The world is changing fast and to keep up you need local knowledge with global context.
Ranmore Funds founder Sean Peche is cementing his position among the top-performing 1% of global equity funds by disciplining himself to what guru Howard Marks called “second-level thinking”. In this masterclass on investing that self-helpers will appreciate at all levels of expertise, Peche shares the rational approach which has enabled him to outperform no matter what the investment trend of the moment. Hint: study the companies you want to co-own instead of being part of the crowd that attempts to guess big trends (and fails at least 50% of the time). He also points us towards some juicy out-of-fashion investment opportunities that Peche is confident will reward the patient. As a bonus, below the edited transcript is Sean’s view on Disney shares. – Alec Hogg
Edited transcript of the interview with Sean Peche, portfolio manager of the Ranmore Global Equity fund.
Alec Hogg: Sean Peche from Ranmore Funds one of the top money managers in the world. Nice to hear that, isn’t it, Sean?
Sean Peche: Alec, that’s very kind of you, thank you. I’ve been in this industry long enough to know complacency is a killer. It’s not just me; I have a wonderful team. We’re getting a lot of recognition, particularly as we focus more on the market right here. Around £21 trillion is managed in the UK, with some wealth managers overseeing over £50 billion. We’ve performed well this year without relying on tech stocks like AI and the FAANGs. Every day brings something new and exciting, and I love it. But, of course, challenges are always around the corner.
Alec Hogg: You’re a veteran of money management. You’re based in the UK but have a strong South African heritage. I’m delighted you’ll return to the BizNews conference next year. But it’s interesting to hear that it’s taken you so long to get recognized in the huge UK market. Why is that?
Sean Peche: I’ve been largely focused on marketing to South Africa. I thought maybe I’d have a harder time breaking into the UK market because I didn’t attend prestigious schools here. However, I’ve learned that the UK is quite welcoming. On a lighter note, my son, born here, was told he has the ‘poshest South African accent’ ever when working at a golf club over the university holidays. So yes, it’s still very much South African, and it’s great to connect with people from both places.
Alec Hogg: Well, we never lose our blood, our heritage, and we have our challenges, but my goodness, we’re growing through them. From your side, though, look at the markets because that’s where the action is, and that’s the purpose of this conversation. Things are very turbulent. Our BizNews model portfolio was doing swimmingly earlier in the year because it is focused on exponential stocks, but it’s had two very rough months where these growth stocks dropped about 10%. From your side, though, even though you are mostly focused on value stocks which have been out of favour again, you’re still performing among the best in the world. What’s your secret power?
Sean Peche: I’ll tell you what top tip I can give you this episode. I’ve nearly finished a book called Richer, Wiser, Happier by William Green. And I recommend everybody read it. William Green interviews the top money managers from John Templeton to Mohnish Pabrai and all those guys. And it’s really interesting. So what’s the secret sauce? We’re bottom-up investors. [He explains his investment strategy in detail, emphasizing the advantages of being a bottom-up investor.]
Alec Hogg: That makes a lot of sense.
Sean Peche: So you’ve got oil back at $94. [He elaborates on various market factors, such as interest rates, inflation, and oil prices.] And what’s interesting to me, Alec is if you look at the market, the market year to date is up 10.5%, and growth is way ahead of value. [He continues discussing the fluctuations in the market.]
Alec Hogg: It’s so interesting, but I want to move it to a different area we’ve never really spoken about. I read an incredible speech by David Ansara, who’s the new chief executive of the Free Market Foundation, where he unpacks the South African situation and then talks about the disruption and making yourself ‘state-proof’ – in that, the way we always used to think “Pretoria will provide” is over. [He raises the question about potential disruption in the investment sector and asks for Sean’s perspective on whether boutique funds could be the future.]
Sean Peche: Alec, I hope so. The problem is we’ve had disruption the other way. We’ve had the disruption of the passive funds. Howard Marks always talks about first-level thinking and second-level thinking. When we look at a company, that’s what the market’s saying—that’s first-level thinking. What’s the second level? We’ve got to dig a bit deeper. The first level thinking on passives is that most active managers underperform the benchmark because of fees, so we must go for passives. But what’s the second level? Markets have increased in the last 10 years, making it easy to perform in line with a rising benchmark. But who wants to perform in line with a falling one?
