As television stations continue to roll out blow-by-blow accounts of the coronavirus pandemic sweeping the globe, it’s hard not to feel despondent about the future. But Kokkie Kooyman, one of South Africa’s top investment specialists, reminds us it is at times like this, when the herd is stampeding away from investments, that the astute stock-picker can pick up bargains. Kooyman has a value-style investment approach and has spent many years studying the moves of Berkshire Hathaway principal Warren Buffett. He has gone as far as attending Berkshire Hathaway annual meetings in Nebraska in his quest to deeply understand how to be a successful investor. Kooyman says that, in three decades of investing, the opportunities have never been better to establish a portfolio of stocks that is likely to produce superior returns once scientists and doctors have put the Covid-19 genie back in the bottle. Biznews founder Alec Hogg spoke to Kokkie today – you can access that interview in our Premium section. – Jackie Cameron
Denker Global Financial Fund: finding opportunities amid the fears
The current market panic has dealt a significant blow to the financial sector, presenting very attractive investment opportunities. In fact, in my 30 years of researching and analysing banks and insurers, I have never seen opportunities like this. In this article we put aside the emotions fuelled by the negative media coverage, look at some of the facts and compare the current situation to the global financial crisis of 2008/2009. It’s important to remember that, irrespective of how bad the situation looks, markets tend to overreact to the current scenario before looking forward. You can’t control what the markets will do – but the decisions you make today are likely to have an impact on your investment returns for years to come.
At close of business on Monday (16 March), the MSCI World Financials Index was down 37% (in US dollar terms) from its 17 February 2020 peak. The decline has pushed quality banks and insurers throughout the world to record low prices, with stocks like ING Group in the Netherlands now on a forecasted dividend yield of 9%.
If our assumptions and the results of our research are correct, in 10 years’ time those who invest now will look back and be glad that they were brave enough to take advantage of opportunities at a time when so many others were fearful.
There are several differences between the two sell-offs that are very important to understand in the context of the financial sector, which explains our confidence that there will be a sharp rebound.
The companies in which the Denker Global Financial Fund invests have been chosen for their quality and proven ability to grow shareholder value in both good and bad times. Our experience has shown that events like these shake out poor management teams (who were, for example, over-geared), and provide good management teams with strong balance sheets with the opportunity to take market share or buy weak opponents. In Figure 5 we show how JP Morgan and Essent Group have continued to grow shareholder value throughout the turbulence of the past 15 years, including 2008/2009. Based on these figures, and our research and contact with their management teams, we believe we can safely assume that this will also be the case in 2020 and thereafter. Yet, despite this track record, the market has sold them down to their lowest valuations (as measured by their price to book or P/B ratios) in 20+ years.
The diversification of our fund holdings across approximately 50 companies in the financial industry (retail banks, commercial banks, insurers, debt collectors, etc.) across the US, Europe, the UK and about 10 emerging markets, reduces risks significantly. With our long history of managing the fund, the quality of the companies we are invested in is high, as is evident in Figure 6 below.
We’ve made some changes to the portfolio and are proactively monitoring the environment for opportunities.
- At the initial outbreak of the virus we had very little by way of investment in China (and nothing in Italy). The small indirect investment we did have in China (Prudential) was reduced.
- Fearful market reactions have pushed the valuations of several of our portfolio holdings down significantly − well below levels that we believe reflect the reality of the coming years. We have used this opportunity to add to our positions with the strongest balance sheets.
- We increased the quality of the portfolio further by increasing our investment in the property and casualty insurance sector. This sector could benefit from the increased demand for pandemic cover and event cancellations.
- The fund has held up well but, as can be expected, has taken a knock in the last week as the market started selling smaller cap, higher growth financials. These should bounce right back as the shutdowns are reversed.
- The fund’s current cash position is at a minimum (well below historical levels), reflecting the level of attractive valuations and long-term upside we see. No one knows when or how the current market meltdown will end, or how to call the bottom.
Successful investors don’t try to call the bottom. Rather they invest when there is a disconnect between intrinsic value and price. At the moment, some of them are likely to be once-in-a-decade opportunities that will generate good returns in the years to come.
Investors can invest in the Denker Global Financial Fund in US dollars, British pounds or euros. Please contact us at [email protected] for more information.
