🔒 Meet “one percenter” Dawid Krige: China-focused Buffett devotee who generated 75% last year

LONDON — Ever since my first visit to the Berkshire Hathaway AGM, that was back in 2006, I’ve been keeping an eye out for investment professionals who follow the Warren Buffett Playbook. There aren’t as many as you’d expect, considering the fantastic record that the Oracle of Omaha has built-up during more than half a century of market-beating returns. Many of those who claim to follow his approach make too many adjustments to be true Buffett disciples. But the intervention of a Biznews community member pointed me towards the real deal, the London-based Saffer Dawid Krige, the man behind Cederberg Capital, whose performance ranks in the top 1% of all money funds on earth. Krige’s fund, which focusses exclusively on investing in companies based in Greater China, last year produced an astonishing 75% return for his investors. Here’s the story of the man who is applying the Buffett Way to astonishing effect in the world’s great growth market, China. – Alec Hogg

Dawid, that 75% return last year, is that a misprint?
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No, it’s not a misprint. It is 75% net USD return, net of fees.

So, after all the costs involved? That’s extraordinary. We’re going to unpack the whole thing but it is focussed on China. You’re a South African, as we already can hear, and with a name like Krige. Why China?

I think why China, because I think it’s easier to add value as an active investor. Obviously, coming from SA, having lived in the UK for the last 16 to 17 years, I wouldn’t want to manage SA equities. I wouldn’t want to manage UK equities because I think there are a lot of very smart, long-term orientated investors with patient capital. In China, there are lots of very smart people but there’s a real lack of patient capital. Hence, that creates a lot of inefficiencies. So, there’s more low-hanging fruit there than I think there are in the UK, even US small caps, and certainly SA.

Low-hanging fruit. I was having a look at your presentation that you put together and you quote Charlie Munger, are you a fan?

Yes, a big fan. Charlie Munger, interestingly enough, less than a year ago at both the Daily Journal meeting on the west-coast, as well as at Berkshire, commented on how he things in China there are very dominant, very intrenched companies selling at much lower multiples than in the rest of the world, specifically the US, and that’s our experience as well.

Something I also picked up from your presentation is that you say, China is offering half the price and twice the value. Just explain that. It sounds to me like that’s the place you should be putting your money, and your returns are quite evident, but unpack that for us.

Yes, at the time we drew that up, and this is about nine-months ago so, it might not be 100% the case today, but at the time we compared Diageo, which is Jack Daniels and household brands, in the spirits company versus its Chinese peer, Kweichow Maotai, and Diageo is growing 6%, 7%, at most 8% a year, and Maotai is growing at much more than twice that. It’s growing at around 25% to 30%, but at the time, Diageo was trading at twice the pre-tax earnings, versus Maotai, which made no sense, we thought. Diageo’s average top-6 brands are 156 years old. Maotai is about 400 years old. Diageo doesn’t really, with the exception of Scotch, it doesn’t really dominate any category. Maotai has 60% market share of premium baijiu, or white spirits category in China so, it’s a household brand. It’s got a 99% added brand awareness. So, if we look at spirits companies we look at some internet companies, we look at financial services, we look here, in the UK, there’s some great wealth asset managers, at St Jame’s Place, Hargreaves Lansdown. We compare them, versus their Chinese equivalent, which is a company called Noah, and similarly speaking you’ve got twice the growth in China, yet you’re paying half the price. That’s probably no longer true, after last years very strong returns, but the western companies are still trading at a premium, despite Chinese companies growing much more rapidly.

You speak basic Mandarin.

Basic Mandarin, yes.

So, if you were to say, ‘good morning, it’s nice to be with you here, in your studio,’ how would you say that?

Now, you’re testing me. Yes, my language skills are pretty rudimentary. I’ve actually got some of my Chinese homework here with me today.

As he pulls out a book. He goes off the microphone to show me. What got you to learn Mandarin?