Sean Peche: The problem for boutiques is that there’s been massive pressure on fees. Some fees are fixed, like paying external directors and money laundering risk officers. Whether you manage $100m or a billion dollars, those costs remain the same. It’s been tough for boutiques because of the focus on fees driven by passives. However, the evidence suggests that boutiques outperform large fund managers. The big guys are stuck in large caps, ignoring smaller-value companies. Recently, in South Africa, I discussed Walmart. Despite a share price increase, their earnings per share growth has only been 2% compound per annum over the last 10 years. Meanwhile, Kroger, the second largest food retailer in the U.S., has grown earnings at 12%. That’s the kind of opportunity that’s out there for smaller boutiques.
Read more: Numbers not the narrative – Sean Peche
Alec Hogg: Sean, before we go, I’d really like to get your thoughts on banking. Kokkie Koeman says banking stocks are at their cheapest ever. What’s your thought on that?
Sean Peche: Some banks in our portfolio are trading at 0.35 times book value. If they just shut up shop, collected their debts, and paid the creditors, you’d make multiples on your money. These are big European banks. They haven’t grown because of low interest rates. People think banks have been terrible businesses, but they shouldn’t be. The threat from FinTech is more perceived than actual. ABN AMRO offers a 10% dividend yield and trades at five times earnings. Compare that to Microsoft’s 2% earnings yield. The market always changes.
Alec Hogg: Do you think the disruptive force from fintech is so powerful that it’s changing the banking landscape?
Sean Peche: I think that’s a perceived fear more than an actual one. I still use a bank, and they’ve been able to use technology to their advantage. In fact, the oldest businesses in the world are banks, so they can’t be that bad.
How Sean Peche analyses a stock – a view on Disney…..
Disney hit the lowest price in a year – down 59% since March ’21
Isn’t it a “great business” with “excellent management”?
I thought “great businesses” meant “great share prices.”
But their parks & ships must be pumping with post-COVID vacations,
Disney+ has over 100m subs, and they own the best sports content in ESPN
But we already KNOW that
The flip side is streaming competition is rife, parks have high labour costs & sports rights will cost more in the future with Amazon joining the party.
And that’s precisely why we’re not in the “buy a great business and hold forever” camp.
Do you really think it’s that easy?
I know it SEEMs easy because we look at Apple & think, “Grrr, I love my iPhone; all I had to do was buy the shares & hold them forever.”
But we’d be fooling ourselves because we only see survivors
It wouldn’t have worked if you’d applied that strategy to Nokia – the early smartphone leader
Or to Intel, the semiconductor heavyweight champ pre-Nvidia
Or Avon Products
They were all considered “great businesses” once upon a time
But things change
New competitors come along; economies change, management change, and valuations change
And we need to be alive to those changes – that’s why active management makes sense
And why “low turnover” may be the reddest of all herrings
Maybe the “buy and never sell” teams are secretly hoping their clients apply that strategy to their funds and never sell
A good way to afford that Chateau in the French countryside.
Speaking of castles,
When the entire world knows it’s a great business with a wide moat, it’s often already in the price
How much would the landed gentry have paid for a castle on a hill with a wide moat back in time?
Probably any price – their lives were at stake
But castles still got stormed because enemies would
fill in the moats or
drain them or
launch fireballs over the walls or
do a stakeout & wait until the castle inhabitants are starving to death and surrendered
Sure, moats slowed down the speed of attack, but they were all stormed sooner or later
Disney’s peak free cash flow was $8.3bn in 2017, back when “we” all wanted superhero movies
other than Value managers who don’t like “fantasy.”
But Disney has only managed free cash flow of $3bn over the past yr
Netflix has generated $4bn
So how much would you pay for peak FCF of $8bn?
Assuming you received it all in cash dividends & management keeps a lid on Share-Based Comp?
I know it’s more fantasy … but have a heart; it was “only” $1bn last year, doubling in 2yrs
If only profits grew as fast..
Would you pay $200bn = a 4% yield on their EV?
Considering they’re nowhere near generating $8bn..
So I think I’ll sit this one out & and watch the battle from the sidelines
Although it might take some time, $1bn in annual comp means the inhabitants won’t be starving anytime soon 😉
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