JOHANNESBURG — The Cyril Ramaphosa effect has seen the South African Rand return to levels last seen in 2014. This, the same year the Biznews Global portfolio was launched. And despite this flat line growth seen in the currency against the US dollar, the portfolio has managed to maintain an annualised return of 32 percent. Driven mainly by holdings in Amazon and Alphabet. Alec Hogg takes viewers through February’s update. – Stuart Lowman
Let me just give you some of the overall numbers in the last month. In January the portfolio was sitting at R4.48m. It is now sitting at R4.31m. Now that’s a decline in Rand terms but in USD terms it’s gone from $330k to $369k, so it’s gone up by almost $40k in the month. The difference then in the Rand is because the Rand has been extremely strong over the last month.
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If fact, over the last 2 months and that has been the difference in the portfolio. We did say ahead of the ANC elective conference in mid-December that our view was sanity would prevail. Cyril Ramaphosa would win and that this would strengthen the Rand but that we weren’t going to make any changes to the portfolio on that kind of a decision. Clearly, for the most part anyway, the portfolio has performed sufficiently well to offset the decline that you would have seen when you price it in Rands.
In fact, you can see it here much clearer, as the Rand has now improved to almost the level it was at when we launched the portfolio in 2014, how’s that? So over three-years ago, the Rand was 11.37 against the USD, and it’s now at 11.60. That doesn’t take into account inflation differentials or anything really. It shows you that the Cyril Ramaphosa-effect has been enormous on SA’s currency, and it is hopefully going to be justified. Despite that, our initial decision with this portfolio was to hedge against the poor economic policies of Jacob Zuma. We are now seeing far better economic policies that are being implemented by Ramaphosa. We also saw some very welcome returns to the Cabinet last night in Nhlanhla Nene as Finance Minister, and Pravin Gordhan as the Minister of Public Enterprises.
So we’ve had that good news to come on top, which helped the Rand in the last 24 hours. But on the other hand, the portfolio in the US has been performing incredibly well. We’ve been fortunate in that if you have a look at this portfolio in Rand terms, you can see that Vanguard, for instance, which is the overall market. Vanguard is an exchange traded fund – the S&P 500 Index that follows the American share market, and that is up by 38%, in Rand terms, pretty much a similar increase as you can be aware because the Rand hasn’t depreciated much against the USD now, going back to the beginning.
Against that we’ve had two outstanding performers in Amazon and Alphabet. For the rest, Berkshire Hathaway, and Tesla – Tesla a late edition to the portfolio, has done fabulously well but Berkshire Hathaway – a little bit better than the market and then, on the other hand, a little worse than the market has been Tencent and Facebook. But those are not really fair comparisons because as you can see there Tencent was purchased in May 2017, and Facebook was purchased in October 2016. Whereas we are taking the market overall from December 2014 so there are timing differentials there as well, so not really directly comparable. But overall the annualised return of the portfolio, in Rands, has been 32% in the three-and-a-bit years that we’ve been in business.
The major reason for the portfolio’s tempering performance in the most recent times has been the Rand and I’ll just show you these three graphs very quickly. In USD – you can see the elective conference just ahead of it, the Rand was trading at R14.50, today at R11.60, and that is an appreciation of 20% but it’s been across the board.
Here you can see an even stronger graph for the Rand against the Pound. Ahead of the elective conference it was R18.50 and it’s now just over R16, which will buy you £1.
Here’s the Hong Kong Dollar (HKD) and there you can see a similar kind of a move. Why do we refer to the HKD, well because one of our holdings is Tencent – Tencent is listed on the Stock Exchange in Hong Kong.
The other big story last month has been the volatility that has returned. In fact, the volatility has been so low for so long, so tranquil and peaceful that a lot of people have been making fortunes going short of volatility or the VIX Index. That all changed at the end of January, as you can see. I’ve used here the VOO, which is the S&P 500 Vanguard ETF. It’s the most accurate reflection of the market overall, because the costs that are charged by Vanguard for this exchange traded fund are actually 4 x 100ths of a percent. It used to be 5 x 100ths, and they’ve managed to even cut it further so, 0.04% is the total cost that you would pay to get into the Vanguard ETF. It’s a benefit or a function of the enormous size of this exchange traded fund. But as you can see, at the end of January the value of the ETF went from over $260 all the way down to about $235, but since then it has improved. There was quite a big selloff in the early part of February, but as long as you held your nerve over this period you’ll be looking much better today.
The individual performances of the portfolio. There you have Rand/Dollar in three years a depreciation by the Rand of just 3%. On the other hand, the star performers are very easily pointed out there. Whereas Microsoft and Metro Bank are laggards in this portfolio, relatively speaking, but at least they’re still nicely in profit.
