Andrew Vintcent – Depressed JSE stocks’ ‘new normal’ is only a temporary trough

One of SA’s best-performing fund managers is adamant that South African shares are discounting the worst but will rebound strongly, just like in every previous cycle. Andrew Vintcent of ClucasGray, whose returns in the past three years have been double those of the market, is confident that the worst is already behind JSE-listed stocks. In this interview with BizNews editor Alec Hogg, he argues the perfect storm of bad news is already starting to brighten, especially for small and medium-cap stocks. This assessment aligns with what we heard from Piet Viljoen earlier this week.


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An edited transcript of the Interview with ClucasGray portfolio manager Andrew Vintcent

Alec Hogg: There are lots of conversations about active fund managers being unable to beat the benchmarks or the index, and most of them don’t. But one who does and beats it by quite some margin is Andrew Vincent, who looks after the GlucasGray Equity Fund. I want to give you this stat so you know where he’s coming from. The compound annual return of this fund in the last three years has been 23.7%. Just put that in the back of your mind. That compares with the JSE at 12%. So, it is more than almost double what the JSE has delivered. Andrew will benefit us from his wisdom in the next 20 minutes. Yeah, it’s good to be talking with you again, Andrew. And you know, there’s this, I suppose, debate that goes on. It’s well, all value managers or asset managers are bad active managers because they can’t beat the index, but of course, in every area, you have exceptions. Now, your performance over the past three years is exceptional. Is this something that you’ve achieved over longer periods?

Andrew Vintcent: Alec, nice to see you again and thanks for the introduction. Yes, it has been an interesting three-year period. I mean, several things did go right for us in that period. To answer your question, the fund’s been going for 11 years, of which Grant and I have been managing it together for the last, I guess, eight and a half years. It’s coming up to 12 years now. And over that period, we have been fortunate to outperform the overall market. And over those periods, we have delivered what we deem reasonably good alpha. As you alluded to, the last three years have been particularly strong. If you go back three years, you’re probably coming out of that COVID carnage, if I can use that as a phrase. And subsequently, over the last three years, many things have worked in our way. There are some bigger-picture and stock-specific issues, but the net effect has been that the fund has delivered pleasing results.

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Alec Hogg: I’m sure the next question, the obvious next question, if a financial advisor is watching this, is saying, but how did you do it? How did you beat the indices when we were told it’s very difficult for active managers?

Andrew Vintcent: No, it’s a very good question. So when we returned, we had an exercise we did for an institutional client. We wanted to break down the contributors to relative performance. The stocks that contributed most to the active returns. It is an interesting outcome because of the top 10 largest relative contributors to performance; seven of those are what we deem to be mid-cap shares, or in some cases, slightly smaller than mid-cap. But… But the interesting stat was that four of those ten contributors were companies that were the subject of a corporate takeout. So they were either delisted, they got to a stage where other businesses or investors thought they were too cheap and too attractive given their potential growth prospects, and it was better for them to take it out at an appropriate price, which in some ways was a vindication of the investment case that we had built around those companies. In other ways, it is disappointing that companies get delisted. But I think that’s the natural evolution of a market you get. You go through these phases where businesses get very cheap, good businesses get unjustly sold off, and alternative sources of capital come and find these businesses and ultimately delist them. So there’s a very pleasing outcome in that we’ve always told our clients that we can, as smaller boutique managers, play across the market cap spectrum. Given our size, mathematically, we have a wider array of companies from which to choose. And I guess it’s pleasing that seven of those ten largest contributors would be considered mid-cap shares. Not necessarily all small caps, but certainly outside of the top 40. And I think that’s a real, I guess it backs up the process that we’ve been talking to clients about over the last number of years.

Alec Hogg: Earlier this week, I spoke with Magnus Heystek and Piet Viljoen, you know, their Million Rand Challenge. And Piet was saying that small caps are now incredibly cheap. He says it’s ridiculously cheap. They’re just being sold down to levels as he’s never seen before. Is he exaggerating?

Andrew Vintcent: No, to put it bluntly, I would completely concur with what Peter told you. It’s quite interesting to me how the psychology of investing is real. We’ve touched on this before, I think. But I think what’s happened has been a sort of acceptance. There’s a disbelief initially at the rating at which good businesses trade, and then an acceptance. So, if I look at the list of companies we analyse as a team and what we deem to be an appropriate exit multiple, hypothetically, if a business typically trades on a ten times PE multiple, it is now trading at a 7. And there’s an acceptance that seven is the new ten. And in many cases, they’re still trading below. Even using 7, you’re getting an upside. I think there’s a complete resignation or acceptance of the scenario that the current… environment that we’re currently in. And you can draw parallels across various parts. So the RAN, for example, is at 19. We accept that it’s at 19.

