The Value Investor’s value investor Piet Viljoen has taken a big hit with the decision by Nedbank to move the billions in its Managed unit trust away from the company. Like other authentic value managers, few of whom remain, Re:CM’s performance has been poor over the past couple of years as its strategy of buying the cheapest assets on the stock market – commodity-based businesses – has pushed it ever lower in the tables. Viljoen says lessons have been learnt, but he refuses to be swayed from the firm’s approach (“it’s in our DNA”) although he has returned to personally manage the company’s four open ended unit trusts. In this in depth interview he talks to Biznews.com’s Alec Hogg about what happened and the way ahead.
Well, joining me on the line from Cape Town is Piet Viljoen, the Founder and Chairman of Re:CM. Piet, not a great day for you – the news that the Nedbank Managed Fund is being moved away from you. Just by way of context though, how long have you been managing this Fund?
We’ve been managing that Fund ever since we opened our doors in 2003, and so it’s been about 12 years now.
What’s the process in something like this? Clearly, it is best of breed. You are a Deep Value Fund Manager. Would you get warning that you weren’t performing well enough, or how does the whole thing go? How do you get it in the first place, and how do you lose it?
Yes. You get it and you lose it based on your track record. NedGroup has been a client for us for a very long time and we have, over the past 12 to 18 months – when our underperformance started happening – we’ve been in constant communication with them. We explained to them and their clients what we were doing and how we were going about doing it. We were getting feedback from them it became clear over the past few months that there was a level of unhappiness within the Nedbank team with our performance – understandably so. Ultimately, the decision was made and communicated to us last week that they wished to terminate the mandate.
Let’s just go back a little. How did you get the mandate in the first place, given that you’d only just started in 2003?
Well, I’d been managing money for quite a long time with my previous employer and when I left, they contacted me a few months later and said ‘let’s sit down and chat and see if you are willing to have a look at one of the funds that we have, which you can manage’.
Some of Piet Viljoen’s favoured stocks
How did that perform over the period?
It went through different periods. Initially, it performed well and then in the 207/2008 period, it performed relatively poorly. There was quite large underperformance during the time of the Commodity Super Cycle when we didn’t own any mining stocks. That corrected itself in the meltdown of 2008/2009 and then we outperformed again quite nicely for two or three years and then, over the past two years or so, we’ve been underperforming again with mining stocks taking a hammering. We’ve been increasingly exposed to the mining sector because being value investors, we buy the cheap assets and that’s where they are today – in the mining sector. So far, it’s looking rather stupid.
Could you have done anything differently, given your investment style?
Not if we wanted to stay true to our philosophy and process, which we very much intend doing/continuing to do. That’s who we are. That’s our DNA and that’s what we do. In the long term, things will turn around as they did in 2007, 2008, and 2009 and our philosophy and process will prove itself again.
You are in value investors, but why commodities, Piet? Lots of other value investors exist on the planet, but most of them just tend to go for companies themselves and not necessarily for commodities.
Well, companies that produce commodities are companies, just like any other company. They produce commodities. Other companies produce beer. Other companies happen to produce sugar. We are interested in commodity companies at the moment because that’s where the value is. These companies are dirt-cheap, generationally cheap. One doesn’t get these types of buying opportunities often. It’s amazing. Right now, they’re very much out of favour. People hate those stocks but it’s only eight years ago that they used to be the market darlings and they were very expensive. That’s when we didn’t own them, by the way.
Give us an example of how it’s played out in those eight years.
Let’s take a stock like Amplats. I think it peaked out at R1500 per share. Today, it’s trading at around R200 per share. It’s lost 80 to 90 percent of its price. Whatever they were discounting in 2008 obviously didn’t happen and we believe that whatever the share price is discounting today is not going to happen either. As with all these things, we think the truth lies somewhere in the middle.
How do you balance that so that you don’t go through what must be a turbulent period for you – losing such an important client?
Yes, it’s very tough and not the only client we’ve lost. It’s very hard but we have to call it as we see it and this cycle, I think we’ve been pretty early but we tend to be early in most cycles. With hindsight, one could probably say we should have waited longer, but we would have ended up with the same portfolio.
No regrets, then?
To the extent that we’ve caused permanent declines in our clients’ capital and the fact of them withdrawing the money, we’re very regretful about that. That’s not something we set out to do and that’s not something we would have liked to do. That’s how it’s worked out. Obviously, we have to take lessons from this, going forward but this is the way we manage money and at a different point of the cycle, value investors just look pretty stupid. We’re looking pretty stupid right now and it’s very hard for clients to stick with that. I can understand what clients are going through. I happen to be a client myself so one has sympathy and understanding for their point of view.
What about your personal role, Piet? You got the portfolios. You built it up, very much on your own track record. Has it been difficult to remain as intimately involved with the portfolio selections? As an entrepreneur, sometimes you have to give other people greater capacity. Is it still, very much, a ‘Piet Viljoen show’?
