🔒 The Editor’s Desk: How do you dodge the falling rand and come out on top?

DUBLIN — The rand is officially slumping and it looks like the fall could continue as emerging markets currencies remain under fire. What is a South African to do in such an environment? Well, the biggest trick is investing offshore, hedging against the rand with dollar, euro, or pound investments. Alec Hogg and I discuss how the falling rand has boosted the Biznews Global Portfolio and how offshore diversification can help South African investors stay on top even when the rand hits bottom. We also catch up on the Reinet share buyback and talk about Alec Hogg’s upcoming interview with Lost Boys of Bird Island co-author Chris Steyn. – Felicity Duncan

Hello and welcome to this week’s edition of the Editor’s desk. This is Biznews radio and I’m Felicity Duncan. With me on the line is Alec Hogg. Alec it has been a bad week for the rand. We’ve seen it steadily weaken over the last five days, but it’s an ill wind that blows no one any good. This has actually turned out to be quite good for our global portfolio. Do you want to give us a little background?
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It has been an incredible wind from behind. Certainly not ill as far as investors in the portfolio are concerned. We started the portfolio in December 2013. The intention was to be a rand hedge or a hedge, primarily, against poor economic promises from the Zuma administration and it really has paid off hugely for those people who have followed us. We invested primarily …We had roughly half the portfolio in stable stocks – and in that I include Google, Berkshire Hathaway, and the S&P500 index – and then we took the rest of the portfolio and found some stock picks, amongst them Amazon. And Amazon has been an incredible performer – that, together with Google, with Apple which has got a big chunk in the portfolio, have really out-performed and have built the portfolio to a sterling performance in US dollar terms. But, of course, overlay the rand, and what the rand has done in the last couple of months and you’ve taken it still higher, so that in almost four years – it will be four years in December – our annualised return over the four years is now well into the 40%.

Those are kind of dream numbers if you’re an investor. To be making 40% a year, even Warren Buffett only makes 20%. Of course, you’re talking about a long-term there, and we’ve only been going for four years, but it gives you a feeling or understanding for if you get the broad picture right and you have some good fortune with a couple of stock picks you can really outperform to a large degree. And that’s what is happening in our global portfolio. Incidentally, the last time we did an update on it, it was this week when we did our monthly webinar – the annualized return in rands was 41% and that was when the rand was sitting at R14.17 cents. It is now sitting at R14. 71 cents, so you can add a couple more percentage points on that return, just because of the way the rand has been falling.

In US dollar terms the portfolio has virtually doubled in the four years. In rand terms it has gone from around … It started off at R2,000,000 and it is well over R5,000,000 now.

It just really shows the importance of diversification, not only within a country, but also global diversification especially, of course, in a country like South Africa, which has a free floating and very volatile currency that is going to be blowing whichever way the wind blows. So, of course, over the last few months as we’ve had crisis in Argentina and then in Turkey, emerging market currencies have come under fire. The rand sort of naturally enough has been steadily weakening, so we are back now where we were in November before we had the Ramaphosa bump – actually a little higher than we were in November. So, it just really says to people out there, “Listen it is not enough to just diversify by sector. You’ve really got to diversify by currency and by geography, particularly when you are in a small open economy with a free-floating currency.”

That is so true. We have two portfolios with EasyEquities and there is the SA Champions portfolio and the US Exponential portfolio and the difference of performance of the two has been unbelievable. The SA Champions portfolio, we really tried to focus on entrepreneurs who have made an impact globally, but it is such a small universe. You have to, for instance, put Steinhoff in there and of course that hurt the portfolio. We were very lucky that we got out of BRAIT, as an example, and Blue Label, which we had in the portfolio. But if you have a look at that portfolio at the universe that you could invest in via the Johannesburg Stock Exchange, you are really struggling to find stocks or more than 20 or 30 stocks.

When you go internationally you’ve got thousands and thousands of stocks to have a look at, and that is really the difference here.

