Steven Nathan on portfolio construction, Aveng and doing your investment homework

Steven Nathan joins Alec Hogg to discuss the BizNews Share Portfolio, among other things. The Share Portfolio has been going for nearly seven years now, with the most recent addition being Aveng. Nathan comments on portfolio construction, giving his thoughts on structuring your investments. “You might be 30 years old [and] your retirement horizon is 35 years. Your objective is to say, when I hit 65, I want to have the biggest retirement pot possible, without being silly along the way.” He also comments on Aveng, giving a brief overview of the company. — Jarryd Neves

Steven Nathan on investment portfolio construction:

When you’re looking at portfolio construction, there’s quite a lot of thought that one can put behind it. I normally look [at] what the investor’s objective is. What is your time horizon? A lot of people are investing for retirement. You might be 30 years old [and] your retirement horizon is 35 years. Your objective is to say, when I hit 65, I want to have the biggest retirement pot possible without being silly along the way.

Then you’d put in a portfolio that you thought was going to give you the highest probability of achieving that. You wouldn’t be overly concerned about short-term fluctuations and quarterly earnings, for example. But most of us, although we are long-term investors, are overly concerned about the short-term fluctuations. You’ve got to look at your time horizon and your asset allocation. Then you [build] on that. What portion should I have in equities, bonds, property, local and offshore?

It’s not a bad idea to put a relatively small proportion of your portfolio in what we would call more speculative stocks that have the possibility of doing really well. You’re not too exposed to them, so if things went wrong, they would materially damage your wealth.

On Aveng:

If you look at the construction sector in South Africa, it’s a bit like the airline industry; very capital intensive and [it] has not done well in South Africa. The cost of the capital equipment to construct is high. [There are] high capital costs and you either tend to do really well or really poorly. In South Africa, we’ve had low-fixed investment, so it hasn’t been a great environment. Then we had the bonanza of the 2010 World Cup and there was an enormous amount of construction, so that was a boom period.

Unfortunately, there was a bit of price collusion, and some of these companies suffered with fines thereafter. It’s been a really barren period and the companies with very high capital costs [and] high debt costs have, in the downturn, done really poorly. But there’s a price for everything and there is less competition. We’ve seen consolidation in the construction industry, so there are fewer players and these companies are getting smarter about how they manage the capital.

When you see good people like Bernard Swanepoel and others associate themselves with this company, it tends to be a forward-looking indicator [that] credible people have done their own due diligence. That is probably a [positive] sign that there’s a lot of potential upside. Aveng is down something like 99% over five years. The potential for it to go up 20, 30, 40 times is not impossible. There’s a reasonably good probability. Once again, it’s a small company. Its market cap is something like R4 bn. It has gone from two to six cents, so it’s tripled. You cannot buy that much as an investor; maybe as an individual investor, but a fund can’t buy that much, which does give an opportunity for the smaller investor to come in. You might be buying [maybe] R10,000-R20,000, not R100m that a big fund would have to buy.

It’s definitely worth what I would call a bit of a punt, but just have the right expectations, and [remember] these things can turn quite quickly. That is why people like Piet [Viljoen] and others want to hold a basket of these more speculative shares because you know they’re not all going to do well. Probably only one or two. But all you need is one out of six to shoot the lights out and you would do very well overall.

On the importance of doing your investment homework:

Going through the annual report is a fantastic discipline. What is a good idea is to go back at least five years. If you’re really a serious investor, you’d go back at least five years and read what the company said. What were its expectations, what was that outlook? What was the strategy? If you see a company that is consistent in its outlook and strategy and is credible because they actually deliver on their promises and they don’t change all the time, that gives you much more confidence. But a lot of people don’t put in that level of homework.

They are looking really at the short run or [they] listen to the CEO and the CEO sounds incredibly bullish and optimistic. That is probably the last thing you should do, listen to the CEO. Recently, I was reading something about great investors and they basically contrasted the personality. A great investor is someone who is unemotional, who is probably, socially, a little bit awkward. If you look at these great investors, they’re quite awkward with people because they are devoid of emotions and don’t get caught up in the crowds and the euphoria that most of us do.

CEOs are on the opposite side. They are nice people [and] easy to talk to. You’ve got to be careful who you pick. Most definitely, read the annual report but go back in time because there’s a lot of rich information. As you say, a company like Aveng is not what it used to be five or 10 years ago. It’s a very different animal and you wouldn’t necessarily find that out if you were listening to management or to other punters and weren’t doing the homework yourself.

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