It’s just Serendipity got me into China so, my first role, 16-years ago, I was working here in London, for FirstRand, picking Asian equity strategies – I did that for three-years. I looked at about 300 funds and allocated money to five of them. I realised that I wanted to analyse Chinese companies. But there are only about a handful of these 300 managers that I would want to work for or that I’d give my own money to. So, I joined a value shop called Mondrian. I spent seven-years there and again, just through Serendipity this was in 2005, there were two roles at the time. One was to cover Chinese equities and the other was to cover European banks. Now, I could have been the Lloyd’s TSB expert. Thankfully, as European banks become less and less significant, I just got lucky and continued on that.

Did you have a choice on that one though?

I didn’t have a choice. I would have accepted the European banks job. Yes, my guess is European financials are probably down 70%, 80%, or 90% since then. Where Chinese equities are up multiple times.

It’s amazing how you get those paths and forks in the road, but you are clearly South African. Where did you grow-up?

I grew up in the Cape. I did my high school in Johannesburg, I studied at Stellenbosch and studied statistics. I came to the UK in 2001, and I’ve been here ever since, investing into Asia so, three-years with FirstRand, in an indirect way, seven-years at Mondrian, where I had responsibility for their China book, which was about $3bn when I left, and then in 2011 I set-up Cederberg with two co-founders.

And you studied here, in London as well.

I did, I studied at London Business School. There’s an excellent value investing program there run by a guy called Eddie Ramsden, which is very similar to Columbia’s value investing program. Obviously, Columbia is the home of value investing, with Ben Graham, Buffett, and dozens of others.

That’s where Buffett went, didn’t he?

Buffett went there, yes.

Would he approve of the value investing course that you did here?

I think so. Eddie Ramsden goes to Omaha every year. He’s been going there for the last 15-years. He teaches pretty much the Buffett Playbook, as well as the Joel Greenblatt Playbook. I don’t know if you’re familiar with Joel Greenblatt, he’s a professor at Columbia, and yes, so the emphasis is on trying to buy good companies. Companies with moats and honest management, excellent long-term oriented management, where they offer a margin of safety.

Those three M’s.

The three M’s, exactly. Yes, moat, management, margin of safety.

How do you find them in China and specifically the BAT companies? Baidu, you don’t have in your portfolio.

We do, but it’s not in the top-10.

Oh, you do but it’s not in the top-10.

Yes.

So, Baidu, Alibaba, and Tencent. Now, South Africans want to know all about Tencent, which we’ll touch on in a moment but those three have all had fantastic runs, as maybe investors outside of China start discovering them. How do you get the margin of safety still?

Yes, the margin of safety these days, in a company like Tencent, I would say is slim. We think it’s trading at maybe 85-cents or 90-cents on the Dollar, of intrinsic value so, pretty close to intrinsic value. But, and there’s a ‘big but,’ and that is its intrinsic value is growing at quite a rapid pace, say 30% year-on-year so, very happy to own it. We wouldn’t buy at these levels but when you have a tailwind like that, I wouldn’t say, never sell a great business but you have to think pretty darn hard before you sell a great business like that.

Do you agree with the Buffett philosophy that you buy it and hold, well, the average holding period forever?

Our average holding period hasn’t been forever. Last year the turnover was probably about 30% so, that implies it was over a three to four year holding period. But there are companies that we’ve owned since day-one in the fund company, like Clear Media, and a company like NetEase.

These are all Chinese companies?

These are all Chinese companies. We exclusively invest in companies from Greater China so, China, Hong Kong, and Taiwan, or non-Chinese companies where at least half the earnings of revenue come from that region so, a company like the old Yahoo, which is called Altaba these days. Sort of 85% of intrinsic value is at stake in Alibaba.

Why not live in China then?

I have lived there. The longest I’ve lived there is two-months at a time. It’s not a great place to raise kids. The pollution is a big issue in many parts of the country, certainly in most of the big cities so, that’s on the one hand. On the other hand, for the last 13-plus years, I’ve been investing directly in Chinese equities, adding north of 6% alpha from London. So, it is what I know and it has worked so, I don’t see that… If it hasn’t broken then don’t fix it.

That’s an interesting point that because many times in the past, in SA history, you would have Old Mutual and Sanlam based in CT saying, their distance from the Johannesburg Stock Exchange gave them advantage. Of course, the greatest proponent of that theory is Warren Buffett himself, who sits in Omaha and not in New York. Does it give you, philosophically, an advantage or how do you actually, when you think about all those airfares that you are spending going to China so often, how do you justify it to yourself to stay here?

