter Armitage
And, you know, what was particularly severe this time was actually not being able to sell the iron ore. ArcelorMittal locally didn't buy for quite some time, and then, of course, we had the export rail issues. But those things will reverse. If you look at the local issues, rail is getting slightly better.
00:16:05:21 – 00:16:26:07
Peter Armitage
It's starting from a very bad base, but we've got new projects and volumes coming through in the next year. And then, interestingly, they bought Lafarge, which created 100 million rand in value. You know, that's an asset that, when it's operating well, can be highly profitable. Ten years ago, it was worth billions of rands.
00:16:26:09 – 00:16:45:23
Peter Armitage
So, they continue to find these gems and opportunities. That said, there are risks because they're buying assets that others haven't been able to do well with. Some of the assets they've bought are still in the mining phase and getting off the ground for the first time. But it's a management team with a strong track record.
00:16:45:23 – 00:17:05:14
Peter Armitage
They've had one of the best track records on the market over the last ten years. Of course, there are times when things are out of your control, and you can't make them better. But I think the share price reaction tells the story. For someone unfamiliar with the company who saw today's news, they would've expected the price to drop by 25%.
00:17:05:14 – 00:17:24:11
Peter Armitage
But when things are bad, companies don't give you insider information. We weren't expecting the extent of the profit decline. However, they've given the market a clear picture of where the business is headed over the next two or three years. We don't believe the long-term value of the business has changed because of a poor six-month period. That's what the market is reflecting.
00:17:24:11 – 00:17:36:23
Peter Armitage
The market's telling you that the long-term value remains intact despite a difficult short-term period.
00:17:37:01 – 00:18:04:12
Alec Hogg
Let's close with something that's going to worry a lot of people very soon. According to SARS, 5.8 million South Africans have exposure to crypto. I didn't think that was possible. But they say many of these people haven't disclosed it and have been making money using that asset. Now SARS is warning people that if they don't disclose their crypto assets, they're going to be caught—especially since finance ministers around the world are sharing information. They're signing an agreement in November that will facilitate this. So, it seems like an easy decision for you to advise clients to disclose their crypto.
00:18:04:14 – 00:18:27:23
Alec Hogg
If they have crypto, they probably should be playing ball.
00:18:32:22 – 00:18:55:03
Peter Armitage
Yes. Any asset you buy and sell is supposed to be declared to the tax authorities. You know, the appeal of crypto, if you go back five years, was that it was the currency of crooks and vagabonds. But it's become much more mainstream. When it became regulated, people initially cheered. But with regulation comes tax implications. More than a year ago, SARS made it clear that crypto is no different from any other asset you buy and sell.
00:18:55:03 – 00:19:12:15
Peter Armitage
The issue now is that the real money in crypto was made six years ago. The concern is for people who've made big profits over the years and haven't disclosed it.
00:19:12:17 – 00:19:22:19
Alec Hogg
Yes, it seems impossible to hide from the taxman forever. It makes sense to just be transparent. As Warren Buffett says, "Don't do anything that keeps you up at night."
00:19:22:21 – 00:19:44:19
Peter Armitage
Absolutely. We don't invest clients' money in crypto because if it went to zero, I couldn't explain why. There's no fundamental value underpinning it. Someone recently told me crypto is purely a supply and demand equation. Over the last two years, demand has increased as it's become institutionalized. You can buy it through an exchange-traded fund now, so the demand is there.
00:19:44:19 – 00:20:09:15
Peter Armitage
It's an interesting asset class, and we tell clients that having a small percentage of your investable assets in crypto might end up being worthwhile, but they must understand the risks. You can look at AfriMat's earnings dropping 80%, but there are still earnings, assets, and dividends. If crypto goes up or down 30%, no one can explain why, because there's no fundamental underpinning.
00:20:09:17 – 00:20:46:07
Peter Armitage
So, while we might invest a little in it, we don't put clients' money there. We focus on assets where we're comfortable with the price relative to the underlying value and growth prospects. Maybe we're being old-fashioned, but we like to sleep at night. People have spent a lot of time making their money, and I always tell them not to put themselves in a position where they'd have to make it twice. Steady compounding of invested money is the prudent way to go. From a business perspective, it doesn't make sense for any asset manager to try to be a hero by taking outsized risks.
00:20:46:02 – 00:20:52:22
Alec Hogg
Peter Armitage is with Anchor. I'm Alec Hogg from BizNews.com.
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