There’s the profits since purchase – as you can see, the improvement there is, well Amazon and Alphabet are just way ahead of everything else. Let’s get into the individual stocks and some of the stories around them. In fact, just to remind you that Stuart is standing by to take any questions, we do really like to make this an interactive discussion and we tend to always have lots of questions towards the end so any time that you want to stop me, to have a chat about an individual stock or something that I’ve said about it, please do.
That’s a good point for me to come in then Alec. Just quickly, I know you mentioned Tencent but Benjamin has got a few questions. He says, ‘please elaborate on Tencent and Naspers, and the differential between the two equities, and has Bob found a solution yet?’ Then he wants to know if he should include both in his portfolio?’
Benjamin, we have Naspers as the dominant stock in our SA Champions Portfolio because it is reflective of Tencent and it is still trading at a huge discount. The discount has narrowed but it’s certainly in the 30s, way in the 30s on the overall market value of Naspers, relative to its share price. What that means is if you were to sell or liquidate all of the assets that Naspers has today, and put the cash in the bank, it would be worth at least 35% more than what the share price is reflecting right now. Bob van Dijk, the CEO, has been working hard to try and narrow that discount. Including on the 12th December 2017, having the inaugural investor roadshow in New York to tell people about the attractions of the company. It’s helped a little but the Rands’ appreciation – remembering that we look at Naspers in SA Rand terms, has offset that narrowing of the discount. I haven’t done the numbers in the last couple of days but it is still very deeply into the 30s so it’s still a very good opportunity for value investors. Should you own both? I would be buying Naspers with Rands that you have in SA, but using your Dollars converted into HKD to buy Tencent. Tencent will give you a much closer reflection of the performance of the company than Naspers will because with Naspers you’ve got the Rand to come into it and of course, the discount as well.
Just to put it into perspective. Tencent’s market capitalisation has now gone beyond that of Facebook. It’s with $550bn. Facebook is at $537bn so, it’s catching on with Western investors. That the value of Tencent and the growth potential of Tencent, even bigger than Facebook, but interestingly enough in this last period, Amazon went past Microsoft into position 3 with regards to market-cap, and they now stand up there with the most valuable companies in the world and they’re all in our portfolio (the top 4) are Apple at $908bn, Alphabet at $794bn, Amazon at $736bn, and Microsoft at $734bn so there’s not a lot between Amazon and Microsoft but Amazon moving through into that position. To just sum up on the question that you did ask. Would I have both of them in the portfolio? Yes, using offshore or hard currencies to buy Tencent. Using Rands to buy Naspers. Is Bob van Dijk having any progress on contracting that discount? Yes, but nothing like the speed at which I’m sure he would like to see it happening.
Thanks Alec, just with Tencent. Ed wants to know is there any advantage between buying Tencent on the Hong Kong Stock Exchange or the New York Stock Exchange?
I’ve had a look at that and the problem with the NY Stock Exchange with the ADRs is they don’t seem to trade that freely. So, as a result, it’s a much better decision, and with Standard Bank Webtrader you can trade in Hong Kong. I would just go straight to Hong Kong. That’s the primary market for the stock to be traded in and then you don’t get caught with low volumes, which means you have a big spread, i.e., if you want to sell at 100, if there’s very low volumes traded in the stock, you might find that someone is only prepared to give you 95. Whereas, if there’s high volumes, you’ll probably find someone prepared to give you 99.5, so it’s much better to trade where the trade is made. Naspers, for instance, has got (ADRs) American Deposit Receipts, which are available in the US but they are very poorly traded and you would generally, if you were investing in Naspers, you’d be going through the (JSE) Johannesburg Stock Exchange, and it’s a similar thing with Tencent. Rather use Webtrader as an advantage and make your investment into Hong Kong.
Thanks Alec. Still on the Naspers discussion. Dominique wants to know, ‘how do you consider capital gains tax when looking at the Naspers discount, with the similar valuation situation to Yahoo and Alibaba?’
Capital gains tax only comes into account when you sell the stock. Then with the way that we like to propose and recommend you shouldn’t be selling the stocks within 5 years, and then capital gains tax becomes much less of an issue. The average holding period for a share, according to Buffett, and we’re going to look at his portfolio a little bit later, is supposed to be forever, but even he does quite a lot of trading from time-to-time, as I’m going to show you in his top-15 of the Berkshire Hathaway portfolio. But it’s one of those prizes that you should be happy to pay capital gains because it means you have made a gain.
