Flexible strategies for a changing market: Nick Balkin discusses Foord’s investment philosophy
In an engaging interview, Nick Balkin, CIO of Foord Asset Management, shares insights on the firm's flexible investment philosophy. Emphasising cash flow sustainability and quality companies, he advocates for a long-term approach. Balkan's pragmatic strategies provide valuable guidance for investors navigating today's complex market landscape.
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
Watch here
Listen here
Highlights from the interview
In a recent interview, Nick Balkin, Chief Investment Officer of Foord Asset Management, shared insights into the firm's investment philosophy and strategies. Emphasising a disciplined, long-term approach, Balkin highlighted the importance of understanding cash flows and the sustainability of earnings when evaluating investment opportunities. He stressed that Foord does not confine itself to traditional classifications like value or growth investing, describing their method as "imperial pragmatism," where they remain flexible in their choices.
Balkin discussed the firm's relatively low turnover rate, maintaining that most of their holdings are long-term investments, with a focus on quality companies that can withstand market fluctuations. He noted the significance of thorough analysis, combining qualitative and quantitative factors to assess management quality, industry structure, and financial health.
Regarding asset allocation, he pointed out the renewed relevance of cash in portfolios, particularly in today's uncertain economic climate. He advocates for a balanced strategy that includes both risk-off assets, like cash or bonds, and risk-on investments.
Balkan concluded by advising investors to remain disciplined, focusing on quality and being adaptable to changing market conditions. His insights reflect a commitment to thoughtful investment management, positioning Foord as a resilient player in a complex landscape.
Edited transcript of the interview
Alec Hogg (00:08.199)
Nick Balkin is the Chief Investment Officer of Foord Asset Management, a company that I've watched for almost four decades. It's a bit embarrassing to admit, but I've seen how it has developed into a cornerstone of many portfolios here in South Africa.
Alec Hogg (00:32.903)
Nick Foord has been around for a long time. I remember the days when it was Foord and Mankies—Dave Foord and Liston Mankies. Of course, it has come a long way since then. In a way, it's similar to Allan Gray. Everybody knows about Allan Gray, but Foord seems to have kept a little under the radar, although your performances have been outstanding.
Nick Balkin (00:57.538)
Yeah, it's never been our focus to shout from the mountaintops about what's going on. At the end of the day, we want to serve our investors and ensure their returns are the best we can achieve. We usually use these sorts of communications to educate people rather than anything else. To us, the most important thing is just making sure that the returns are there.
Alec Hogg (01:24.113)
David, is he still involved?
Nick Balkin (01:27.15)
Yes, absolutely. I think he's an amazing man. I've been around at Foord for nearly 19 years, which is close to half the time the business has been running. Just being around him is exceptional.
Alec Hogg (01:34.683)
Not Foord. Okay.
Alec Hogg (01:42.577)
Hmm. Wow.
Nick Balkin (01:56.236)
I've learned so much from him. One key thing about Dave is that he allows people to be themselves. He has cultivated a very flat structure, where facts and communication are key. Although he's plugged in and committed to the organisation, he's created an organisation that can outlast him, which I think is very important.
Alec Hogg (02:35.975)
That's always a great feather in any founder's cap that the organisation lasts, even if it becomes unrecognisable from the early days. How big are you guys now? How much do you manage?
Nick Balkin (02:51.438)
It's not something we like to broadcast. I'd say we are in a comfortable spot—big enough to pay really good people and small enough to be very nimble. We've never fixated on the number, and I don't think anyone should. The fact is that we are flexible and big enough, but not too big.
Alec Hogg (03:18.595)
All right, so let's put it differently. How many people work at Foord now?
Nick Balkin (03:23.022)
I think that's an important part, Alec. We sat around many years ago, and our whole point during a strategy session was to stay boutique in mindset, no matter how many assets under management we had. So we have less than 50 people across the whole organisation, including Singapore and South Africa. The most important thing is that you can't have hangers-on; each person must contribute. Each person here has a particular role, but they do a lot more than their title suggests. This is how you get the best out of people: by making sure that your small team consists of highly motivated, highly skilled individuals who work hard.
We believe staying small and boutique in mindset, with a flat structure where everyone carries their weight, is the best approach.
Alec Hogg (04:32.627)
It's also interesting how you handle investments. Many money managers categorise themselves as value investors or growth investors, top-down or bottom-up investors. Foord has always had a reputation for getting value for money. You're not going to be buying Nvidia at $200, but from my conversations with both Dave and others at the firm, it seems you haven't painted yourselves into a corner.