I think Buffett said that the hardest part of the job is the temperamental side, and managing one’s emotions and I think it’s a lot easier to manage one’s emotion if you’re not in the noise and in the mealy. If you’re a little bit removed, and Buffett is a very famous example but there are others, like Sir John Templeton.

Where was he?

In the Bahamas. They’ve got Allan Gray with Orbis sitting in Bermuda. You’ve got a guy like Kerr Neilson from Platinum, who is also an ex South African, sitting in Sydney. There’s plenty of other examples. I think it depends on one’s style, one’s investment philosophy, but if you’re a low-turnover long-term oriented investor then to remove yourself from Mr Market. All the greed and fear, all the emotion that’s very prevalent in a place like Hong Kong, or Shanghai, Beijing even – it makes it a lot easier.

What about accounting? One hears the term ‘Chinese accounting,’ which suggests that it isn’t to be trusted. Can you?

No you can’t. All of our 20-holdings are big-four audited but that does not mean much because all the big-four in China have all signed off on fraudulent financials in the past. As we’ve seen with Steinhoff recently it does not mean that much. So, in the last 13-years I’ve invested in several dozen, very close to 100 Chinese companies. We haven’t had any fraud or corporate governance blow-ups. So, it is possible to avoid that risk but you’ve got to do your own homework and you have to ideally have boots on the ground in China, or access to local resources, which we have in the team, it’s myself and three Chinese analysts. We have an office in Shanghai, where the head of research is based.

And they are unlike you, completely fluent, in Mandarin?

They are native Chinese speakers, that’s right, exactly.

So, you’ve got to kick the tyres?

You’ve got to kick tyres.

Do you speak to management as well?

We do, and that’s usually towards the end of the process. So typically when we analyse a company, we’ll be speaking with up to 20, or even more different sources of information, and I would say that the two best sources of information on the governance side of things is former employees, as well as customers because these folks would tell you exactly what you need to know with respect to management’s integrity. The culture of the business, from a customer’s point of view. They will, at a minimum, and you can corroborate what the disclosed revenue and the disclosed volumes versus what these customers are telling us, to triangulate? But we go beyond that. We do go out and count trucks. We do visit retailers and check shelf space. Speak with distributors so, these are the types of former employees, the customers, competitors, and distributors.

Scuttlebutt.

Yes, scuttlebutt, exactly. Phil Fisher’s scuttlebutt – that’s exactly it. That was a big part also, of the London Business School syllabus. At the very end of this process we speak with management and the reason we do it at the end is, and this is universal and it’s not unique to China. Management has a tendency to sell so, it’s easier for us to cut through that once we’ve gathered all our information but also, it makes for a better conversation.

Do you think you would have picked up Steinhoff?

I don’t think we would have invested in Steinhoff, I can say that with a lot of confidence, based on the way that business grew and the debt, the balance sheet. If you look at our 20 holdings every single company we own has a net cash balance sheet. In other words, cash is more than debt or there’s no debt. It’s quite interesting because China has been in the news a lot because of its debt, but at the corporate level, at the listed corporate level that’s not really much of an issue, especially for these dominant consumer businesses, and these dominant internet businesses. Their growth has been cash-generative so debt is something that I don’t like. Issuing equity is something that I absolutely loathe. It’s like my pet peeve, and hence, I think there are a lot of things that would have made us sceptical about Steinhoff, including the business model. Low-end retailing is tough globally, right, brick and mortar?

Yes.

I don’t think we would have necessarily identified it as a fraud but I’m pretty sure that had it been a Chinese company, we wouldn’t have invested in it.

So, in a case like that, you wouldn’t have even got to the point of meeting management and finding out whether they were honest or not?

No, we wouldn’t, exactly because within the first day of looking at publicly available information we would have concluded it was highly unlikely to meet our quality criteria.

But as far as the Chinese companies concerned, are there enough? Is there enough of a universe for you to be able to find these gems?

Yes, there’s a huge universe. If one takes a $100m market cap or above, companies listed in onshore China.

This is Dollars, hey?

