Piet Viljoen: Investors AWOL so many managers run companies for themselves

Piet Viljoen, top money manager and founder of RECM, linked up with old pal Alec Hogg in this week's episode of Rational Radio to talk about his alma maters Allan Gray and the recently renamed Ninety One (Investec Asset Management). He offers some scathing opinions on Tiger Brands – a company whose shares he has avoided for years – and puts it down to the way corporations are "gaming" the oversight-implications of indexation of investing. Fascinating insights as ever from the forthright value investor who also provides some insights into what might be the real reasons for the massive unbundling of FirstRand shares..It's really good to be talking to Piet Viljoen from RECM. Nice to have you on the show. Our story goes back to when you started RECM. How long ago is that?.___STEADY_PAYWALL___.We started in 2003, so it's 16 years ago. Very good to talk to you again Alec..Makes me feel a bit old Piet but I don't feel it. You were once with Investec Asset Management before you started RECM, I see they've now changed the name. If you go back 16 years ago, it's a pretty different company, is it something that you anticipated, was there always a desire for independence – the old Investec Asset Management?.Even in the days when I was there – going back more than 16 years – the relationship between Investec Asset Management and Investec was somewhat tense, but there was always this feeling of the need for independence. I think asset managers generally speaking, do best when they're independent – from outside influence, shareholder control – who might have different points of view. So there was always that feeling within the business that is where they wanted to be. I'm very happy for Hendrick and his team for achieving this now..And the name? You had to create your own name – RECM – and an interesting name that they've chosen..Yeah, Ninety One. I think it's one of those names which at first glance you question and you wonder how they come up with it, but I think it's a sort of name that can stick and there's a lot of significance – it's when Hendrick actually started the business – in 1991..Another ex-boss of yours – the late Allan Gray – who passed away in the last couple of weeks. Do you have a similar view of him – what we're seeing from many people outpouring – that he was a humble man, a bit of a recluse, but a man who actually made a big contribution?.Oh yeah, he made a huge contribution to the world of asset management. I think he is probably the father of professional asset management in South Africa and I think he had a brilliant mind and it was an honour and a privilege to work under him at that time..Piet, talking about asset management and the industry generally, Coronation's results were out in the past week, big outflows – R40bn – is that telling us anything about how your sector of the economy is going?.Yeah, the asset management industry – as with many other industries in South Africa particularly as well as globally – is under tremendous pressure from various sources, the most important one being the strong shift towards passive management. That's putting tremendous pressure on the ability of asset management business to raise new funds or to generate inflows. Markets have also become quite narrow, performance or relative performance at least is difficult to come by. So those are two things playing a big role in the asset management industry today and there's no doubt it's a much tougher industry than it has been for a very long time..So how do you counter this?.The first thing you do of course, is you cut your cloth according to what you have. So you cut costs and bring them under control. Historically the industry has been quite generous on how it spends money both on publicity and on the people that work there and I think that is busy changing – quite rapidly – and will continue to change going forward..Another company that we've often spoken about over the years – which you used to like a great deal – is Tiger Brands. The results coming out recently, do you still like the business the way you used to?.I think in there – deep in there somewhere – is still a very good business, I just think it has been managed fairly poorly over the past 10 years. All sorts of different things. Competition commission problems, the listeriosis outbreak. Companies make mistakes, it's how you deal with mistakes and how you come up from them, that's the important thing. My view is that Tiger Brands has not done their souls proud in how they've dealt with their mistakes..But how is it – from a complete external perspective – that the investors are happy for the same management team that should be taking responsibility for the listeriosis process, to continue in the future and talk about going back into the area of the supposed second biggest disaster which was Nigeria?.Yeah, I think we'll have to ask the shareholders..Are you not a shareholder?.No we haven't been for a very long time. That's one of the unintended consequences of this rise of indexation, a corporate oversight which sometimes falls by the wayside – in that the the owners are no longer worried about what goes on in the business – they're worried about what weighting the shares are in the index. The corporations are very smart in gaming this aspect of indexation so I think oversight can fall by the wayside and it sometimes does. Tiger Brands – the way it's currently run – is the poster child for that..And the unbundling of FirstRand? Again, we've both been around long enough to remember when it was started. Johann Rupert's RMB, getting together with the bucket shop, really, that Laurie Dippenaar, Paul Harris and GT Ferreira had, then developing it into a business that acquired the old First National Bank, now bundling it. There's all kinds of speculation that's going around this. What's your reading?.It's very interesting. I think there must be something more behind it than meets the eye, but I haven't been able to come to grips with it. I do think that it will be key to see what Remgro does, if it bundles all its FirstRand shares or only a portion of them. They haven't yet stated what they're going to do. If they just unbundle a portion of it I can understand that. I think it's a very tenuous position these days to be a shareholder of reference to a large bank – as we saw 10 years ago – the national crisis of banks being highly leveraged institutions, can get in trouble quite quickly and can sometimes require quite a lot of capital, so I think being in the position of being a shareholder of reference to a large bank is not always a great position. Maybe that's what they're thinking about. That's only speculation that I can add to the pot..The official story – or maybe unofficial story, because I had a long chat with Laurie Dippenaar about this – is he says that he, Paul and GT have now taken 10 years to extricate themselves completely, to move from an owner managed business to a professionally managed business. You can kind of get it from the three founders perspective because their investments must still be very heavily weighted towards FirstRand. But it's the Remgro story that you've touched on which is really relevant here. It's about 35% of the asset base and 45% of the earnings. When you unbundle that chunk of your revenue generation or your revenue stream, you've got to have a good reason for it..Yeah that's right and I think that's the answer a lot of people are looking for and the answer I unfortunately can't give you..Piet, just to close off with – because it ties it all together quite nicely – when you were talking earlier about investors not really having that close a relationship with companies and then the managers of those companies managing it. Is there a big difference between businesses that are are managed by managers – professional managers – on the one hand, or owner managed businesses? Is one better than the other – for an investor – or is there anything that one should be looking out for on either side?.I think, as with most things in markets, the answer isn't unequivocally yes or no. I think each individual case needs to be examined separately, but I do think what is happening in a lot of cases, is that managers – professional managers of business – are usurping the role of owners and they are managing a business for their own benefit. Sometimes consciously and sometimes less so, but that is happening – to a large extent – in some instance. I think that is something that the owners of the business or the shareholders – who are the owners at the end of the day – need to start looking at and I think that's starting to happen, but I think we need a lot more of that going forward..What do you do, from that perspective given that your clients have got billions of rands invested in these companies? Do you shout your mouth off at the AGM?.Sometimes we would go to the AGM but I'm not sure the AGM is the platform to shout your mouth off. We prefer to engage privately and try to influence things in the right direction. If one starts forming an antagonistic type relationship, that generally doesn't help in moving things forward..Piet Viljoen is the founder and chief executive of RECM – the original value investor in South Africa and somebody who I have the greatest admiration for and have had for many years. He brings to a close today's edition of Rational radio. We're back again between noon and 1pm next Monday and every Monday. Look forward to being in your company then.

Piet Viljoen: Investors AWOL so many managers run companies for themselves

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