Many people in this industry or many people who invest in stocks try to chop and change regularly. In fact, they try and trade against those who have much bigger balance sheets and are far better connected to the market place and it usually is a bit of a fool’s errand to do that. I don’t feel that capital gains tax is something that should ever influence your decision to sell a share. You should only sell when you have decided that there’s a fundamental shift in the underlying part of that stock, and as a consequence of that you can invest your money somewhere else to give you a better return.
Thanks, Alec. Just a follow-up from Dominique on that. With regards to Naspers unbundling Tencent and how CGT would be considered in valuing that discount? I’m not sure if that changes the answer.
No, it’s a theoretical question. At this stage Naspers is saying it’s not interested in unbundling and it has continued to follow that line for many years. So it really is theoretical. If it were to occur it would be a huge surprise but if that were to happen we would, no doubt, the company would give us all the insights and the details on that.
Perfect, Alec, let’s get cracking.
Here’s the richest man in the world, Amazon.com now worth $736bn and that’s been enough to push Jeff Bezos over $120bn, and comfortably overtake the previous holder of that title, who is Microsoft’s founder, Bill Gates. Just to have a look at the share price. This gives you an indication of what’s happened with that volatility. Even the mighty Amazon came down quite sharply in early February, as you can see there, but it’s back on its track again. Back into record area. In fact, in the last month, Amazon has again been the star performer in our portfolio – it’s put on $100 a share from when we last spoke in mid-January, when the share price was $1,417. Last night it closed it at $1,522. Amazon just keeps pulling further ahead.
There was an interesting comparison that’s been brought up between Amazon and Walmart. Now you might remember that Walmart is the biggest offline retailer in the USA, with huge stores. Walmart is represented in SA through what used to be the old Massmart. That whole company is now part of the Walmart Group. You have Game, Dion’s, or brands like that that are in the Massmart stable. The big concern for Amazon shareholders was, what’s going to happen when Walmart becomes proficient at selling ecommerce. Is it possible with its scale that it could start unravelling the whole Amazon magic? Well it looks like its going the other way because in the final quarter of last year, Amazon, which has a far higher base of ecommerce sales than does Walmart (far higher) – grew its sales by 24% in the fourth quarter. Walmart, after doing very well in previous quarters, only grew its sales by 23%, ecommerce sales that is. Not the instore sales but the ecommerce sales and this is being interpreted as ‘Walmart has got an enormous amount to learn on ecommerce before it can even be thought of catching Amazon and is a very bullish point for Amazon’ – as you see the share price just going stronger again.
The big story on ecommerce or this fight between Walmart and Amazon, which Amazon is winning hands down by the way, and has been for years, is that toiletries are now starting to come into the point. Things like deodorants, moisturisers, etc., and the detergents, which in the past were the kinds of things that you went into the store to go and buy because they’re too expensive to deliver individually. However, Amazon Prime is a club that it put together. It costs about £79 in the UK, about $99 in the US. That has been growing like crazy. In the last year it grew by 51% with revenues generated there of $9.7bn. The average Amazon Prime member spends $1,300 a year on buying from Amazon. The intention would be to open up even further and bring in detergents and toiletries – all manner of fast moving consumer goods. So it will be interesting to see how that all pans out. The market is telling you that Amazon is likely to keep winning.
Just on Amazon and I know we get this question every month – is it worth buying Amazon now, at these levels?
It’s a good question Stu. Everytime you see share price going up you wonder if it’s the end of the Amazon effect. I don’t believe so. Amazon is a company that we’ve had in this portfolio now from day one. We bought it in the $300’s so it’s put on more than $1,100 a share. During all of this period a classical trader would have said, ‘dump it – take your profits and move on.’ You need to ride your winners in every portfolio, and when you’ve got a winner like this one, who until you look at their business model and say, ‘something is going wrong,’ or ‘something is going to trip them up,’ or ‘somebody is going to put a spanner in the works in some way.’ Stick with it.
You buy companies, you buy your share – your slice of a company for a particular reason and the reason at the time will be that you believe in their business model over the long-term and that the price is not excessive that you’re paying right now. To start imaging Amazon’s share price going back to say $1k is very difficult to see because the Amazon story is now more widely appreciated amongst investors. Until we see a reverse in the momentum that’s been built up, and there’s a lot of runway still to go for Amazon. In theory, they could still sell all the retail or do all of the retail sales in the whole world. Of course, they only have a fraction of a percent of that potential. So Amazon is a company with lots of runway. It’s a company that has a fantastic business model. It is one that as it gets bigger, it gets even more successful. So I would be buying the shares, putting them away, and not worrying about them. Just put them on the side. You might see an opportunity, like what happened in February, when the shares came down to $1,300 or so. That would have been a very good buying opportunity, but if you have them in your portfolio – hold onto them. If you don’t have them in your portfolio – get some.
