As load-shedding escalates, some SA investors panic – but not JSE-bull Andrew Vintcent. Here’s why.
Dive into an insightful discussion with Andrew Vintcent of ClucasGray about the current volatile landscape of South African stocks. Andrew defies the bearish outlook by advocating for JSE-listed stocks, offering an intriguing take on investing in a South African-only balanced fund. The conversation delves deep into key issues like load shedding, inflation, and the cyclical versus structural nature of current financial difficulties, all framed within an overarching optimism for the future of South African investing. This candid conversation is not to be missed by any investor. – Alec Hogg
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Edited transcript of the interview
Alec Hogg: It seems like every time we contemplate diving back into South African shares, we're reminded of that movie Jaws. It never really feels safe to get back into the water. But over the last month, things have looked slightly different. Andrew Vintcent, portfolio manager at ClucasGray, is one of the advocates for investing in JSE-listed stocks and last month launched a South African-only balanced fund for investors. This approach might seem foolhardy if you align with Magnus Heystek's view, but Andrew will explain to us why it isn't. Andrew, let's start with Magnus – do you value his opinion? He's been consistently bearish on South African stocks.
Andrew Vintcent: Indeed, one has to. He is highly esteemed, and while I don't personally know Magnus Heystek, I have extensively read his work. He's made his views known in a very articulate manner, and his predictions over the past decade have proven to be correct. The last 10 to 12 years have been challenging for South Africa, igniting a debate all investors must engage in: are these cyclical or structural issues? Considering the events of the last six weeks and even seven years, one could argue in favour of structural issues. However, history will ultimately judge these debates. We believe we're experiencing a more cyclical than structural period. We've seen many periods in South Africa's past where similar existential threats existed, often coinciding with tough global conditions. Given the prevailing dominance of a few large US stocks, it's easy to overlook the challenging global backdrop of the last 12 to 18 months. We'd be remiss to disregard perspectives like Magnus's, but we believe that the current negativity is well-reflected in the investment landscape. We're in a tough period, but we view much of this as cyclical rather than structural.
Alec Hogg: It's beneficial to get some context. Now, based on the roadshow you conducted last month, it appears load shedding is a significant issue. Just today, we received news that Jan Oberholtzer, who seemed to be the last responsible figure at Eskom, has resigned. In a detailed interview, he talked about the issues he was dealing with at Eskom. As former COO, he explained that Eskom had spent 6 billion Rand annually on diesel to prevent load shedding. Yet in the first three months of this year alone, they've spent 9 billion Rand. This suggests that the utility has been heavily investing in diesel. Considering Oberholzer's departure, what's your view on load shedding?
Andrew Vintcent: As you've rightly summarised, load shedding has been a significant issue. This factor differentiates this cycle from others due to its unique influence. Unfortunately, we don't have a surefire solution for load shedding. We've heard from experts who suggest there's substantial capacity coming back online, but we can't accurately predict Eskom's future. What we can do is anticipate how this situation will impact the 2023 earning cycle, as companies are incurring additional costs to stay operational. From small businesses to large corporates, everyone is trying to become energy independent. But the transition period is expensive, and that's the aspect we believe needs more attention. Once we move past load shedding, we expect companies' costs will normalise significantly from the high 2023 base, which may lead to attractive investment opportunities. Despite the dark cloud that Eskom's load shedding issue casts, we believe there's a silver lining in the form of undervalued opportunities to invest in.
Alec Hogg: That's fascinating because if you look back a year in the United States, inflation was at 9%. Who would have thought that a year later it would be down to 3%? There were many who thought it would stay high or go even higher. It's a similar kind of exercise, looking beyond the short term, clearing the noise, and looking ahead. So, what do you foresee for South African companies listed on the JSE when earnings normalise?
Andrew Vintcent: Yes, the present is indeed uncomfortable. We don't just sit quietly and naively look forward. It has been a challenging six months, which we can't ignore. What we see is quite similar to the situation you just outlined. In South Africa, we're caught in a vortex: a weak rand causes supply side inflation, which leads to high interest rates, and in turn, results in structurally low growth. We've been dealing with high interest rates for about 12 to 13 years now. Despite the challenges, the Reserve Bank has done its constitutional mandate well. The weak rand has led to inflation, high interest rates, and low growth. We're hoping that the global supply-side inflation pressures are alleviating. Our inflation numbers, due to the base effect, will start working in our favour at some point. Once inflation falls, we can break free from this uncomfortable vortex. That's the cyclical part I referred to earlier.
Looking ahead, bond yields are currently at 12. Because of high inflation and a weak rand, you can understand why some company PEs are trading at seven or eight since our cost of capital is so high. However, if bond yields start to normalise, we can start paying better multiples for future earnings. That's one side of the equation. The second side is that, for the 15 companies we own, we're expecting a compound earnings growth by 2025 of around 10 to 11% per annum. This is above inflation. The earnings that you're paying for these companies are extraordinarily attractive relative to long-term history. So, that's why we're more constructive on some of the opportunities to invest in.
Alec Hogg: Many asset managers have taken full advantage of the 45% they are now allowed to invest in international stocks. However, you've just launched a new fund focused only on South Africa: the ClucasGray Asset Management SA Balanced Fund. Who's going to want to invest in that given all the noise at the moment?
Andrew Vintcent: Well, our Equilibrium fund, the typical balanced fund, can go up to 45%, and nothing changes there. That remains our flagship fund. But because of the 45% allocation allowed offshore, we believe there's room for us to manage the 55% of large institutional mandates in domestic assets. We've developed our skill set over a long period in South African assets.