Yes, $100m market cap or above, you’re talking about five-thousand companies. If you take the A-shares, that’s the Shanghai, Shenzhen listed Chinese companies, the A-shares in Hong Kong, Taiwan, listed in the US, even some in the UK and elsewhere – there are over five-thousand companies. Our quality universe, in other words, those companies that meet our quality criteria, we’ve identified about 130. So, 130 that’s a decent universe but it’s tiny as a percentage of the overall, it’s about 2.5%. I think that’s where China, sort of sadly today, falls short, both in the moat and the management side of things. So, if you think of most of the things in the studio were manufactured in China. That’s sort of low-end price taker-type businesses, and that’s pretty representative of the overall universe of companies there. So, there’s a lack of moats, not that many great consumer brands.

So, a very commoditised type of products.

A very commoditised. Virtually all Chinese exporters are price takers and highly commoditised, but then also the other end, the management, you are looking at and I think Steinhoff is the unfortunate recent example but I think mostly in a country like SA, also in the US and the UK, business folks have tended to be straightforward, take a long-term view, and be aligned with minorities. In China it’s the inverse. The mindset there, by enlarge, is to make a quick buck so that could extend to outright fraud, and there are dozens, if not hundreds, of frauds and zombie trading in exchanges like Hong Kong or the US, and elsewhere. Or it could just lead to shortcuts when it comes to how you treat your employees and how you treat the environment. So, a company that we’ve visited, a lead battery producer a couple of years ago. It’s a stable duopoly, a lead acid battery technology, 150-years old, it’s used in electric bikes, and little light vehicles for curriers, etc. so, we think so far so good. A stable duopoly, you’ve got an 18-month replacement cycle, brands, distribution. When we visited them, it was very apparent and very quickly when we walked around the factory floor, workers are constantly exposed to lead, which is highly toxic. So, when we asked them they said, we screen our workers weekly to ensure that their health is okay and if it’s not okay, we move them to an office job for them to recover. So that is (A) it’s unethical but (B) it’s unsustainable because ultimately, these companies are earning super normal margins. Eventually, they’re going to have to comply with environmental, and health and safety standards, and then margins would halve.

It’s an interesting focus that you’ve got and one given the economic growth rate of China, and given what Charlie Munger and Warren Buffett say about China, that the people are smart, they work hard. That you would have expect more competition – more people going in there. Do you think it’s the language barrier that might be stopping them or there something else?

That’s a really great question and yes, we launched the fund 6-years ago because China was hated, and people assumed that all Chinese companies are frauds and China is about to blow-up but amongst that debris, we found lots of great businesses at bargain prices. Today, it’s changing but still, when it comes to company visits, for example. We’re not bumping into a lot of competition. I think it’s partly language, and partly the western media. If you take the FT or the Wall Street Journal, and the Economist as examples. I’m a big fan and subscribe to all of those publications, but when it comes to China I think they’re not particularly good because there’s a significant bias in their reporting. Call it China bashing. That’s the go-to for most western or most international fund managers that sort of prescribed reading rights. So, I think that’s made a lot of people misunderstand China.

Koos Bekker doesn’t.

I think Koos Bekker and Naspers…

Yes, we’re talking about the Naspers’ chairman.

Yes, I think they got many things right but one of the things they got right is to spend a lot of time in China and to partner with locals, who they can trust, and I think that’s vital. You cannot become a China expert by not going there. You need to spend time there. You need to have a network there.

Have you got one yet, would you say?

I think so. Obviously, we have the office on the ground in Shanghai. We’re a team of four, usually two out of four of us are in China. I was in China in December, I’m going there in two weeks. I typically go out four or five times a year and spend two or three months of the year there. Our chairman is the former CEO of Deloitte, China, Peter Bowie. He’s got a great network there and we’ve benefitted from his network, from his expertise.

Don’t you think that being China-focussed and going in with maybe a different approach, more open-mind, has endeared you to your contacts that side of the fence?

Yes, I think so. We love to learn and I love going there. It’s a fascinating culture. I would say that there’s always something to learn. I won’t pretend. I would delude myself if I said, I know everything there is to know about China.