So there we go. You can have a look at that share price. You can see, going back to November, when the quarterly results came out the share price shot up. This time round it wasn’t quite as marked but after the volatility of early February was out of the way, Amazon was back on its merry upward run.
Here’s a company that’s not quite as strong a long-term bet, I think, as Amazon is. It’s going to be very hard, given where it is, for anybody to trip Amazon up. Whereas Alphabet, which has got Google that generates for Alphabet about 86% of online advertising – 86% of its revenues. It is in a place where international regulators are looking more closely at big tech and Google, being the major part of Alphabet Inc., is of course, very focussed on big tech through online advertising. It has a dominant share there and the EU has already challenged them and left them with a fine worth more than $2bn. We also saw a very sharp decline in the share price of Alphabet. As you can see there, in early February, that was after the financial results for the final quarter of last year were released. That was a 15% drop in the share price, from around $1,150 all the way down to $1k but it’s recovered, as has the rest of the market, very strongly since then. That is because this Is the second highest market value company in the world and it’s a good business model. Is it sustainable? Surely for some time it will be, and that’s why we still have it in the portfolio.
But if you were asking me, ‘would I be buying Alphabet or Amazon?’ I would certainly be leaning towards Amazon at this point. The increase in acquisition of traffic costs for Google are becoming apparent. The publishers are fighting back in various ways and Google/Alphabet is having to change its business model a little. Become friendlier towards the publishers, which in the past it’s been able to just aggregate all of their content. It’s complicated and it’s a highly complex world but as far as Alphabet is concerned, and here, we really need to talk about Google and the advertising from Google. – the cost that it’s getting per click is continuing to decline. I.e., what advertisers are prepared to pay per click through Google is continuing to decline as the supply is infinite. You and I can right now start a new website, which would add new pages and if everybody in the world were to do that there would be an infinite supply of pages because we would do it every day and so on.
That’s what Alphabet is fighting against. It’s trying all kinds of interesting things It has got self-driving cars, for instance, which has been widely publicised. It’s the leader in that market around the world. It’s also going into the cloud computing where Amazon has, by far, the lion’s share or the dominant position, having gone in early. There are options and one of those could hit in a big way but as things stand right now, the core business of Alphabet is the online advertising and that is coming under increasing pressure.
Here’s one of my favourite stocks, even though not everybody agrees – Apple has been all over the place, as you can see. A big decline in the share price there with the volatility that came but interestingly enough it’s back to all time records again, after picking up again yesterday. Apple is the most valuable company in the world. Our view on Apple is that the network effect here is enormous. If you buy an Apple computer or an Apple iPhone or become part of the Apple iTunes family – you become part of an environment, an ecosystem that serves you so very well. Their products are excellent. The sales of the latest iPhones, the 8 and the X (Ten) have been in line with the optimistic projections, and things are going well in China was well so Apple is in a good place. As you’ll see a little later, when I spend some time on Warren Buffett, it is now the second biggest holding in his portfolio.
Tencent we’ve spoken a little bit about. That’s Pony Ma, not as recognisable a face as Jack Ma, who runs Alibaba.com, but Pony Ma is rated by many as the best entrepreneur in China. The share price of Tencent reflects that as well. Again, the volatility that came into global markets in early February, with a pullback in the stock prices – it also affected Tencent. You can see it went back to almost HKD400 a share. It has shaken that off and continued to steam ahead. The SA connection here is pretty clear with Naspers owning about a third of the equity in Tencent and Tencent now one of the top-10 most valuable companies on earth.
Facebook has similar kind of challenges, if you look for them the same that Alphabet has got. Again, you can see that big selloff that came in early February. It’s recovered not completely though to where it came from. Part of the reason for this is that for the first time in its history the daily active users in the USA and Canada (North America) went down in the past quarter when it reported it’s results at the end of the December and that got people a little bit worried. It does appear that the growth that we’ve taken for granted from Facebook is now starting to slow, at least in the mature markets.
Something else that’s really been weighing on this company has been its vulnerability to interference. The Russians appear to have wanted to influence the US election. They didn’t like Hillary Clinton and they were prepared to do some interesting things in the online space to ensure that Hillary Clinton did not get elected. The insights on that is that fake news was taken to a whole new level by people from Russia. Of course, the winner, Donald Trump, who beat Hillary Clinton in a shock election result, as we recall. He was perceived to have been much friendlier towards Russians and not as harsh on Russian sanctions, etc., but Facebook was right in the middle of all of this. It had to change algorithms and had to address its business model as a consequence.
