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Piet Viljoen’s Counterpoint value fund has been the best performing local fund over the last five years, managing to achieve a compound annual return of a shade under 15%. This is a phenomenal achievement, especially against a backdrop that hasn’t always been conducive to his investment style, which is value focused. The interview concentrates on two topics; the delisting trend that faces the local bourse and legacy-stricken Steinhoff. Piet, who has listed businesses himself, says the burdensome regulatory and accounting requirements outweigh the benefits of being listed on an exchange. He adds that investors may be getting a bit excited regarding Steinhoff’s R25bn valuation, as despite the more transparent road to recovery, it still faces a number of challenging headwinds. – Justin Rowe-Roberts
Piet Viljoen on whether investors need to temper their return expectations in 2022:
Look, I’m still optimistic about returns available from emerging markets in general, non-Asian based emerging markets. Markets like Russia, South American, Latin American and South Africa specifically and there are some of these markets that are still set fair. It’s quite simple. What sets the bar for long-term returns for markets are interest rates. So, if you look at the interest rates in Russia, Mexico, South Africa and Brazil, they are all between 8% and 12%. That’s what you’re working with and equities should give you something in excess of that over time. Those markets are well positioned, where I would want to temper my expectations around returns more in the developed markets in Europe and the US, where bond yields are negative or zero because that sets the bar quite low. As a result of very low interest rates in those markets, equities have been priced quite highly because at the end of the day, the cash flows to the equity owners of the business are determined by discounting all the future profits, by the interest rate and, if interest rates are very low, the present value sum is a big number and that is what has happened to those equities. I don’t think there is room for one to expect fantastic outsized returns from those markets over the next three to five years.
On the reasons for the delisting trend on the JSE:
I think there are several factors at work here. Number one, from a regulatory point of view – in terms of compliance and accounting standards – it has become burdensome to be listed anywhere in the world, not only South Africa. The rules and regulations have become very onerous. The accounting standards have become almost ridiculous if you look at what they make you do these days with regard to fair value accounting and all those sorts of things. That is the one set of pressures listed companies face. So, we are seeing more and more delistings globally. The second, very important factor, is that a lot of the money is flowing into index funds and all those funds do is buy the large companies, so smaller companies get completely neglected. If you do a small-cap listing, you get no traction because the index funds are just not interested in buying small companies. Also, in the asset management industry up to fairly recently, money has been flowing to the large fund managers. And again, they don’t care about small companies.
On why legacy-stricken businesses struggle to ever recover:
Investors run for the hills when they lose trust and these businesses become neglected and out of favour. Especially something like Steinhoff, which was so popular and a big portion of most investors’ portfolios. It will be hard for it to get its old rating back again. It is possible but it will take a long time and there will be many starts and stops along the way. We have seen it below R1 and now it’s 5.6x (R5.60). I don’t think it’s that cheap anymore but it owns some good businesses. Ultimately, if the management team plays the ball well, I think they can have a very nice business going forward and do fairly well for shareholders over the long term. I think it’s quite possible, and the same goes for others, as well. But what you do need is the old management to get cleaned out and a new thought process in the business. You need ethical business dealings.
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