Two big things I need to talk to you about. Number one is Tencent, given that it has such a huge impact on every South African, given that Naspers owns 1/3^rd of Tencent. Naspers is 20% or 25%, depending on which index you’re looking at, of the whole JSE. You said earlier that it’s not quite at its intrinsic value yet, and you like holding onto it. Should South Africans though, given that it’s such a high percentage of their portfolio start getting worried?

I think Naspers is a name that one could own on a 10-year plus investment horizon. I have two young daughters and I would love to own a company like Tencent, or Naspers, for their university funds. I think that the growth runway stretches beyond a decade. Take advertising revenue for example so, WeChat, which is its key, social media site. In 2016, WeChat advertising revenue was $1.1bn. In the same year, Facebook’s advertising revenue was $27bn so, 25X. Facebook has more users than WeChat. It’s about 2-billion versus 1-billion, but WeChat users are twice engaged as Facebook users. On average, they spend 90 minutes on the site daily versus 50 minutes. There’s a lot more that they can do. They are absolutely tied-in. So, that 1.1-billion is going to become 25-billion, and it’s going to go beyond that.

So, you would switch from Facebook, if you owned it, to Tencent?

I think Facebook is a wonderful business. I couldn’t comment on the valuation today. I haven’t looked at it very recently. I think Facebook is a wonderful business. What could go wrong? I think with big tech businesses the biggest risk, and the number one risk is regulatory, and on this score, we actually think that the Chinese companies have lower regulatory risks versus the US or global tech. So, if one considers Alphabet, Google’s parents, and Facebook. Google got fined several Euros last year by the European Anti-Competition Authority so, as these businesses are growing outside of the US, they’re coming up against anti-trust or anti-monopoly risks. China, on the other hand, they quite like national champions. There are plenty of examples of that. If we take online travel, for example, Ctrip, the number one player. We saw the Priceland.com equivalent – they bought the number-two player, eLong, bought the number-three player to have 75% market share. That certainly wouldn’t be allowed in the UK or Europe, and probably wouldn’t be allowed in the US. In the old China if you like, you had Shenhua Energy, which is a very large coal company merging with Guodian to become the world’s largest coal company, the world’s largest thermal power company, the world’s largest coal to chemical company.

So, they’re quite happy. No worries about anti-trust?

They have no issue but there is a regulatory risk and it relates to censorship so, as long as these companies stick with the government’s policy, and play according to the rules that risk should be mitigated, and because Tencent and Alibaba are 18 or 20-years old, we think that risk is manageable.

You mentioned Alibaba.

I love it.

Even at these levels?

Absolutely, Tencent is trading 40-times plus this year’s earnings. Alibaba is only trading at about low 30-times, with I would say, equally entrenched and growth runway with likewise stems that can grow beyond the next decade.

Well, people who only invest in the US will be listening to this thinking they can go for their Alibaba. Something that is really interesting though, about the way your business is structured or the way the fund is structured. It’s a $335m fund. Partners have 40% of it.

That’s right.

Does that mean that it’s your money, you, and your partners, with your cash in there?

Yes, that’s right. Partners in the business and their immediate families.

How did you get that right? That’s a big slug. Have you got some very wealthy partners or did FirstRand pay well?

I wish I could say it was the latter. We’ve won a very significant investor, who’s a 20% shareholder in the business. Who’s also our largest client but then myself and immediate family have the big chunk. The bulk of my net worth is invested in the fund. I don’t own any other, other than the property that I live in. I basically, don’t have any other assets.

When you’re growing at a 20% compound, in the last 6-years, and 75% last year, it quickly adds up. That 75% – a flash in the pan?

It’s not going to happen anytime soon. We don’t expect it. It really follows two to three years of pretty modest returns, lower single digit Dollar returns, whilst earnings is growing at, let’s say, 20% year on year, on year and, so to a large degree it was just share prices catching up with intrinsic value, and catching up with earnings growth.

So, let’s understand this. You’re invested in China. The Chinese market was out of favour. Earnings continue. Profits in China, on those companies that you’re invested in, continue to grow but the share prices didn’t and then they all came together last year, and you had the skill to have been invested in those that outperform the market generally.

Yes.

Is that the story?