It’s difficult to make a fundamental investment case for why the RAN should be at 19. Bond yields were high at 11. They went to 12.5 and almost 13 a month or two ago. It’s very difficult. And now we accept that 12 is the new 10, for example, in bond yields. And I think a very similar issue is playing out in equities. As I said, there’s an initial disbelief at the valuation opportunity, there’s excitement around how cheap these businesses potentially are, and then there’s a sort of an acceptance that seven is the new ten or five is a new eight. And I would completely concur with what Pitts and his Merchant Rest colleagues are saying. I think that these businesses right now are extremely attractively priced. And whilst the small-cap index is… attractive, I think you can make that argument up the market cap spectrum to some relatively big companies, too, and certainly in the mid-cap space. So I think as investors, we are seeing a, we use the word in our most recent quarterly, a plethora of opportunities of companies that are just inappropriately priced for the quality of these companies.

Alec Hogg: Because of the negativity around South Africa.

Andrew Vintcent: It must be an issue. You know, you’ve had the sort of the perfect storm. You’ve had load shedding, which we discussed previously, and load shedding is not… It’s in the process of going away, we believe, but it hasn’t yet disappeared. Interest rates are extortionately high, and you’ve had a significant amount of consumer confidence that’s been eroded on the back of high interest rates, load shedding, and a very weak currency coupled with a very difficult global backdrop. Interest rates globally are very high. The global economy is tough. So I think there’s a whole range of different issues that are at play. But certainly, I think it’s real, this apathy towards South Africa and many of these companies that we’ve alluded to.

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But Alec, I think the point to make is that we’re having several engagements with companies we are invested in around this particular issue. So you can bemoan the fact that you trade on it… six multiple or five multiple or eight multiple if you’re a bigger, better business, you can bemoan that fact. Or you can accept that and find ways to unlock the value that the market has presented you with. And I think that is the debate that is increasingly becoming relevant, which is why when I go back three years and look at the last three years’ performance, the fact that four of the ten contributors to performance were takeouts… is quite interesting because that is effectively what we believe will continue to happen unless these businesses don’t rewrite.

Alec Hogg: So all you need is a little confidence coming back in the system. And those share prices that don’t react would quickly be bought out by potential predators. Because if you aren’t confident about a country’s future, you won’t buy out businesses unless they are unbelievably cheap. Is that a fair comment?

Andrew Vintcent: Yeah, that’s a very fair comment. So, there are two ways that businesses can re-rate. The one is the sort of silver bullet where someone comes in and buys them out, and you get that immediate kick up of the rating, and you get the value unlock immediately. The other more sustainable one, which I think is the companies we’ve engaged with are embracing more, is just to do what they do best: run their businesses. We have been blessed countless times with extraordinary management teams, as it’s been alluded to on your show. The environment is extremely difficult. But we believe in many ways, and it is the most difficult it’s likely to be looking forward to right now. As I alluded to, companies reporting right now are dealing with an environment where the RAND cracked. Load shedding was at level six for a sustained period of the last couple of quarters. This is a very difficult operating environment. Interest rates have gone up, and I’ve lost track of how many rates I’ve had. It must be 350 basis points in the last 18 months. It’s a very penal, difficult environment right now. So I think that we are nearing an environment, we think, we’re nearing an environment where you’re closer to trough earnings in companies. You’re trading at these multiples that pit, which we have alluded to, which are very low relative to history and earnings base, effectively factoring in all of this negativity and bad news we’ve lived through. So, I’m not exactly sure when things will change. None of us can predict that. We want to think that the environment that we’re reporting in now, the September 2023 earnings numbers… and potentially even to December 2023, is going to be an environment that is as difficult as we’ve seen at any stage in the last number of cycles outside of obviously the COVID crisis when things were just, things closed down. So yeah, I think that the real unlock will come with companies delivering steady growth with this current pace and realising that they’re good businesses, they’re deleveraging, their balance sheets are strong, and the prospects for earnings are okay…

And the rating being applied to them is inappropriate. So I think there’s going to be a combination of those. Undoubtedly, some will go, and hopefully, we will position ourselves in those companies. Still, most of the re-rating will come from businesses doing what they do best, steadily growing earnings in a difficult environment. And I think the ultimate catalyst for all of this, outside of ESCOM issues, which we can’t predict, the ultimate catalyst for all is going to be this continuing rolling over of inflation and the prospects for interest rates to be cut. The consumer economy… is well aligned to a lower industry environment. And with that comes confidence, and with that comes corporate earnings. So I think a few issues play here, but the net effect is that the value unlock story is the potential for value unlock is real.