Nick Balkin (05:14.99)
Yeah, that's an important point. I think consultants want you to define yourself, making it easy to say you're value or growth-focused, which simplifies communication. But at the end of the day, there are many ways to make money. If you box yourself into one category, you close the door to other opportunities. Dave has used the term "imperial pragmatists." To be honest, we just look after the investment, ensuring that what we're analysing is well thought out and that we're long-term in our thinking. We understand where management is headed and have a forecast of where earnings will go, then pay the right price.
Sometimes you might have a 15 to 20 P/E ratio that requires certainty for long-term growth, but at other times, a lower P/E can present your opportunity. Closing the door to any of those opportunities is wrong. Ultimately, we're trying to price free cash flow for our investors, and that may involve a cheap cash flow that grows slowly or a higher-rated cash flow that grows faster. The key is to understand the sustainability of those cash flows, balancing the price you pay with the value you receive.
Alec Hogg (06:53.533)
Can you explain cash flows?
Nick Balkin (06:56.59)
Yes, at the end of the day, whether you're investing in a bond or in our multi-asset funds, where you're balancing equity, bonds, cash, and property, each of those provides a different form of cash flow. For instance, a property giving you a 10% yield represents the free cash flow of the property company. In an industrial company, you generate cash flow from operations, but you also have to consider capital expenditures and expansionary costs.
The cash that comes in minus the cash that goes out gives you the cash yield on your investment. You also need to determine the required return based on the risk. Some companies are so well-managed that you'd accept a slightly lower return, while others may require a higher return. Additionally, where you are in the investment cycle matters. When you look to the future, you need to consider interest rates because they set the benchmark. If you can earn 4% in a U.S. government treasury, that is important to know versus if it's 2%. The free cash flow yield I mentioned earlier needs to be compared against those figures.
It's quite complex, but if you distill it, it becomes simple: buy a good company with increasing competitive advantages, ensure it's cash-generative, and hold it for the long term.
Alec Hogg (09:14.471)
So, while it's complex to reach those solutions, you're continuously looking at a smorgasbord of opportunities, some of which become more appealing and others less so. How often do you change the options on the smorgasbord?
Nick Balkin (09:33.998)
We tend to have one of the lower turnover rates in the industry, which measures what percentage of your portfolio changes yearly. For our forward equity fund, this number fluctuates, but it's roughly around 20 to 25%. This means we hold stocks for an average of about five years.
Of course, there's some nuance to this. About 80% of our holdings are long-term, while the other 20% might be tactical opportunities that arise due to market cycles or specific takeout targets. Most of our portfolio consists of good-quality companies, but we also leave room for tactical plays.
Alec Hogg (10:44.563)
I remember during the COVID period when we saw Sasol at 20 rand a share, for instance. Even for us, that seemed like an obvious opportunity. Can you share some of your recent war stories regarding opportunities you've found?
Nick Balkin (11:01.336)
Yes, bringing up Sasol is important. The opportunity doesn't always mean buying something beaten down, expecting it to bounce back. For example, we talked about Premier in a client presentation. They were offloading stock due to a bond refinancing situation, which created a liquidity event. Being able to act during that period was much better than buying a distressed asset like Sasol when it was near death.
Sasol's situation was uncertain, but with Premier, we saw a high-quality business with excellent management. A year and a half ago, we believed fixed capital formation in South Africa would grow. We recognised that Wilson Bailey, while not the best construction company globally, was well-managed and presented an opportunity. We prefer those types of investments over waiting for a company's share price to rebound simply because it fell.
Alec Hogg (13:05.095)
From our perspective, we didn't know all of that. Sasol did turn around, but it might not have. What you're talking about presumably relates to the aftermath of not being able to sell its Australian asset, which was half the business, and government intervention impacting Wilson Bailey's share price. So it seems that these companies may have been oversold by people taking a superficial view.
Nick Balkin(13:41.09)
Yes, it's important to note that they had already divested the Australian business before we looked at it. They wouldn't have been on our radar if that liability remained. After selling, they were in a net cash position.
Moreover, with many construction firms exiting South Africa, there was almost an oligopoly with Rabie and Wilson Bailey. With only two bidders for contracts, margins improved. We also noted an underspend in fixed capital formation, which we expected to rebound in South Africa.
Alec Hogg (14:54.119)
What about long-term holdings, like Naspers? If someone had invested in Naspers in the late '90s when they bought into Tencent and held onto that investment, they would have seen spectacular returns. However, today, they're not so sure. It seems that for long-term investors, you have to also watch out for long-term headwinds. What is your perspective on these long-term investments?