Something else that it’s had to do is to hire something like 10,000 cyber security staff to make sure there’s not a repeat of what happened with the Russians – now that adds a lot to the costs and clearly, will be reducing is margin in time to come. So Facebook is another one, Facebook and Google – it’s still too early, I think, to sell them but you have to be aware that they are going through changes in their business model that will make them less appealing in future.
This is the S&P 500 Index – again, if you look at that. This is a graph of the past year. You can see how the correction or how sharp that correction was in early February but, also, what the recovery has been since then.
Then Microsoft – again, being influenced by the volatility, the sell-off there. Microsoft is a little higher than where it was a month ago so it’s getting back to all-time record territory. The reason we bought into Microsoft was the new business model that it has introduced, which is called Office 365. You buy the software once and it gets updated but you pay either on a monthly or an annual basis – it’s part of the automated customer experience, which is a much better option than when your customers have to go into a retail outlet or have to buy online. Specifically, make a date to go and buy online and we really like that as a business model and we feel that Microsoft will benefit from that in time to come.
Here’s a very interesting company, Metro Bank. Their financial results for the year end December 2017, came out earlier in the month. Interestingly enough the share price went down despite the fact that the financial results showed a pre-tax profit of £21m, and this is the first time that Metro Bank has reported a profit. It did promise last year, when it showed a loss of £12m at the pre-tax level, that it would be aiming to at least break even in 2017. Well, it did a lot better than that and this is a bank that continues to grow very rapidly. Last year its lending was up 64%, deposits were up 47%. That’s hyper growth for a bank that was the first High Street bank in over 100 years to launch in the UK and its first branch was opened in 2010.
Interestingly enough, they are scaling back on their new branch plans. The anticipation was that they would get to 110 and then reassess. Now they’re saying they’ll get to 100 and reassess, but they will be opening 12 new branches in 2018, and that will take the network up to 67. So they’re 55 at the moment – 67 branches is where they’re looking at the end of 2018 and 1.2-million customers. The reason for the surge in the share price, after that pullback on the results, is perhaps reassessment of the results, which in my opinion, were very good but also because the company has bought a mortgage book of £523m from Cerberus, which is a private equity fund in the USA. They concluded this transaction yesterday. It will help to increase the mortgage book. That’s one of the targeted areas for Metro Bank and these are high quality properties and high-quality lenders, apparently, in London, Greater London, and the South East of England. So the part of the country that has been less affected so far, anyway, by economic slowdowns. It does increase the total loan book by 5% and in the banking sense, when you have scale it does give you a better margin overall.
The one question that remains on Metro Bank is at this rapid rate that it’s growing, as you can see lending, as mentioned, was up by almost 2/3rds in the last financial year. You generally need additional capital. Then it becomes a battle of wits between investors who want to try and keep the share price down. So that when they give capital to the bank they get the best possible return for it – they buy new shares at the lowest possible price. Then of course, from the bank itself, who is wanting to see the share price go as high as possible so that it can issue the least possible shares in the capital that it needs. The chief-executive Williamson reckons that Metro Bank will have to go back to the market in 2019, to go and raise more capital. Maybe even at the end of this year. But that the model, the rapid growth model is one that is working for them and they’re continuing to focus on hyper growth.
One thing that is restricting that growth is Tier-1 capital and hence, the need to go into the market at various times and to raise more money. That was down this year from just over 18% to just over 15%. Metro Bank is in that interesting situation where you know that one day it’s going to take off. It’s got a pretty modest market capitalisation of only £3.5bn. So, when it takes off, this thing is going to be a little bit like the kind of rocket we saw at Capitec but when that happens is anybody’s guess. I’m quite happy for us to be sleepers on that one.
Fritz just wants to know, but I know we don’t really look at PE ratios when investing in the Fourth Industrial but he wants to know what the Metro Bank PE ratios, and if it’s a concern with you with investing in the stock?
No, not at all, not with Metro. The reason for that is that it has just broken into profit. It’s the kind of company that is focussed on growth, a bit like Amazon and Google, where they don’t worry about the profits that they put on the table. The fact that Metro Bank has broken into profit is good because it shows it’s got a model that works. But the profit that it’s generating is a fraction. If you look at £15m after tax profit, and it’s got a market-cap of £3.5bn so the PE would be a few hundred years. That’s not what we are looking at in this company. The good news is that it is making a profit. In fact, if they wanted to maximise the profit they would just stop growing. They would just switch off the growth taps and that’s not part of their strategy at the moment. So profit maximisation – not the deal there. Much more important for them is enterprise or growing enterprise value, and that’s a similar story with Amazon. You’re looking at Amazon adding to it’s enterprise value rather growing the earnings. That’s the comparison that you need to look at – enterprise value in those cases.