Alec Hogg: I guess we all get caught up as well, especially the retail market in the bad news cycle. Wherever you look, it appears to be a government shooting itself in the foot. It’s overspending. It’s going to have to increase taxes or borrow more. And the economy is not growing. So everywhere you look, things are not happy. But by the same token, You can take advantage of any environment, and boutique funds are showing. We’re seeing this with the Corian report, that boutique funds, smaller companies or more nimble money managers seem to be able to take better advantage than the big companies where there might be size showing to be an anchor to growth.

Andrew Vintcent: Let’s be open and honest here. Big companies have become big companies because they are very good. They’ve delivered very good returns over a sustained period. So, we had enormous admiration for large asset managers to grow in a highly competitive industry, which is something to be very proud of. We, just mathematically, though, the opportunity sets that smaller managers like the boutiques you referred to must have a broader opportunity set. So… It’s one thing saying that I think, and that’s the discussion we’re having at the moment. One thing is saying that, and another is acting on that. And that, to us, is key. So, we have a process that spans the whole market cap. We have the whole JSE. So we have; if we look at the 100% allocated in the SA Equity Fund, we have about 65 to 70%, which would be what we would deem to be larger cap shares, not top 40 necessarily, but larger caps. I think it’s a cut-off is about 15 or 20 billion rand market cap. Those would be deemed to be large-cap shares. So yes, we play there, but we also play away from that space into the smaller and mid-cap names. And we think our investors will expect that from us. If they wanted a large cap allocation, they would either buy the ETF or pick a large manager who’s very good but limited towards a more narrow opportunity set. So yes, I think this ability to play more broadly… is why we get pretty excited as a smaller boutique by the opportunity set. But be mindful that we’re not a small-cap fund by any means. We’re an investment house that is making fundamental investment decisions on opportunities. But I think our range and our breadth is that has to be that much wider.

Alec Hogg: So equities are in a trough. What’s to say they aren’t going to stay in a trough for the long term? What’s going to rerate South African shares?

Andrew Vintcent: The, I mean, I haven’t got the exact answer, but my suspicion is the rerating will be a combination of the issues we alluded to. Firstly, a resolution of the power situation. Secondly, the noise one hears around the urgency at which Transnet is being resolved. And those two parastatals are key to the potential growth prospects of the broader economy. But thirdly, I think it’s a macro environment in which inflation subsides, interest rates get cut, and you start seeing some economic activity happening on the ground. But I think it’s also fair to say that the global economy has not been that constructive for economic activity anywhere, and we, as a small emerging market, are a victim of that. So, the interest rate cycle globally has been brutal. So it’s an alleviation of a number of those factors that we think will be the catalyst.

But ultimately, as I said, it’s companies, you know, even if our GDP growth is modest, which is expected by every single economist, good companies still managed to show a way of growing earnings ahead of nominal GDP. So we think that good companies can still grow modestly, if unspectacularly, at 8 to 10 percent and with the potential for rerating. I think the argument that businesses are appropriately rated is fundamentally flawed. This acceptance that a 10 PE business is now a 6 PE business because there’s no power. I think that’s a fundamentally flawed argument. We’ve had many cycles over time, proving that the current ratings are inappropriate. And to now accept, as I said, this acceptance that fives and sixes and sevens are the new 10s and 11s is inappropriate.

Alec Hogg: Andrew, we’re coming to the end of the Fantasy Fund Manager competition. I’ve had a lot of fun. I think David and I are head-to-head in the 700s and see if we’re having our little competition now on the side. How are you doing in it?

Andrew Vintcent: I got off to a very slow start, and I took a slightly more passive approach, if that makes sense, as an active manager because there’s a great quote we use a lot about tolls to it. It talks about the two great warriors being patience and time. And in the fantasy fund manager, where there is a deadline, patience and time can often work against you. So, I’ve been particularly patient on several shares, which I know are fundamentally too cheap. They may not have re-rated by the time… the final gong goes. So, I had a very slow start. The second half has been much better. I think I’m in the, I’m coming in the top 50 or 60 somewhere. So, it’s not too bad. As you and David have alluded to, it’s been a difficult environment. But I honestly think are two shares I own, which we could wake up one day and that could be worth 30 to 40% more. I don’t think it will be before the end of the month. I want to think it would be, but it potentially won’t be. So I’m doing slightly better in the Fantasy Fund Manager than in the World Cup Superbru. That makes sense.

Alec Hogg: And have you, can you share those two stocks with us?

