Once in a while, the country’s biggest investors lift the veil on their strategy, sharing ideas on how they intend applying the hundreds of billions entrusted to them. That’s exactly what Allan Gray director and portfolio manager Duncan Artus did for us in the latest episode of Rational Radio where he discusses why the company is such a big investor in Naspers, and how its Sasol shareholding knocked a hefty 4% off the total return of its biggest unit trust last year. And he answers the criticism about the performance of Allan Gray and its global cousin Orbis over the past year. Fascinating insights from one of SA’s most thoughtful money managers. – Alec Hogg
A warm welcome to Duncan Artus, who is a director at Allan Gray, and a man that I like to get on the program from time to time. Duncan good to have you on the show. We haven’t spoken since the passing of Allan William Buchanan Gray, I see you guys have got him on your homepage, did you have much to do with Allan Gray himself?
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Allan actually interviewed me for my job so that’s how long I’ve been here. Allan used to spend just under a month in Cape Town every year. He used to have a flat in Clifton, so for the first 5 or 6 years of my time at Allan Gray, he was here once a year and then after that he really just focused on the foundation. Allan was never really involved in the investments since I’ve been at the company. I think he stopped managing some of the money at Orbis in 2012, he still managed part of the Japan Fund and I think the emerging market fund as well.
This is so interesting that he interviewed you because one of the points that I picked up from Allan Gray – and in fact from Investec as well – was the rigorous process that you had bringing people into the company. In other words you didn’t just arrive at your desk one day and found a new guy sitting opposite you. There was always a lengthy process and in fact when I started Moneyweb, every single person in our company – because of what you guys did – used to interview all the prospective employees. So it was quite a long process before getting people on board and that was something presumably that he instilled.
Yes. interesting enough I think my second round of interviews on the day was with Simon, Stephen, Allan, Urie, Jack, Mitchell… so it was also was a long day and quite a rigorous process. What’s instilled in the business, was not only a rigorous recruitment process – because obviously we’re a people business – is finding people with strong values and the same ethos. At one stage we only kept one or two out of every five people who started in the investment team, it’s a tough task to make it all the way to the top. The processes put in place by Allan have lasted well over four decades.
You talk a lot about long term. I was looking at your website, which explains how well you’ve done going back to 1998, but I met with Magnus Heystek last week – I know you guys have crossed swords – but he was saying Allan Gray’s performance has been pathetic in recent times and he believes that you guys have lost the plot. I’m sure you’ve heard this before.
I’ve heard that many times before particularly from Magnus Heystek. I think he said the whole of August was going to blow up because they had a position in Japan and there was an earthquake etc. So that’s something you have to take if you’re managing public money.The only person who knows everyone’s true investment track record is SARS because that’s where people are willing to declare their losses. If we look back over the last 18 months it’s been tough for Orbis which is pretty similar for most value managers that I follow around the world. The only way you could have done well over the last two years is owning those big US tech stocks and a couple of consumer staples and maybe one or two Asian technology stocks. Orbis has had around nine occasions where they’ve underperformed and then locally the performance has been fine up until around six months ago and that’s mainly because of Sasol, which was our second biggest share and when your second biggest share halves, that does affect performance in the short term and it tends to drag down some of the numbers.
Reading your report on the unit trusts, Sasol alone contributed minus 4% to the fund performance in the past year. That’s a massive hit. How are you reading it?
When we look at Sasol, we sold roughly a third of the positions – at higher levels – so roughly about two thirds of their original investment. I guess what you’re got do is go back and ask what we think the value is today. We know what Sasol earned as a business – we’ve got a long history there – it earned around R50 a share in today’s money and because we use a low oil price, we think that the business can generate around R40 of earnings – pre Lake Charles – Sasol’s roughly trading on just under seven times. We know what it has earned in the past. Obviously, they have to prove themselves in the ramp up and the running of Lake Charles, people want proof that it’s actually working and we mustn’t forget they’ve invested R300 per Sasol share into Lake Charles and the share price is R262. What that has left you with of course, is a lot of debt – around R120bn of debt if I remember correctly – what we need now is for Lake Charles to start producing that cash flow. They’re still sticking to their $1bn EBITDA target I think in 2022, so it’ll be interesting to see. It’s going to be tough in the short term but with these commodity companies, things can change very quickly. If you think about Impala – 18 months ago – Impala was R15 a share. They would have sold the lease for zero and sitting with a lot of debt on the balance sheet, now the share price is R115 and they’re making acquisitions offshore, that’s simply because the price of palladium and radium went up significantly. So if for some reason oil goes to $100 for a few months, obviously Sasol can pay down the debt much faster than what people have made their model. So yeah, it was a big disappointment and clearly the company is worth less than we thought it was before.
But is it worth investing in now?
It’s our fourth biggest share.
So are you buying more?
