Kokkie Kooyman
Kokkie Kooyman

Kokkie Kooyman: Use the slump to grab bargains. Like Citigroup.

Kokkie Kooyman explains the current trade-off between quality financial stocks & those trading at obvious discounts but where quality may be less.
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The recent precipitous drawdown in the US's S&P500 and other global indices has not left global financial listed equities unscathed despite many of them having recently delivered upside surprises on earnings results. SIM Global's Kokkie Kooyman, four times winner of Investment Week Fund Manager of the Year award (specialist financial category) explains why those with bets on the table are looking at a trade-off between high quality stocks and those now at substantial discounts. His favourite – Citigroup, a major US bank whose shares are currently available at 0.75 times its tangible book value.  – CP

ALEC HOGG: Joining us for an update on the international markets, particularly the financials, is Kokkie Kooyman, the Global Fund Manager at Sanlam Investments. It's nice to have you in our Cape Town studio Kokkie. It's not really good news that we can talk about. I thought for a moment that the JSE was stabilising. It certainly was in the initial stages but selling waves came through here, selling waves internationally, the banks that you've been following very closely, on Wall Street came out with pretty good financial results. Yet, the consequence was, well you'd swear that they are actually disappointing.

KOKKIE KOOYMAN: Yes, even if you just look at the results generally, they've come through, specifically Citygroup, which beat expectations by quite far and is trading at 25-percent discount to tangible net asset value. Yet, on the results, the price went up and then the next two days it goes down five to six-percent. JP Morgan also came out with actually quite good results, except for further litigation reserving, and the price goes down ten to 12-percent, so I think what's quite clear here is, this is simply a panic in the market. Investors that were overweight or weak holders are selling out. It's actually good news. If you are going to be investing for the next few years, and building up retirement savings, then this is a great opportunity to really pile in and invest more. You've got to think as well, the news flow coming out of Europe, and Japan, and even the U.S. shows that interest rates aren't going to go up for a while, so you are going to sit with a quarter-percent or half-percent on your savings, and you're getting a lot of these banks on dividend yields, of four or five-percent. It's a total overreaction by the market.

GUGULETHU MFUPHI: Overreaction, so clearly one should ignore the sentiment, judging by your comments there Kokkie, maybe when you look at the banks and their different strategies, does one need to be slightly more selective in their choices, with regard to investment?

KOKKIE KOOYMAN: That is the key and the market there is not silly. If you look at something like US Bancorp and Wells Fargo, two of the best run banks in the US have come through the crisis exceptionally well but they're trading on two-and-a-half times price to net asset value and higher. Then something like Citigroup, which has had a very patchy track record, is trading at a 25-percent discount, so the market there is saying there are some banks that they are very happy with the management team and that will continue delivering value. As an investor, you've always got the two decisions that you're going to make. The one do you just go for quality and pay up, and sleep well at night or do you sometimes take a risk, on something like Citigroup and say, "The market is wrong here. At this discount I think this is a good investment." You've got the same in South Africa, where Capitec and FirstRand are trading at very high multiples and something like Standard Bank, which is actually being, demolished relative to the other two. Now if you go back six years, 2006, that's more or less eight years, Standard Bank was trading at a premium to FirstRand. I think the discerning investor says, "Standard Bank should get back there, so it's maybe a better opportunity now to invest in Standard Bank." In terms of your question, it always comes, do you go for quality now, when the prices come down, or do you go for something that's a higher risk?

ALEC HOGG: Kokkie, we do know that Berkshire Hathaway, Warren Buffett's company, has got a big option on those Bank of America Shares, and if he's going to make an investment there, at some point in the future, who are we not to coattail him? Where would that fall in the good management pay-up or the not such good management discount leak?

KOKKIE KOOYMAN: Alec, as usual, you are too sharp here for me. No, that's a very good question but what you must bear in mind that Warren Buffet bought into Bank of America, I think it was in 2010 or 2011, when the share price had fallen to five-Dollars, and he got it at five-Dollars, and he got it via warrants. The share price of Bank of America is, well it was over $17.00 last week, it has now fallen to, I think, $16.50. That was really, shrewd. That's a very good example, where he said it is five-dollars. This is not a good quality company, like Wells Fargo or US Bancorp, but at five-dollars, it was just so cheap, and by the way, if you look at it, the fines that Bank of America has paid, since he bought it is huge. Yet the share price has tripled because all of that was in the price, so you've got to really decide is the bad news in the price. I think you are getting some opportunities now, like with Warren, you are not getting them at, it was trading at point-five price to NAV but Citigroup is trading at point-seven-five. Citigroup will be around. They've built up their reserves. They've built up their capital. They've written off the bad debt, so it is one of our top picks. Citigroup and, by the way, AIG is two of our top picks in our funds, in our Global Financial Fund, it is more than ten-percent of the Fund.

ALEC HOGG: So to buy one banking share in America it would be Citigroup?

KOKKIE KOOYMAN: Well, Alec that you know is very dangerous, to say one banking share, but if you have exposure and you want some more exposure, the thing you should have exposure to is Citigroup and I think AIG as well.

ALEC HOGG: For a South African connection this morning on SENS we had news that Old Mutual has now concluded its IPO placement for the Old Mutual Asset Management, which is listed in America at $14 a share, is the price. Old Mutual itself is going to get about $450m, which sounds like a pretty, useful amount of money that's going to go into the London listed company. Does this make it more appealing, particularly as that share price has come down a long way in the last couple of weeks?

KOKKIE KOOYMAN: Old Mutual has actually been a poor performer for a while; I think it must be U.K. investors, who hold it to sell it because of a negative view on South Africa or whatever, investors taking a negative view on South Africa, but to put the $450m into context. It's fairly small fry in the total scheme and Old Mutual have targeted acquisitions in Africa to the value of R5bn, which is almost $450m, so they've spent I think about 20-percent of that. This is more or less, what they were planning to spend on Africa, so it helps but it is not big but I think what is interesting for Old Mutual is that, remember they listed, I think only 18-percent of Old Mutual Asset Managers US, so it keeps an independent evaluation, a market valuation to that. That most probably is higher than what the market was putting on it, inside of Old Mutual, so it should add to the uplift of Old Mutual, and you get the staff. They are mostly more incentivised, so I think it was a good move and Old Mutual is also now, actually quite cheap in South Africa.

Old Mutual's one year share price graph shows its precipitous plunge in the past few weeks – offering a great buying opportunity?
Old Mutual's one year share price graph shows its precipitous plunge in the past few weeks – offering a great buying opportunity?

ALEC HOGG: So, Gugu, if you are looking to buy a share cheap, Old Mutual is now 20-percent down from where it was six-weeks ago.

GUGULETHU MFUPHI: Six-weeks ago?

ALEC HOGG: There's been some big sell-offs here. It was sitting in late August at R36.00 a share, and now it is R29.55.

GUGULETHU MFUPHI: I've got R30 to spare.

ALEC HOGG: There we go.

GUGULETHU MFUPHI: On that not, thank you so much Kokkie Kooyman, Global Fund Manager at Sanlam Investments.

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