Kokkie Kooyman: In 30 years of investing, I’ve never seen opportunities like this. MUST READ!

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.

The financial sector has declined significantly, presenting very attractive investment opportunities. Last week, European financials were trading at new lows following the 1987 Black Monday lows, recording a decline of 28% in just two weeks. Figure 1 shows that this has been the sharpest correction compared to other periods of decline in the last century.
Figure 1: Trajectory of historical 25% drawdowns of US large cap stocks from 1 July 1926 to 13 March 2020 (scaled to start on 20 February 2020). Source: Ken French, Bloomberg, Analysis by ReSolve Asset Management.

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%.

With markets around the world in turmoil, the financial sector should be the one that bounces back the most. It is difficult to be positive amidst the current doom and gloom but once the turmoil caused by Covid-19 settles down, the financial sector should remain well positioned to grow shareholder value at 14%+ per annum. Figure 2 illustrates the impact different returns would have on shareholder value over the long term.
Figure 2: The value of $100 invested today in 10 years’ time. Source: Denker Capital.

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.

Comparing 2008 to 2020 – the financial sector has learnt from past mistakes. Let’s go back to the global financial crisis. In 2008, markets were down over 50% in US dollar terms, but showed significant gains the next year as shown in Figure 3 (the MSCI Emerging Markets Index gained 79.0% and the MSCI World Financials Index 31.1%).
Figure 3: Returns of the Denker Global Financial Fund and MSCI indices during and after the global financial crisis. Source: Morningstar, Denker Capital (31 December 2019).

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.

Figure 4: Differences between the 2008 global financial crisis and the 2020 Covid-19 pandemic. Source: Denker Capital.

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.

Figure 5: The valuations of our two largest holdings indicate it’s time to invest. Source: Denker Capital.

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.

Figure 6: Even measured from the February 2020 low point, the Denker Global Financial Fund has outperformed over most periods. Source: Morningstar, Denker Capital (29 February 2020)Inception date: October 2004. Annualised return is the weighted average compound growth rate over the period measured. Cumulative return is the aggregate return of the portfolio for a specified period. The highest annual return in the last 10 years was 30.3% and the lowest was -17.2%. These are based on a calendar year period over 10 years.

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.

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