As the business grew, as with any healthy business you start devolving responsibilities towards the up and coming guys, which we did in the firm. Obviously, that hasn’t worked out as well as we would have hoped so for quite a while there, I wasn’t managing money and I’ll be attending to that role at this point in time.
So you’re going to be putting your hand very firmly on the tiller again.
Very much so, yes.
As far as the overall situation at Re:CM is concerned, you said you have lost some other clients in addition to this Nedbank Managed Fund. Is there enough to keep going? Are you comfortable that you still have enough loyal clients who will see it through?
Yes, we still have loyal clients. We still have a significant book. Historically, we’ve managed the firm very conservatively (financially) so our balance sheet is strong. We can see this through and we fully intend doing so for those clients who still trust and are still willing to have us look after their money. Fortunately, there are quite a few of them.
You also have a listed company. How has this been impacted?
Well, the listed company is listed and if people don’t like what we’re doing there, they can sell the shares. It hasn’t been impacted at all. They are Open-ended Funds’ performance. The investments in our Listed Investment Trust look very different because they’re mainly private and not listed companies, although some of them are in the mining sector (again, that is where the value is). That business has been doing very well.
That’s as far as the investments through the Johannesburg Stock Exchange, through your Re:CM Company…that’s completely separate to the Unit Trusts.
Do you have your own Unit Trusts, which you’re still going to continue to manage?
Yes. We have four of our own Unit Trusts.
Which of those are you personally looking after?
All of them.
All right, so you have your hand on all four of those Unit Trusts to presumably, see what you can do with the performance.
Yes. The fact is that we have disappointed our clients. There’s no getting away from that. We need to win their confidence back and we aim to do so.
Piet, you are one of the most rational people I’ve had the privilege of meeting. When you look at an irrational situation, which appears to have happened now with the commodities stocks and the commodities cycle, how does one actually reconcile it with your own investment philosophies – your own rationality that you’re looking at it with – with the way that the market is just not looking at it in a similar perspective?
Yes, but the market never does. At these points, when things get very expensive or very cheap, the market justifies those levels and does so in a way that most people buy into, but that’s exactly why value investors can do well over time – by exploiting that sort of sentiment and doing the opposite. When things get to this sort of, very extended level where they are now, it’s the ideal time for value investors such as ourselves. However, things only get this extended when the news is very bad and when it’s very hard to stick with it. Most people can’t stick with it. Fortunately, we tend to be quite rational at Re:CM and this is the sort of opportunity we look for.
But it’s tough.
Oh, it’s very tough. It’s very hard. It’s very hard for us. It’s very hard for our clients because at these points, there’s also the point of maximum pessimism. It’s also the point at which one looks the most foolish.
Have you been through a period like this before?
I would say 2007 and 2008 was very similar, when we didn’t own any mining stocks and they were going through the roof. In 1998/2000, it was even more similar. It was when the IT stuff was going through the roof and we didn’t own any. We owned the value companies then, the industrial companies, the SA Breweries, and the Tiger Brands of the world. I remember in the late 90’s with my previous employer, they terminated our mandate because we held too much SAB. SAB was doing poorly and the IT stocks were going through the roof.
Yes, so these waves come and go. Have you learned anything, though? Have you learned anything from this cycle? I suppose some would say (as a genuine/authentic value investor) that turbulence is going to happen but surely, you can at least ensure that it isn’t too amplified.
Yes. Again, one can do so. With a bit of hindsight, you can do that very easily but at the time when one is going through it, it’s very hard to do so. One of the lessons one learns from this sort of thing is that an Open-ended Fund, when you’re managing Unit Trusts… Even though the situation might warrant greediness (in other words, buying as much as you can), one should probably soften one’s stance somewhat and take account of the fact that it’s very hard for clients to go through periods like this.
If you have a Closed Fund like Warren Buffett operates, it’s okay. I was doing the calculations the other day. He’s dropped $1.7bn on his IBM investments and he’s still buying more. No one’s saying Warren Buffett’s wrong – well, I suppose some people are – but it’s not an Open-ended Unit Trust, which is being priced daily.
Exactly. If they’re not happy, then can sell their shares but then they have to sell it to somebody else. That’s probably a better environment to be a true value investor. People like Warren Buffett have also gone through cycles where they’re regarded as ‘out of touch’ and not understanding what’s going on. To the extent that people are saying that of us today, we’re in good company.
On the other hand, you do have a Closed Trust – the one that’s listed on the JSE – and you’re still quite comfortable that it is properly positioned, and that the investments are in the right area.
We think so. We think it’s a nice mix of investments. They’re all very conservatively valued. We think they’re all doing very well – doing the right things. The management teams of those businesses are good businesspeople so we think it’s very well positioned, and we’re very excited about what’s going on there.