It’s a bit like when you’re buying into an investment company. If you can imagine an investment trust. Investment trusts would be, well they’d be receiving dividend and they could decide to distribute those dividends or they could decide to reinvest those dividends. If an investment trust reinvested all the dividends that it got then you’d have to look at its enterprise value, i.e., the value of its portfolio rather than the income that it’s distributing as the basis for valuation of that particular stock that you’re buying into. It’s a very similar situation, for the moment any way, with Metro Bank, and even Amazon, who have been at it for many years.
Let’s just go into Berkshire Hathaway. You can see, even old faithful came back after that fall-off in early February and over the last weekend Warren Buffett, the creator or the guy who built it. He didn’t found Berkshire Hathaway. It was an old textile company that he acquired control and just kept the name really. He built it into the enormous business that it is today, worth $520bn. Again in the top-10 of the world.
Bu why I like to look at Berkshire is not only because it has more than 80 subsidiaries that are in the backbone of the US economy so it tends to mirror what happens in the overall market. But also, to see what investments that Buffett, himself, has made.
Here’s his big-15 at the end of 2012. I found this so fascinating because Buffett’s philosophy, and I wrote a book on this subject, ‘How to Invest like Warren Buffett.’ Is when you buy a share you should be buying it forever. But he doesn’t practice what he preaches and this shows you because here’s his top-15 holdings in December 2012.
Number 1 – Wells Fargo (it’s still in the portfolio). So is the Coca-Cola Company, but IBM, which was the third biggest holding – it was 17% of his portfolio (as you see that percentage of the total at the end) – worth $13bn. It’s no longer in the top 15. American Express is there but outgoes Walmart, Proctor and Gamble. US Bank Corp was here. Out go Sanofi, and of course very famously Tesco, Moody’s is here. Out go ConocoPhillips, Posco, Direct TV, and Phillips 66, another energy company is still in the portfolio. So what this is telling us is that of the top 15 stocks that Warren Buffett Held at the end of 2012, only six are still in the portfolio.
For a highly focussed portfolio that gives you some very interesting insights into the way that he might say one thing but he doesn’t always follow the same process himself. This is the latest portfolio so if you have a look at the bottom, the market value of Buffett’s big 15 is $170bn. Of that, the top 15 accounts for 86%. Then even more concentrated than that, is you can quickly have a look at the top 5, and the top 5 will get you to over 60%. Around about almost two-thirds of the portfolio is focussed in Wells Fargo, Apple, Bank of America, Coca-Cola, and American Express.
It shows you again here that of the top 15 Buffett only owned 5 of them 5 years ago. Well, put it differently. He might have owned more because you can see, for instance, BYD, which is lying in position 14, has come from an investment of $232m to nearly $2bn so it’s forced its way into the top 15. BYD is the Hong Kong battery manufacturer, which is a company that we’ve looked at and never really had the guts to buy but clearly, Buffett bought it nice and early. Goldman Sachs is in there as well. It had a market value of $654m it’s gone up to $2.9bn. Moody’s cost them $248m, it’s now more than a ten bagger – $3.6bn. If you go back to Moody’s here there were 28.4 million shares. Moody’s here – 28.6 million shares so it’s been the appreciation of the share price and Buffett’s love of the company and the decision not to sell the company, which has brought Moody’s into the preeminent position that it holds there.
This is a nice reflection of the world’s greatest investor. It also tells you that he’s gone pretty big on airlines, SW Delta Airlines, and on banks. If you go from the top you’ve got financial services companies, Wells Fargo (of course), Bank of America, American Express, US Bank Corp., Goldman Sachs, Bank of NY Mellon. Those are all banking companies and a pretty dominant side of his portfolio as well. So Warren Buffett’s big 15 makes interesting reading and you don’t really need to write them down but you can pick up from the podcast which will be on BizNews Premium in the next couple of days.
I really thought long and hard about Tesla and I almost sold the stock because there is so much negative news around Elon Musk. The last set of financial results were really all over the place. He’s telling a story but the story that he’s telling, at some point in time, has to come close to what the reality is. Musk was promising a massive rollout of the Model-3. That hasn’t been happening. We were getting feedback on the Model-3, you might recall the last time we spoke about Tesla. Some of the information was saying well, they were now getting up to their production targets. But there are many sceptics. It is the biggest short-position on the NY Stock Exchange, of any stock on the market. There are those who are holding to Elon’s tale so strongly.
So far, it’s a bit like Bitcoin. It’s managed to defy all logic but it’s becoming very high risk now and my intention, at one stage, but I’m not quite sure about… I don’t know enough about Alibaba to be able to make the switch. But it would be to sell Tesla and to buy into Alibaba – we’ll probably do that in the next webinar.