Nick Balkin (15:20.003)
That's a great point. The reality is that when you're holding a stock long-term, you have to consistently ask yourself if the thesis is still valid. Naspers is a classic case. While it was a great investment for years, it now carries various complexities, including geopolitical challenges and the tech landscape shifting.
Many investors might cling to nostalgia or their historical returns rather than reevaluating whether they should still own that stock. This is why we encourage continual analysis; one must reassess based on the changing environment.
If we thought Naspers had a chance of becoming a tech behemoth akin to a Silicon Valley company, we would hold onto it. However, the realities of the situation often dictate otherwise. It's about maintaining a balanced perspective and being open to new information and changes.
Alec Hogg (16:58.663)
The concept of a balanced perspective seems quite integral. You could apply that to sectors and industries as well. We've seen cyclical industries experience upturns and downturns, like the banks, for instance. It seems they're now doing exceptionally well, and people are happy with the banks because of their dividends. They may have been cheap, but there was fear.
How do you assess those cyclical opportunities?
Nick Balkin (17:25.962)
I think it's vital to view cyclical companies with a long lens. Many investors mistakenly buy in when a sector is at its peak, only to face a decline later. The trick is to understand when the cycle is turning—timing that can be difficult.
For banks, we can look back a few years and see that the underlying fundamentals were strong, with consistent cash generation. However, given the macroeconomic factors and regulatory pressures, they had become undervalued.
What we find useful is a good, consistent framework for evaluating sectors. For example, look at the yield spread between loans and deposits. If it narrows, banks become less profitable, and they start to struggle. But if you can see signs of a widening spread, it's often a good entry point for bank stocks.
Also, as the credit cycle moves through its stages, it's essential to assess loan defaults and economic health. That's why a careful examination of credit metrics is crucial—understanding when to step in and when to be cautious.
Alec Hogg (19:16.823)
Let's focus on your processes a little. I think you've touched on a few key factors that you'd look at, particularly regarding management. What else would you analyze before taking on a position in a company?
Nick Balkin (19:37.866)
Our process is quite rigorous. We typically look at qualitative factors first, such as management quality, industry structure, and competitive advantages. Then we look at the quantitative factors: earnings growth, margins, return on equity, and cash flow.
Once we gather that information, we build a financial model and start running scenarios to understand how that business will perform under various conditions—both favourable and unfavourable. This model helps us determine the intrinsic value of the stock.
At the end of the day, it's about understanding the durability of the cash flows and assessing the risks. The macro environment, sector health, and any potential disruption must be analysed.
Finally, we often conduct scenario analysis: what if this company has a great year versus what if it has a terrible year? This analysis will help us gauge the potential volatility of the stock and guide our decision-making.
Alec Hogg (21:23.303)
That's a comprehensive process. Now, can we shift our focus to asset allocation? One thing I've noted over the years is that in the 2000s, there was an argument around holding cash. It became a four-letter word for some people because you couldn't get any return. It seems the winds have shifted, and now it's seen as a more acceptable asset allocation.
How do you approach asset allocation today?
Nick Balkin (21:51.046)
That's a crucial question. Cash has certainly regained its place in the allocation framework, and many investors now see it as a buffer rather than just a lack of investment. In the past decade, central banks' low interest rates discouraged cash holdings, but the dynamic has changed, and cash can now yield meaningful returns.
From our perspective, we focus on capital preservation. The goal is to ensure that, even in market downturns, we have something to fall back on. We believe in keeping a reasonable allocation to cash, particularly as we enter uncertain periods.
We apply a barbell strategy, ensuring we have some assets that are risk-off, like cash or bonds, while also having exposure to risk-on assets. This allows for flexibility and tactical moves when opportunities arise.
Ultimately, the right allocation is about finding the balance between growth potential and capital preservation, adjusting based on market conditions and investor goals.
Alec Hogg (23:31.619)
That's a refreshing perspective, especially given the past decade. As we close, what advice would you offer investors who are navigating today's complex landscape?
Nick Balkin (23:43.44)
My main piece of advice would be to remain disciplined. Don't be swayed by short-term market fluctuations or narratives. Stick to your process, and ensure you thoroughly analyse your investments.
Also, focus on quality. Investing is a long-term game; ensure you're buying good businesses at reasonable prices rather than following the latest trend.
Finally, always be willing to adapt. The world is constantly changing, and so is the market. Being flexible in your approach and being open to new information will serve you well in this complex landscape.
Alec Hogg (24:39.499)
Nick, thank you for that insightful conversation. I'm looking forward to seeing how Foord continues to navigate these waters and unearth opportunities.
Nick Balkin (24:50.724)
Thank you, Alec. It's always a pleasure to discuss these topics with you.
Read also: