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The article was first published on 17 June 2021
BizNews editor-at-large Jackie Cameron had a fantastic interview with Counterpoint value fund manager Piet Viljoen today, in which they went back to basics. With many of us paying – perhaps – too much attention to Mr Market’s movements, it is refreshing to get Viljoen’s perspective on everything from the fundamentals of value investing to the benefits (or lack thereof, in Viljoen’s view) of investing in residential real estate in South Africa. Also, it’s always a plus to hear what this expert has on his radar and in his portfolio. – Nadya Swart
Piet Viljoen on what a value investor does:
We tend to buy assets at a discount to the present value of the future cash flows we expect them to generate. And the cheaper the better. The less you pay for anything in the future – the better, because we feel that the future is so unpredictable and unforecastable that we don’t want to pay a lot for a rosy picture. So we try to pay as little as possible. And every now and then you get opportunities to do that in different sectors and different assets.
On whether things are currently ‘on sale’ or overheated in South Africa:
I think things are still pretty much on sale. Asset prices are up quite a bit off the lows of last year – the pandemic-caused lows, but their valuation is not stretched by any stretch of the imagination. I mean, I think valuations are reasonable and – in some cases – very, very cheap. So, we still think there’s quite a few bargains around. South Africa still is very much not the flavour of the day. Most South Africans would rather invest offshore than onshore, and understandably so. But I think that the pendulum has probably moved too far in one direction, [and] probably needs to move back a little bit, at least to the other direction.
On whether the alarm has been rung that the markets have hit the top in the US:
So, we try not to predict what’s going to happen. We’d rather play the cards as they’re dealt in front of us and try to buy the assets that are cheap. So what the US market is going to do, I have no idea. If I had to guess, I would say that equity markets generally in the world will continue to go up. I think fiscal conditions and monetary conditions are such that it will be conducive for earnings going forward. And I think interest rates won’t go up a huge amount. So I think that will be good for valuations.
So I think equities are fine. Personally, we prefer to invest in a place outside the US. We think the US is relatively more expensive than many other markets. We’re finding the bargains. The things that are on sale are in other markets, not necessarily the US. But just as a point of departure, I think equities are fine. I think it’s a fairly comfortable place to be.
On whether Labat Africa has been on his radar:
Actually, no, but I was fortunate enough to listen to an interview that Alec had with Brian van Rooyen when he announced his foray into alternative medicine, if you could put it that way. And I think there’s a space. I think that’s a growing trend. I think it is quite popular. The only thing I would say is that it’s hard to see any barriers to entry, at least in the short to medium-term. There are no barriers yet, and as brands get established, maybe there will be barriers to entry. But right now, I think it’s very much a free for all.
On how seriously Labat shareholders should take the news that Labat Africa may lose its JSE listing due to its failure to timeously submit its financial statements:
I think that’s serious. I think a company needs to explain very carefully why they’re not producing financial statements on time and – to the extent that they haven’t done so – I think they should do so as quickly as possible because it is quite serious. If you can’t produce financials, that leaves question marks around the viability of the business.
On whether – as a value investor – Labat would be seen as a bargain opportunity:
Look, if a company is struggling to produce financials – you probably want to be cautious. I mean, Steinhoff is an example – case in point – that for two, three years couldn’t produce financials and the share price just kept going down all the way to, I think at one point, 50 or 60 cents. But there was a time there where the market was too negative. So I think you probably have to wait and evaluate the situation as time goes by. But it’s not something you’d run into right now, no.
On Sanlam as an investment opportunity:
No, it isn’t [in my portfolio], but it’s one I’m having a good look at. It is a very well-run, well-managed business. It got quite cheap during the pandemic. I still need to get my mind around how the insurance business dynamics play out into the long-term future. They have had a tailwind of declining interest rates for quite a long time, which helps the business. I think if interest rates start going up over time, maybe that’s a bit of the headwind, I’m not quite sure. So that’s something I’m thinking about. But it is definitely something to evaluate because it is probably one of the better insurance companies in South Africa at this point.
Look, in Sanlam’s life that’s quite small. I don’t think it makes a big difference. I think it’s the right home for that sort of business, seeing that Alexander Forbes has stated they want to be a capital light business. Life insurance is a capital heavy business – one needs to have adequate regulatory capital set aside when you write policies. So I think the natural home is Sanlam, but will it change the valuation of the greater Sanlam business? No. I don’t think it’ll make a difference whether they paid a bargain price or not. I don’t think it makes a big difference.
On whether residential property and in particular South African luxury lifestyle and estate properties are a good investment:
No. I rent, I don’t own residential property. I rent. I think it makes no financial sense at all. I do think it makes sense from security and from a sense of belonging and all those issues. I think owning a home makes sense for that. But as a financial investment, I don’t think they make sense at all.
On why investing in residential property doesn’t make sense:
The cost of homeownership is extremely high. If you take the frictional cost of buying and selling, all the brokerage and taxes and everything you have to pay – number one – and then the cost of maintaining a house… It’s huge. It runs 2% to 4% per annum of the value of the house, and it tends to be lumpy as well. There’s always a pipe breaking and a roof that needs to be fixed and a geyser breaking – there’s always stuff happening – and it needs to be painted every now and then. And the other thing that happens to houses; after about 10, 12 years – it becomes quite old and you need to remodel to keep it sort of in pristine condition. So all those things need to be taken into account. It’s not only what you pay for it and what you can sell it for. There’s a whole lot of costs that happen in between that people tend not to take account of.
On whether political developments in South Africa play a role in his investment planning:
Oh, very much so. I think when you are planning your investments as a South African, you have to make sure you have a diversified portfolio. Even though South African assets are cheap, it would be foolhardy to have all your assets in South Africa – because of the poor political environment, the lack of trust between business and government, lack of infrastructure development and unavailability of reasonably priced energy. All those problems have a dampening effect on economic growth. And if the economy isn’t growing, then companies will struggle to do well.
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