Andrew Vintcent: Well, the one is Caxton. Caxton has a significant amount of liquid assets on the balance sheet and a significant stake in Mpact. You’re effectively getting the operating entities, which is a printing business and relatively low growth, steady-state high cash generated businesses. You get those for free if you strip their stake in Mpact and cash. And I think that is worth it; it trades around 11 times. It’s probably worth it in today’s terms north of 15 to 16 Rand. And the other one is a controversial share. So I mean, I think our South African financials and life insurance are just too cheap. And the biggest one of the lot, well, it used to be the biggest one, being Old Mutual. I think it’s a fundamentally undervalued business for the amount of cash flows these businesses generate. And I think we spoke about our engagements with some of these smaller companies. I think the engagements at a larger company level, too is around how companies articulate that they generate so much in the way of good cash flows. Yes, the growth rates may be modest, but the cash flow generation is not reflected in the underlying share price of some of these businesses. So I think those would be two. And then I think something like a Sassil also falls into the camp where it’s just… Sasol used to be a standard 10 PE business. It rolled with the tongue. It was always going to be a 10-PE business. It now trades on a less than 5 PE. that is deemed to be appropriate. And I don’t think it is a 10p because it’s got some structural headwinds, but it’s not a four or five. So I think there are a few of those I own out of six that have the potential to, we could wake up one morning, and they could be up 20 or 30%. It’s unlikely to happen, but certainly fundamentally, if there was no finish line, which is the asset management industry, we haven’t got a finish line. I think that these businesses are the ones you want to be owning.

Alec Hogg: So the new normal is temporary, as it always is in your business and money management field.

Andrew Vintcent: That’s a view we’re expressing. Many learned experts would disagree. But certainly, we have to take a view. And what we have done to compensate for the fact that bond yields are higher here than ever in the last 15 or 20 years. So, mathematically, a PE multiple should be slightly lower. It’s just the extent to which that derating has happened. So what we do in our models is we’re not using the long-term average for a business being 11. We are using nine as opposed to 11 in certain circumstances. And I’m using averages here. So we do believe it’s temporary. The catalyst for that will be businesses delivering sustainably on their earnings objectives. Good companies, strong balance sheets, well managed. And that will ultimately be always the longer-term catalyst.

But the short-term risk is that businesses get private capital and do what they can to unlock value. The companies themselves can unlock value through material buybacks. They all have, the businesses we’re alluding to, have strong balance sheets and the ability to buy back material amounts of shares. So I think there are a few levers that companies can play at to unlock value right now, the most recent being tax losses, whereby companies… The value of the tax losses is a technical issue; I won’t bore you with the details of it. But they’re effectively saying, well, we are deeming this as a value of this now. And I think there are a few levers to be played with.

Alec Hogg: Andrew, just on that. Have any of your analysts started looking at the potential capital gains tax changes that will hit us if we have a wealth tax, as we’re hearing?

Andrew Vintcent: Yeah, no, it’s a very good question, Alec. We have been. And we’ve tried to get an idea of the quantum. The interesting thing is, if you have the quantum in numbers, the next thing you must do is then work out a way to protect yourself or the client, if you like, against that quantum. That becomes challenging because when you start looking at the existing legislation, the reality is that. You start trying to protect a portfolio; there is no silver bullet, and you must start splitting the portfolio. You have to start using the amounts of the interest allowance within the legislation, which becomes quite complicated. And that’s one of the things we are working with, both at an institutional level with the client, where you start looking at large clients and how you can structure them in a slightly more beneficial tax way. It’s quite a complicated process. And for the individual, it’s a pretty difficult process because the changes will be very significant. There’s no doubt about that. And as asset managers and financial advisors, we must prepare for it. It is part of the reality of the space that we operate in. But at this stage, we haven’t found the silver bullet, which is why we believe that the role of financial advisor has never been as critical as it currently is. These are the issues that clients are not going to find their solution. And if anything, we’ve all become a lot more humble and realised our lack of skill to try and outguess what SARS and the revenue authorities are going to do with our money, our capital, our assets, and potentially even our pensions. So, it’s a real risk, and it’s a risk that I think everyone in your organisation and every individual at the moment is grappling with.

Alec Hogg: So, it’s time to reach out to a financial advisor or specialist financial advisor.

Andrew Vintcent: Absolutely. Alec. And, the challenge you have right now is that most investors and it’s entirely fair and completely understandable, in the face of the declines that one has seen in specific sectors, notably the small-cap sector. People have become nervous and uncertain, and the apathy towards investing, generally, has become higher than the fear of missing out or the greed of owning assets. So you have this apathy towards owning a currency hedge, a currency hedge… inflation hedge, an inflation hedge, and an inflation hedge at a very attractive entry point. So, apathy towards this needs to be addressed, and that’s part of the advisory process. But I think there’s no doubt that people have to start asking questions about what they have to do about a potential capital gains tax and understanding the difference between capital gains tax and what the wealth tax ultimately means to them. That is a technical issue.

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