Isn’t that a better place to play in the long-term, rather than these Open-ended Unit Trusts where you need a marketing element perhaps, to attract the funds to make them successful?
It is, but I think many investors need Open-ended Funds. We think our services are valuable to some of those investors and we would like to continue offering those services to investors who are willing to invest with us. Open-ended Funds play a role and as investors, we can play a part in that role so we’ll continue offering that sort of investment. Recognising that for the true long-term investor, we really want to take long-term views. A Closed-end Fund is probably a better environment but Open-ended Funds are useful for certain types of investors.
What are you saying to the unit holders today?
Today, we are saying that we will continue with our investment process. We are not changing that. For us, that’s who we are. That’s our DNA as I said earlier, and so that stays the same. We continue with that. We continue to buy the cheap shares in the market, which at this point of the cycle, happen to be commodity-related companies. We’re not going to change that, and so for those clients who believe in value and believe in us, we’re going to stay the course.
The biggest lesson that you might have learned from a a business perspective.
From a business perspective, when these cycles/opportunities come in the market, in an Open-ended environment one probably needs to be more cognisant of your clients’ emotions, what they’re going through, and you probably have to soften your stance as a result of that. I think that’s quite rational in that sort of Open-ended environment.
Perhaps you’ve been operating in ‘give more credence or more due to the market’ conditions and a little less to your aggressive views.
Rational views. We implement them less aggressively, would be a good way of putting it and running a more balanced portfolio in terms of the risks one is taking as well. Taking risks is what pays off, in investing. Not every risk pays off but on balance, you have to take risks. There’s no such thing as risk-free return.
Isn’t there a problem/risk now that you might become risk-averse, so that when your view finally is justified that in fact, you won’t get the full upswing there, or are you guarding against that?
Well, we’re guarding against that as best we can. Of course, we have to balance our clients’ interests with the business interest. Our business always said (1) our clients’ interests come first and (2) business interests come second. However, when clients start terminating you because they are uncomfortable with your process, then I think one needs to look at that. You need to help the client to stay the course.
Are you going to have any personnel changes as a result of a big chunk of assets that’s leaving you?
No, as I said earlier on, our investment team is still intact with the exception of Daniel Malan who left at the beginning of the year. The investment team is still, exactly the same and because we’ve been managing the firm very conservatively [financially], we can continue to keep the investment team intact so there will be no change.
Piet, from a personal perspective, you’ve been through the fire a few times now. Do you keep learning?
You learn all the time. I don’t think you’re ever too old to learn. Each time you go through it, you learn new things and when we go through it next time, we’ll probably learn a couple of other things.
Looking at it rationally, the way ahead: are commodity stocks still offering value? Is South Africa Inc. still offering value to you?
South Africa Inc. – not so much. It’s more commodities. We don’t think South Africa in particular and Africa in general, is a good place to invest at this point in time for most industrial and manufacturing types of companies. You can’t get away from being in African mining, but that’s where the value is so we’ll see how that plays out. We think that these stocks are of the kind that you’d get this cheaply once in a generation. This is that sort of buying opportunity but one needs hair on your teeth to sit through the shorter-term volatility and downwards price movement. The selling of these stocks has long ago, divorced itself from the fundamentals. What’s happening here is clients are withdrawing their money from value managers. I don’t know if you’ve seen other value managers – John Biccard’s numbers and others. Assets have been decimated so you’re getting clients selling out of those funds.
There is forced selling happening in the market and then those funds are moving to Index Funds or other Index-orientated management and you almost get a forced buying of Index. You get a dichotomy between Index-related stocks and the mining stocks where the money is flowing out, and that’s an artificial environment. It’s not a market, setting prices efficiently. It is forced buying and forced selling, which is happening. That’s the opportunity and that’s the opportunity, which we’re seeing and we’re trying to get our clients to stick with it.
How do you stay rational in this kind of environment when you have all these pressures coming at you?
It’s what we do. We look at balance sheets and income statements, and we look at long-term situations. That helps us to stay the course. We try not to look at the market prices all day long. If you look at that all day long, then that stops you from being very rational.
Do you read what other people have been through in a similar situation? Do you talk to other value investors? I’m not too sure that there are that many value investors left. They might call themselves that.
No. Many people are calling themselves value investors but I can tell you now. There are very few genuine value investors left. Many of them have lost all their clients. Others don’t want to be called a value investor because the term stinks a bit right now. Our little club has become tiny – very small. We do speak to each other, though.
What is a value investor?
A value investor buys cheap assets – assets that are priced below their intrinsic value. Intrinsic value being the present value or all the cash flows that business will generate over a very long period of time.
Piet Viljoen from Regarding Capital Management: good talking to you, as always.
Thank you, Alec.