We have limits in the portfolio. Obviously when you look at a share it’s not just the attractiveness of the share, we also have a risk rating at Allan Gray, where we say how much of the fund can be exposed to any one individual share. With increased debt levels we’ve limited the positions. So we wouldn’t be buying any more at the moment.
You mentioned Impala, nice to have been in it at R15 and I noticed from your report that you’ve sold out now.
We still have Impala – our best contributor to our performance over the last twelve months – our clients own around 4% of the business, it’s just not as big a share as it was in the past. All those shares have done really well, so with the strong palladium prices, the profits have gone up quite substantially. It’s amazing how quickly things can change in the commodity sector. I remember when Anglo American was R50. If the coal price hadn’t spiked for the six months, Anglo American itself would have probably had to have a massive rights issue in 2016. Things can change quickly so we have a long term view on what we think oil is and that’s what we used to value Sasol.
Duncan you have a big stake in Naspers. First of all why Naspers and not Prosus and then secondly – because there is a connection – the hostile takeover bid that Prosus is doing in the UK?
We do still have a little bit of Prosus, but most of the investment would be Naspers and that’s simply because the discount is bigger. So I guess for shareholders, the one disappointing thing is – I can’t remember how much Naspers spent on advisors – I think it was north of a billion rand and the discount is back to where it was before they listed Prosus in Amsterdam, so we still think that there’s quite a big margin of safety. We”re still working through our thoughts on the proposed Just Eat transaction – to put in perspective – Old Mutual’s only R100 billion market capital and has been around for 160 years and they’re paying a similar amount for a computer system and agreements with restaurants. We’ve done a lot of work on food delivery globally. Delivery Hero is listed in Europe, there’s a Chinese food delivery company, there’s GrubHub in America, but I don’t think the market is massively enthusiastic about it at the moment and it’ll be interesting to see if they raise the price again.
Duncan one of the shareholders in Takeaway.com – the competing bidder for this London company Naspers wants to buy – is accusing Naspers of manipulating its share price. Its associate company Delivery Hero has got a big chunk of shares in this Dutch company. Does that worry you, does it bother you that there might have been funny things going on?
I don’t know anything more than people who’ve read the announcements, Naspers obviously owns a stake in Delivery Hero and Delivery Hero took a decision – without Naspers – to sell some of the Just Eat shares. Those shares have gone up significantly since Delivery Hero got a stake in the business, so from what we can see on the outside, there doesn’t seem to be anything wrong. The legal and regulatory environment in the UK is very strict. I’m sure if there was something wrong it would have come up by now.
The decision by Investec to finally split off its asset management company – this is an area you know very well – Investec is quite a big stock that you have in your portfolio, once the unbundling of Ninety-One and Investec done, which of the two will be the most appealing to you as a long term investment?
It would depend on how the price splits – we don’t know yet – everyone values the asset management business separately from the banking business, but you don’t know, Naspers/Prosus is a good example. You don’t know the valuation until the actual splitting of the company happens on the day. I would expect the asset management business to trade on a higher P/E multiple than the banking business, the asset management part of Investec has had a much better track record than the bank and the real thing that drags down Investec’s valuation is the bank in the UK. Very poor returns on capital and that’s what we’re hoping will change in Investec going forward. It sounds like they’re making all the right noises on return on capital, so you have to ask me which of the two businesses I like more? I like the asset management business more than the bank. But let’s see where the two trade, I think it’s in March next year.
Just to close off with, the big story in your business is to judge how well companies are allocating capital. We had a conversation earlier with Chris Logan about Tongaat – which he’s been following very closely – would it have attracted value investors given the way the share price has fallen over the period? Did it attract you and what did you make of the PwC report that came out on Friday?
I think our clients own around 5% of Tongaat and if you’re a contrarian sort of value investor, you have to accept you’re going to have a few of these in your career. If you’re looking to buy things that are down and out – and it’ll be interesting to see – the results come out the 10th of December. If you have a look at the cash flow statement versus the income statements over the last 10 years they earn substantially less cash flow than they showed accounting profit on their income statement. The second thing of course is that the sugar business was pretty poor for a while so they were taking profits and over capitalising the sugar business, so I think those results come out next week then we’ll have the actual numbers so we can see. The one thing that was heartening was it sounded more like they were just moving profits around as opposed to a huge overstatement of profits.
But the decision by Tongaat’s board to report the executives including the CEO to the National Prosecuting Authority and to the South African police services sounds like there’s something pretty sinister going on.
Yes, if you manipulate profits you should be reported and what’s important is it’s good to see boards holding people accountable for wrong decisions. Often it’s easier to avoid conflict or not make a public spectacle about it, but it looks like the boards doing the correct thing in this case. I think it’s very important to remember that often the CEOs are paid incentives and bonuses that are based on achieving certain financial targets and if you manipulated your profits to get there that’s clearly something that’s wrong and should be prosecuted.
Duncan Artus, a director of Allan Gray, bringing us up to date on what’s going on at South Africa’s favourite asset management company.