Here it is, just to close off with to give you the portfolio in Rands. We’ve had an annualised return of 32%, which is extraordinary, especially as the Rand has done nothing. So we’ve been invested in the right stocks in the US. We’ve made a couple of mistakes, over the period, as you well know but fortunately we got out early enough to not really be hurt by IBM. I think we even made a small profit on IBM. Novo Nordisk was another stock that we had in the portfolio early on that we are now out of.
We’ve been really nicely targeted towards the exponential companies and they really have delivered exponential returns so that’s our portfolio for this month. Stu, if there are any more questions, we can spend the rest of the time that we have together looking at those.
Thanks, Alec. There’s a question that should rather be picked up tomorrow, at the SA Champions Portfolio discussion. But Benjamin wants to know, should Sasol be considered in a global share portfolio?
I know the company well enough to be able to express an opinion. It is highly leveraged towards the petrol price, the SA petrol price and what that means is if the SA Rand appreciates in value that Sasol enjoys or the price that it gets declines because the international oil price is priced in USD. So Sasol’s income is determined in, primarily, SA Rands. It is a multinational now and it’s growing its international operations but most of its profits are generated by the SynFuels operation, and the SynFuels get their income in SA Rands. So the more the Rand appreciates, as it has been doing, the more under pressure Sasol’s profits will be.
Now, they have a hedging program to protect them against this but with the Rand, under Ramaphosa, likely to be stronger for longer. You then have to look at the other side of that equation and say, ‘are you anticipating that the oil price will rise by more than the Rand will appreciate by?’ Sasol gets its income in Rand per barrel of oil – okay so, you get the story there. I’m not an oil bull for the simple reason that there are any number of shale gas operations that can be switched back on the minute the oil price starts to threaten $70 or $80 a barrel. A lot of those shale gas operations in the USA and there are many others, potentially, elsewhere in the world, including SA, which has at least the eighth largest reserves (some say the fourth largest) of shale gas anywhere on earth. So there’s the potential to switch that on, not in SA but certainly in the US, where they’ve moth-balled a lot of the shale gas plants, and that will put a cap on the oil price.
So you’ve got a cap on the oil price, you’ve got a Rand that is unlikely to blow out, unless there’s some crazy event that happens in SA, and we can never underestimate the potential of that happening. But at least for a period of time investors are going to give Ramaphosa the benefit of the doubt so you can anticipate that the Rand will be stronger for longer. So, put that all together – until Lake Charles comes in, that’s the big chemical plant in Louisiana that they’re busy with an $11bn investment – a huge investment there. Until that starts kicking in and then we can start looking at Sasol more as perhaps as an international chemical play or not as big a SynFuels play as it is at the moment. I think it’s been well managed. I think they’re doing good things on cutting back the costs, etc. But overarching all of that is the idea – that you’re actually having a bet on the Rand and the price of oil and I wouldn’t be too bullish on that at the moment.
Ridge just wants to know, ‘Aside from Alibaba are there two or three other stocks that you might consider as knocking on the door for the portfolio?’
I’m always looking at various shares and always reading annual reports, and always considering where the possibilities might lie but there is nothing that’s jumped out at me yet, like Alibaba. Baidu is also quite exciting but you’ll hear from both of those that it is looking outside of the traditional portfolio of the USA stocks but still looking for exponential opportunities. BYD is another one – I need to do some more work on BYD. It’s a bit like Facebook. I know Facebook and the business model well. I was just very slow in finally grabbing or coming to the party there.
Tesla, on the other hand, another company that I really like and I’ve listened a lot to the quarterly results. I guess it’s because Elon Musk is South African and I read the annual reports as well. To me, Tesla was an absolute screaming buy when the market was negative on it at $200 a share, but now it’s at $350 a share. If Elon Musk doesn’t start delivering at some point. He does threaten losing the magical approach and when that happens who knows where the share price could go to so Tesla has just become a little bit too high risk. But BYD, in the same market, they also produce batteries for cars so they’re also exposed to the seismic shift away from the internal combustion engine. That is one that I’d be looking at, next door to Baidu, and definitely Alibaba.
A quick question on US interest rate hikes. How do you think it will affect the portfolio, if they come through?
It’s a question of quantum. Classical investment theory is based on the reality that you have different options that you can invest in. You can invest in equities, in fixed interest, or you can invest in property. Now, property and fixed interest – generally speaking, are related, and property will benefit when interest rates are low because then your property yields, relatively speaking, are better. But when interest rates rise, property finds the going a lot less easy because the alternative, risk free, becomes more appealing than the alternative of buying into a property where there is obviously the risk of default, etc.
