Following Alec Hogg’s candid interview with RECM’s Piet Viljoen on the firm’s poor performance, Magnus Heystek’s response is published in full. Â
Dear Alec,
Your interview with Piet Viljoen today has reference (see below).
Please understand that an investment advisor labours under the suffocating blanket of a number regulations, i.e. FAIS, TCF and RDR, just to mention a few, when it comes to assessing the performance of a particular fund or fund manager. Furthermore, if that is not enough, clients can still report you to the Ombud for perceived or real poor investment advice.
When it comes to my comments about the poor performance of the RECM Equity fund (find enclosed the returns relative to the JSE over 5 years) and also the Nedgroup Managed Fund which it manages for Nedgroup, it is not aimed at an individual or even a fund house, nor does the comment come with any malice.
The facts, unfortunately, speak for themselves.
As a company we spend a great deal of time and money tracking and analysing the funds we recommend for our clients. We do this in an objective and even-handed manner and to this end we also employ external consultants, Fundhouse, to further add to our scientific analysis before we recommend or discard funds which are ultimately utilized in the creation of client portfolios.
As a result of the high media exposure enjoyed by Piet Viljoen as well as other fund managers at RECM have we been asked on a number of times over the years for our views on the RECM funds for consideration in portfolios.
We cannot therefore ignore the decidedly poor performance of both these funds, which is clear from the attached performance comparison.
On what grounds can I recommend that a client invest in a fund that has underperformed the market substantially over five years and even longer?
Would you be happy to have a portion of your retirement funds in a fund that has grown at less than the money market over three years while the market has grown at 17% per annum or more?
Even more dramatic is the loss in relative wealth creation over 5 years: with RECM Equity Fund the total return was 40% while the index returned 120%! I would be laughed at if I were to tell a client to wait perhaps for another five years for a turnaround in the relative performance of his fund, and then only on the play-out of a global macro-them which may or may not happen. Is that not gambling with a client’s money?
How would I be able to defend such under-performance to, say an Ombud, who would consider such a poor performance to be not Treating the Customer Fairly, and order recompense to be paid to the suffering client?
Remember, it’s not the fund manager who gets hauled before the Ombud, but the advisor.
It would not have been an issue if the underperformance was marginal or for a short period of time, but when a fund, such as the Nedgroup Managed Fund, which is marketed as being part of the Best of Breed-selection of fund managers, underperform its benchmark over ten years and since inception, then it does need to be pointed out to the investing public. After all, there is more than R4,3 bilion  invested in the latter fund, mostly I would guess  by unsophisticated investors relying on the objective advice from their in-house Nedgroup advisors. Are they being treated fairly?
What is galling is that Nedgroup was rated as one of the top three investment houses at the Raging Bull Awards last week. As can be expected my inbox was immediately filed by press releases about this achievement from Nedgroup, but not a word about one of its biggest funds doing extremely poorly.
You, Alec, have built a reputation and a career for pointing out such travesties in the broader investment community, which often times people would have preferred not have it highlighted.
MAGNUS HEYSTEK
Piet Viljoen, Founder and Chairman of RECM spoke to Alec Hogg on CNBC Africa’s Power Lunch about his firm’s poor recent performance and how it believes money managers should be judged.Â
Magnus Heystek, an investment advisor, is among those who have had a go about your performance. Â Do these barbs hurt?
No, they don’t. We’re quite used to being criticised when our returns look like they do at the moment. I’ve been managing money now for 25/30 years. It’s neither the first, nor the last time that this happens. Our style of management lends itself towards underperforming when irrational pricing dominates the market.  We get this type of criticism every time.
You talk about irrational pricing but sometimes one does have fundamental changes to the market. Last time I spoke to one of your colleagues, he said that you were still heavily invested in the energy sector. Do you not perhaps see that as an area where you need to reassess?
We always reassess. We’re never wedded to any position. We’ve looked at our positions in energy and other commodity-related positions. What stands out to us is that the share prices of companies that operate in these sectors – oil, platinum, and iron ore, etcetera – are mostly discounting continued declines in the underlying commodity prices for a very long time, and into the future. It’s in the price. The worst-case outcome is that if that’s true, and commodity prices go down and stay down for an extended period, then we’re not going to lose money on our investments because it’s already in the price. That’s a very comfortable position to be in.