As an investor you shouldn’t be looking at 0.3% of the world’s economy, which is South Africa’s GDP. You should be looking at the other 99.7% as well. Just because you happen to live in one town doesn’t mean that you would only be buying products produced by companies that are based in that town. Imagine if you did so – you wouldn’t have cell phones, you certainly wouldn’t have Amazon, you wouldn’t have Google and so on.

Just taking that globalization mindset and putting in into your investment focussed or your investment strategy can give you completely different returns to those that you are anticipating. And this is a message that we are learning ourselves at Biznews by focussing on the international stocks, because we have got them in the portfolio, and as a consequence to that helping our community to also get to understand more and more that there is this huge world out there, hence our partnership with the Wall Street Journal.

You know, more than 50% of shares by market cap in the world are listed in America. So, that would tell you that if you’re an investor find out about what’s going on in the American markets or at the very least what is going on with American stocks. There was no incentive, there was no interest in the past. Now, we are increasingly looking at that as Biznews and through our amazing relationship with the Wall Street Journal we give our community access at a fraction of what they had to pay if they went direct to the Journal. So, all round we are, I think, making a contribution to the globalizing of the minds of South Africans wherever they might be living.

It’s easier than ever because, of course, there is easy access through platforms like EasyEquities to global equity markets and, of course, thanks to the internet – you can get your information as global as you like. And as you say, through the partnership with Wall Street Journal, we really do bring the rest of the world home to South Africa, which is, I think, very nice for subscribers.

You were mentioning the South African stocks and the struggles of finding things that are going to perform well and I wanted to pick up a bit on the discussion you had with Johann Rupert who is working to reduce the discount that has been plaguing Reinet.

He is such a good example of a South African with a global mindset. In 1985… In fact I first met Johann Rupert in the early 1980’s – I think it was about ’83, ’84 – when he was at Rand Merchant Bank. He started Rand Merchant Bank. He’d come back from … His father Anton who was one of the great entrepreneurs in South Africa, in the Rembrandt group, sent Johann to the United States. After he graduated he worked at Lazard, and I think at JP Morgan, and he worked on Wall Street. He got to understand what the international picture was like, came back home and started RMB Rand Merchant Bank, which as we know today is a huge brand and a very powerful banking organization. And then he moved on, in 1985, to Rembrandt, went in the group. He joined his father.

And I remember at the time, I was working at the Sunday Times and we had a very long lunch, Johann and I at Norman’s grill where you … That’s the way he kind of operates. You get to spend time together. You get to understand a little bit more about how each other work. And we did a wonderful story for the Sunday Times with Johann Rupert, this youngster, standing in front of a Peter Stuyvesant car, because that’s the way they worked at Rembrandt. It didn’t matter who you were. The boss’s son or the future boss or a person who was coming just to sell cigarettes for the rest of their lives – you had to go on the road for three or six months. And that was quite an interesting story for South Africans to see, that this young guy, who had already been hugely successful, was going to be learning from the bottom-up again at his father’s firm. Anyway that was ’85.

Within three years with this global mindset that he had, he started Richemont and housed all of the Rembrandt international interests into Richemont. And then Richemont itself has its own life. It is one of the great luxury brands in the world. But 10 years ago he decided to focus…By this stage, of course, Anton has passed on and Johann was very much in control of the whole Richemont/Rembrandt operation. And he decided with Richemont he wanted to focus it still more. It was in 2008. We just had a stock market crash. He wanted to create a vehicle then for people who were nervous about another stock market crash, so he started Reinet Investments, named after Graaff-Reinet, which is the hometown where the Ruperts come from in the Karoo. In the last 10 years, Reinet has done pretty poorly, because it has been a defensive portfolio – 60% of the portfolio is in British American Tobacco and that was hived from Richemont, so Richemont would focus only on luxury goods and British American Tobacco, its shares – more than 80,000,000 at the time – was housed in Reinet. And Reinet then underperformed because of its defensive portfolio that it had. It made quite a lot of private equity investments and so on.