It’s a similar thing with stock markets. When interest rates rise they have a negative impact on the stock market and on market prices as a whole. But you have to look at the stock market, particularly the USA very differently to the way that you looked in the past. We have this clutch of exponential companies, businesses that grow at 20% plus per annum. It looks like they will continue to grow at that level for many years into the future – Amazon being an obvious example.
Then you have other companies that are also listed on the US stock market who are contracting in their sales, contracting in their potential because the economy is changing. Technology is making them uncompetitive. If you consider for instance, internal combustion engines or motor vehicle manufacturers who make engines that rely on petrol – they, at the moment, have to be looked at as a sunset industry because at some time in the next 20 years, they’re going to stop producing internal combustion engines. Now they have to make that switch to electric vehicles and some of them are doing it quite successfully. We’ve seen Toyota is doing pretty well, BMW seems to be on that path, and Nissan. But it is a huge leap from the one type of business to another type of business and not all of them survive. We don’t know too many companies from the era where they used to make buggies and people used to breed horses for transport. Cars, of course, wiped out that whole sector and horses, I think, are down to something like 10% of the number that was around in the USA before the motor vehicles arrived.
So you have these ebbs and flows that go through all the time and I think we need to just bear that in mind that you can’t say, ‘buy the market’ or ‘is the market expensive’ and ‘is the market going to come back because interest rates are going to rise?’ As you used to be able to do. Now you have to look within stock markets for those companies that are impervious to economic swings and the economic tides because their own business model, their own growth model is exponential.
Just before we wrap up. A nice one to finish off with. Ronnie wants to know, ‘how can he invest in this portfolio?’
Ronnie, the way to do it is to open an account with Webtrader at Standard Bank. They give you the ability to invest or that account gives you the ability to invest anywhere in the world. I think they’ve got a couple of dozen stock markets that are available to you. The good thing about Webtrader as well and if it’s not possible directly through Webtrader – I know through my recent road show with Standard Bank is they’ve got a new app called Shyft. Literally, you can put up to a R1m, no questions asked, into Shyft and then convert that or change it into USD and take those USD and put them into a portfolio. But you’re going to have to replicate the portfolio yourself.
Standard Bank don’t have an identical portfolio like this that you can just put your money into, which they’ll replicate for you. We use this with Standard Bank as a model portfolio so, it’s something for you to look at, to replicate, and then to apply your resources accordingly. But the advantage or the nice thing about this is that every month we get together on the webinar and I can keep you updated with how the portfolio is going, where the concerns are. You can hear right now, I’m sure you got it that I am concerned about Alphabet, I’m concerned about Facebook, and I’m very concerned about Tesla. Those are the three stocks in this portfolio that if I was buying brand new, from scratch today, I’d be wondering whether or not to go into them because as they stand right now, I certainly cannot see a case for buying those three shares at the current prices forever.
Tesla is just too high risk. It’s bouncing around all over the place. It’s gone from $300 to nearly $360 at the moment, in the last few weeks and it just needs to settle down into some kind of semblance of normality. Also, for that to have happened after some pretty mediocre quarterly results, where once again the promises weren’t met – it was concerning me and I’ve articulated the other two. But outside of those three stocks I’ll be very happy holding the rest of them.
Just on Shyft, I’m not sure if you have the answer to this. Fritz wants to know, ‘if they pay interest – if they transfer to Shyft?’
No, it’s not an interest-bearing account. It is just a vehicle through which you, I guess, can trade currencies, or hedge yourself. You can’t really trade the currencies, but you can hedge yourself against currency movements. So Shyft right now, if you put R1m in, you’ll be getting R11.60, against the USD. The idea then would be to use those USD to invest into a portfolio like this one.
Excellent, thanks Alec. I think that’s all from my side.
Well that’s it and we’re spot-on one hour. Thank you again for joining us today for the portfolio. Don’t forget the one tomorrow – they’re coming thick and fast this month. Usually, what we try to do is try to have the SA Champions Portfolio wrap up in the middle of the month, and the Global Portfolio at the end of the month. Well, we’re going to be talking tomorrow about the SA Champions so, please join us again then.
From next month we’ll have SA Champions mid-month and the Global Portfolio, as always, at the end of the month. Just to give you a nice bit of break between the two. Some big changes in the SA Champions Portfolio tomorrow, which shouldn’t surprise you if you’ve been following it for a while. Given that we believe that the direction in the SA Rand is fundamentally going to be different now. It’s had most of its run but it’s unlikely, given that the economic sense is coming back to the management of the SA economy.