Increasingly, the risk for our industry is that a large portion of that 45% may be managed more directly by large offshore managers. In contrast, we're looking to offer a product that showcases our expertise in domestic-only assets. Right now, the variability in offshore allocations between balanced funds is enormous. This has resulted in significant divergence in balanced fund returns.
We don't believe this is just a point-in-time issue where only assets are the way to go. We think that sustainably through the cycle, as the pension fund industry continues to invest more offshore, there's scope for specialisation. We're specialising in the domestic-only component, which we believe is our strength. And we think increasingly, gatekeepers will allocate some of that money to specialist offshore managers.
Alec Hogg: That makes a lot of sense. Here at BizNews, in our model portfolio, I often refer to you and Piet Viljoen as SA bulls. Dylan Bradfield also seems to echo the sentiment to invest locally. Last month, in our Shyft portfolio, we invested in the MSCI South African index fund listed in New York. It has delivered an 8% return in the last month in dollar terms. This demonstrates investment opportunities do exist. Many people have a mental barrier against investing in South African equities, but you consistently show that this perception is misguided. For instance, Reinet, which you recommended for our portfolio and for which we thank you, has been performing excellently and remains one of your top stocks.
Andrew Vintcent: Indeed, Reinet, along with a few others, is a stock we favour. It's uniquely tied to the energy independence theme we discussed earlier. The broader theme you mentioned is the appeal of the MSCI South Africa, which is substantial. We have covered it extensively. It would be among our top holdings, along with two banks and a large life insurance company. Usually, these aren't businesses that excite investors. However, the potential these businesses possess to independently drive the value unlock process is rather compelling. Therefore, we do see significant opportunities. I'm not sure about the composition of the MSCI SA index as it frequently changes, but the concept of investing in domestic assets is indeed appealing. Revisiting previous cycles, the gap in valuations between SA-only assets and the US indices is more extreme than it was in 2002. Coupled with currency normalisation, if that ever happens, the current cycle closely resembles the early 2000s with a very weak Rand and remarkably inexpensive domestic assets among several companies, including Reinet.
Alec Hogg: Thank you for giving us that perspective. Investing is a long-term game, and it's easy to get caught up in daily events. My inbox shows that South Africans are currently very pessimistic, but we find joy even in the investment world with the fantasy fund manager game, co-sponsored by ClucasGray.
In the game I made an error over the weekend by switching out of one of my favourite stocks, Tex Containers, into Richemont. But Richemont took a dive yesterday. Could you possibly explain why that happened and then elaborate on the purpose of the fantasy fund manager game?
Andrew Vintcent: Sure, although I might not be the best person to ask, as my form hasn't been great since the game started in May. It's been a tough month for everyone, especially those who were slightly inclined towards some of the less expensive domestic stocks. My portfolio hasn't included Richemont but has included others that I believe are too cheap and haven't re-rated yet. I'm playing the long game, even though it's only a six-month competition. I am confident that the second half of the competition will be better for me than the first.
As for Richemont, it's been a remarkable performer over time, but the recent slump demonstrates how the market can react to even a small disappointment in an environment where things are fickle and people are on edge. That being said, Richemont remains an extraordinary company, albeit perhaps a bit overvalued.
In my portfolio, I have been choosing British American Tobacco for about 10 weeks, and that has been extraordinarily disappointing. Even with the weak Rand, the stock keeps getting weaker, reaching a level close to the COVID crisis low in pound terms. So, I feel your pain, but with a different stock.
Alec Hogg: Why is ClucasGray involved in the fantasy fund manager game? Is it just for fun or to encourage more public involvement, considering we've had more than 4,000 sign-ups?
Andrew Vintcent: Indeed, it's a wonderful initiative led by Corion Capital and with your support. We appreciate that it introduces people to the thrill of investing. For some, it could become a lifelong passion or even a stimulating, albeit at times stressful, career. We believe it's crucial to get more people involved in individual stock selection and investing.
We're hopeful that next year, more than 4,000 people will participate, gaining exposure to the benefits of compound interest over time. Investing is an integral part of everyday life, and the stock market allows us to express our views and back them with funding. We appreciate the game-like aspect of it. Although one-week returns aren't particularly significant, the idea of it being a fun, potentially lifelong hobby or career is very appealing.
Alec Hogg: Indeed, it's not just about one week, or even one day, as I learned the hard way with Richemont. But overall, it is enjoyable, and it provides us amateurs a glimpse into the professional world of investment. How you manage this stress on a daily basis, particularly as you're dealing with real money, is beyond me. How do you manage your stress levels?
Andrew Vintcent: It's part of the job, Alec. Yes, it can be stressful at times, but we've developed a process over a long period that we can rely on. This process reduces some of the emotional strain and daily stress. We focus on the long-term, looking three years ahead to evaluate compound returns. We understand that we are buying inexpensive shares that should provide returns over time. There will be some mistakes along the way.
The challenge in our profession is that our views don't materialise overnight, and various domestic or global macro events can disrupt our short-term views. However, years of experience have taught us that sticking to our process usually leads to more successes than failures. It's important not to disregard the emotional aspect of investing.
Behavioural finance is real, and we've developed ways to manage it. For instance, going away to a place with no signal, like the wild coast, is a great way to disconnect. Coming back and seeing that the Rand has strengthened against the dollar can be very satisfying.
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