And what has happened, as the bull running international stock markets has been going on, companies like this, which are defensive, have been overlooked. And more and more, the value of the companies has been trading at a discount to the underlying assets. And at the annual general meeting this week, Johann Rupert said that Reinet’s shareholders were being prejudiced in this way, because the professionals were coming along and picking up stock in this deep discount, in other words, buying a dollar’s worth of assets for 60c and it was small shareholders who were giving up their value. So, he said, “We want to fix that.”

In this week, he has already added R5 billion to the market evaluation of Reinet, just by announcing that Reinet is going to be buying back 20% of its equity. So, it could be spending up to R10 billion in getting the value of the shares, of the share price, closer to the underlying value of the stock. We had a really good chat about this in the week. I obviously followed what went on in the AGM in Luxemburg and when he was on his way home with his son – who is also called Anton, he is now in the business as well – in the car, we had a chat. So, the audio was a little unusual, talking to him on a speakerphone, but it was a fascinating interview and he is really an incredibly well connected and a very, very smart guy.

What he was saying, his view is that he’d always been … Often here in London they call him Rupert the Bear – you’ll find occasionally the Financial Times will do a piece on him, on his annual report or something, and they’d say, “Rupert the Bear says watch out for the crash.”

Well, Rupert the Bear is now saying he doesn’t believe the way that central banks are operating is going to be conducive to a crash any time soon, because they are just pumping liquidity into the system. How he understands that is his own personal experiences with the bond issue, a 4 billion euro bond issue that Richemont had, and he said that the European Central Bank subscribed for the bond and didn’t even care what the price was. They were just putting 750 million euros in this bond issue of 4 billion, at whatever price.

So, it told him … As he says it was his ‘aha’ moment – the money was being pumped into the system. And on the other hand, he’s got Reinet sitting over here with lots and lots of… thousands of small shareholders, who might be tempted to sell their shares as the professionals start scooping up in anticipation of the tears that are going to flow at some time at the end this quantitative easing story. And, hence he doesn’t want them to get screwed over.

Johann Rupert says he doesn’t know how long it’s going to last, this continued upswing. And we are seeing it as well in our portfolio. We’re seeing in with the exponential stocks, Amazon has doubled in the past year, this year already, and it just keeps getting stronger and stronger. Strong improvement for Apple etc.. So, money is just chasing the best stocks in the world and we’ve got even one of the most bearish, the most sensible investors around, telling us that he doesn’t know how long it is going to carry on for, because as long as central banks keep throwing money into the system, asset prices will rise.

There is certainly an aspect to worry about in that, right, with the threat of creating very intensive inflation from all this money being produced. It is kind of interesting, because really the last big crash – the 07/08 financial crash – was all down to problems in debt markets, very specific debt markets, that then spread to the other debt markets. And one does wonder, you know, given how we’ve been just massively inflating the debt portion of balance sheets, not only at corporates but at central banks and just really around the word. Massive, massive growth in debt … One does sort of wonder, when is the other shoe going to drop? But Rupert is absolutely right. There is no sign that central banks are going to turn off the taps any time soon. Even in the US, they are tightening very, very slowly. And so the party looks like it’s going to continue for at least a while.

And I think that, you know, the share buybacks – that has been a massive thing that’s been happening on US equity markets over the last five years, really, the last year especially. Companies have been very aggressively buying back their stock and boosting share prices, and boosting the return on equity in that way. Apple – big share buyback programme at Apple for example. When you’re a company like Reinet and you can buy back at this huge discount to NAV – to net asset value – then why wouldn’t you, right? That is a way to directly improve the fortunes of shareholders and then to improve your outlook going forward. So, it seems like a very sensible decision, especially if you can borrow at will from the ECB, the European Central Bank.