That’s now but you had those positions when the oil price was much higher and valuations richer than they are today.
A bit richer, but as we’ve entered this downswing we increased our positions. Our average price is very comfortable at this point in the cycle.
How are you reading the oil market going into the future? I ask this because the view from many other places is Iran could come on-stream, Iraq potentially and Libya once it stabilises. The oil glut that we see at the moment might not be a temporary phenomenon.
I would probably agree with that point of view. I think oil prices will be lower than most commentators would have anticipated six months or a year ago, doubtless. Therefore, the type of companies that we’ve invested in are the companies with long life, lost cost resource. I think you’re going to see a lot of high cost resource go out of business over the next couple of years.
On the upside, it does appear as though pain is finally ending for the platinum and the gold sector. Â You were in there early, as well.
We tend to be in early with most investments. It’s very hard to call the bottom of any investment. We can’t do it. Some other people out there might be able to do it although I haven’t seen anyone do it consistently, and that’s the problem with that type of strategy. We buy things when they start becoming cheap and then we increase our positions as they become cheaper, as they invariably tend to do. I think it’s far too early to say whether the platinum and gold markets have turned. I don’t think one can say that with any degree of confidence at this time. The share prices of companies that produced platinum in particular, are discounting a very, very bad future. If the future’s anything better than that, one can make a lot of money out of those companies.
So when everybody says you’re right, is the time that you start getting worried?
The discussion that we’re having about how bad it is in the commodity markets and how poorly our companies are doing is exactly, the inverse of discussions we had with our clients seven years ago. In 2008, everybody said you had to buy commodity shares because of how well they’re doing and commodity prices were going to be higher for longer. We didn’t own any of them then, because we thought they were too expensive. There was no margin of safety. We were criticised for not understanding these companies then. A company like Amplats is trading at one-quarter of where it was in 2008, when we didn’t own it. Now that they’re becoming cheap, we’re getting a lot of criticism from places that you’ve mentioned for again, being irresponsible and not understanding what we’re investing in. I think we have a good handle on what we’re doing and we are building portfolios with significant margins of safety that can withstand or be robust towards any future outcome.
What period of time do you feel your performance should be judged on?
That’s always a very good question. The ideal period isn’t measured in years. Sometimes that cycle is longer and sometimes it’s shorter, so it’s hard to specify a number of years. Your performance is really, end-point dependent. Currently, our performance is quite poor, in relative terms so our whole track record looks poor, because the end-point is so low. If one measures peak-to-peak or trough-to-trough, we would only be able to see that at the next trough or at the next peak, when we’ve been able to identify that in hindsight. Then we can see how we’ve done through a cycle and I think that the outcome will be satisfactory for our clients.
What kind of person would feel comfortable investing in your philosophy?
People who like to sleep well at night, who don’t rely on us to be smarter than everybody else and who don’t rely on us to be better forecasters of the future, but who rely on us to understand economics of the industries and the businesses we invest in, and to invest with a large margin of safety.
And when you do get it wrong – what happens? Â
Well, if one had bought Sasol at R600 and it goes to R300 in the space of three months, then maybe you’ve called it wrong. Generally, we tend to buy the large margins of safety so if the share price declines from there onwards; it’s probably a temporary decline. Sometimes we get it wrong. We’re human. We’re not machines and we’re definitely, not smarter than anybody else is out there. It’s happened in the past and it will happen in the future. Then we adjust. If we get it wrong, we will either buy or sell, depending on the action that needs to be taken to correct whatever we’ve done wrong.
Do you keep assessing?
No, you can’t. You can reassess, test your investment case, and run the numbers, and you’re only going to know whether you’re wrong or right with the benefit of hindsight. I’ve been in this game long enough to know.
When is the last time that you got something wrong and you changed?
There’ve been a couple of examples. We possibly got something like ArcelorMittal wrong and we’ve reduced our position in that significantly.
Piet Viljoen is from Regarding Capital Management and a big fan of Warren Buffett and Charlie Munger, who tell us to trumpet our mistakes and be quiet about our successes. That’s the way we learn and Piet’s one of those who continuously learns. An interesting point that he makes here at the end about ArcelorMittal.