We were well positioned and we were patient. If you go back to 2016, 2016 was actually quite a tough year for the fund. Our index was up 5% and the fund was down 7%. Not because the fundamentals of the holdings were poor. The intrinsic value grew close to 20% that year. But, to a large degree, it was driven by Trump coming in. So, Trump, part of his ticket into office was an anti-China rhetoric and so, in queue for 2016, when Trump came into the Oval Office, Chinese companies, especially the US listed Chinese companies, were hit very hard. If we take Noah, for example. Noah is the wealth manager that we own. It’s kind of like a PSG consultant to a Hargreaves Lansdown in China. Their earnings grew about 20% in 2016. The share prices were down 20%. We liked it at the start of the year so, of course, we doubly liked it at the end of the year. Noah was up close to 100% last year. Just as we saw a rerating. Our fundamentals remained sound. Earnings grew close to 20% again last year.

High conviction – how many stocks do you have in your portfolio?

Top-10 stocks close to 80%. I think 78% today, and then there’s a tail of another eight to ten names so, I think today we own 19 names.

As far as the investors are concerned, you are the only South African. Your colleagues are all Chinese. Why Cederberg, where did that come from?

So, I just got married and I was on my honeymoon in the Cederberg and I posed the question to my new wife, whether she’d be okay if I left my very stable and predictable job at the time, and for us to do something entrepreneurial.

That must have taken quite a lot convincing for a new wife, and she was happy?

She said, yes, and she was very happy.

Well, she’s happy now.

Yes, she’s been in my corner and it’s been awesome, and I think a different analogy might be the way we invest. The Cederberg is this beautiful area, a three-hour drive north of CT, which you might know but it’s a bit off the beaten track. It’s a wilderness area and it’s kind of what we’re doing. We’re looking for undiscovered gems and clearly, companies like Tencent and Alibaba, one could argue whether they’re undiscovered, but that’s a relatively small part of our portfolio.

Would Warren Buffett approve, if he had the time to go through in some depth, particularly those top-10 holdings that you have?

I think he would, with a caveat that 40% of our portfolio is internet, which is a field that he…

Well, he does admit that he made a mistake there.

Exactly, he has admitted that.

Do you go to Berkshire Hathaway’s AGM?

Yes, I’ve been there. I’ve actually taken the team a couple of times. I think the first time I went was 2006 so, pretty much around your first visit.

It was a few years ago where he was asked about Google, if you recall, and he said, it was a fantastic business. He couldn’t punch a hole anywhere in it. Most people there went out and bought Google shares and, of course, did extremely well out of it but Buffett himself didn’t. He also has spoken often about Amazon. He hasn’t bought the shares either.

That’s right.

So, in both of those he sees great companies but he just can’t bring himself to invest. Maybe you’ve got over that hurdle.

Maybe, but I feel, when I look at the 20 or 30-year-olds, and see how engaged they are. I think part of the reason why Buffett has been slow to invest in tech is because he is not a power user. He doesn’t have a smartphone, and he doesn’t spend a lot of time on the internet.

He has a Twitter account and I think he’s Tweeted half-a-dozen times.

He has done half-a-dozen Tweets.

But he has a gazillion followers, which he hasn’t used.

Right, and so, I think if you regularly use the products and the services, and you see how addictive they can be, or how useful they can be. In the case of Google, and in the case of Amazon. I mean, I hardly shop anywhere else. My colleagues sitting in China buy things on Taobao, or Tmall, which is Alibaba’s main eCommerce site, as well as JD.com daily. You see the competitive advantage and the value proposition of these products and services, value brick and mortar retailers – it’s very stark in China.

But to his credit, Buffett has invested heavily in Apple so, he’s getting there. It’s taken him a while but he’s finally getting across the line.

He has, exactly. He’s out the lots in that one.

Well, it’s been fascinating talking with you, Dawid Krige, who is the CEO and chief investment officer of Cederberg.

That was Dawid Krige, who I learnt after the interview, is the son of Neil Krige, the former MD of Momentum Life, who went into academia to serve as Professor of International Finance at the University of Stellenbosch Business School. The last time I saw Neil was in Omaha, at a Berkshire AGM. Well, the apple certainly hasn’t fallen far from this particular tree.

Until next time, so long.