Alec before we run out of time I wanted you to give us just a little bit of a teaser of something that is coming up – I mean, surely we’ll be up by the time this interview is up – but you had an interview with Chris Steyn, the author of The Lost Boys … or the co-author rather of The Lost Boys of Bird Island. Do you want to give us a little preview of that?

Chris and I worked together back in the ABSA days. She was taking a break for journalism as was I, actually, in the mid 1990’s. And of all the people that I worked with Felicity, you know highly I regard you, I put her up in the same league. She is an extreme professional. She is a wonderful journalist, very intelligent and courageous investigative journalist and for years she has been working on a story about Peter Villier in the old Apartheid South Africa. What used to happen there was that you had selective, what they use to call national key points, where nobody was allowed except for the military people or those who were very powerful in government. And one of those was Bird Island, which is just of Port Elizabeth, and only special people or people with permits were allowed onto Bird Island which made a haven for those wanting to do… deviant kind of practices which is what happened here.

It was a great interview with Chris. I know her well. I know how her mind works. I know why she would not just let this story go and, particularly now that her co-author committed suicide, why she’s just going to be going ever-more on it. It’s a bit of an update on what’s happened with the … the consequences of this book and there is a lot of investigation going on now, but also a little bit of a prequel on how she got to understand this.

As a small taster … When I worked at the Sunday Times in the 1980’s, a guy who worked with us – Geoff Allen. He was a larger than life character, one of those rotund, overweight, bolshy, spoke a lot. He just knew everything that was going on, extremely plugged in to gossip and so on. And Geoff had a brother in Port Elizabeth called David Allen, and David Allen is the central character in this whole saga. He was the guy who used to round up the street children and take them off to Bird Island where certain paedophilia kind of or a paedophile ring got together with these kids. And David Allen had the contract on Bird Island.

Now, Geoff his brother who I knew and who worked very closely with Chris over many years, was the kind of guy that when he was in his cups would talk a lot about things that is … that he knew and clearly he and Chris were pretty close. So, this is where she started getting an understanding of what was going on in this whole story, and it kind of goes from there.

So, I’ll be working on editing the interview and putting it together in the next few days, but what I do know now, as much as people have attacked Chris and her co-author, the late Mark Minnie, for what they’ve written, I have no doubt that this is accurate and she’s handled it very responsibly. And it’s one of those things you’ve got to bring out. You’ve got to clean out the boil before the skin will heal, and there are a lot of these boils and disgusting events that happened in Apartheid South Africa, that time has taken our heads away from. This is one of those that is now being investigated and not before time.

Absolutely it’s just like, you know… much like the scandals that we have seen in the Catholic Church, where there were very similar abuses of power, because these were people who are untouchable.  You see these apartheid officials feeling untouchable and therefore free to engage in the worst kinds of behaviour. It’s a very common pattern you see around the world and that is why they say absolute power corrupts absolutely. And that is why it is so important to have people out there like Chris Steyn, who are going to explore it and who are going to expose it to the sunlight, because, as they say, sunlight is the best disinfectant. And hopefully with these revelations we can sort of start to expose the crimes, I guess, the lessor known crimes of Apartheid and ultimately move on and heal from those. Because you are right, Chris has come under a lot of attack as did Mark Minnie, but really what they’re doing is so important and I’m really glad that you got to speak to Chris and are going to put out … give her an opportunity to air her side and to explain where she’s coming from and where the story is coming from and why it’s so important.

Ja, and you know, a disclaimer: I rate her highly. I have worked with her. I know her well enough. She is one of the tops. She is a true thoroughbred and what she’s put together here; she hasn’t sucked out of her thumb, I can tell you. It is 30 years of watching of listing, of pulling together the strands, and if there is one book that South Africans should read – it’s a page turner, but it’s a difficult book to absorb because of the content – it’s this one. It’s the The Lost Boy of Bird Island. It opens up some old wounds that need to be disinfected.