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Ranmore funds founder Sean Peche shares a financial insider’s perspective of the massive scams that hit this week – with practical advice to guarantee you never get caught up in these fraudulent schemes. Peche, who has spent his career in the sector, also analyses quarterly results released this week by Wall Street’s ‘Magnificent Seven’ – the Big Tech stocks responsible for most of the market’s gains over the past year. – Alec Hogg
Edited transcript of the interview by BizNews founder Alec Hogg with Ranmore Fund Management founder Sean Peche
Alec Hogg: So why does South Africa have more than its fair share of financial scandals? The last couple of days, we’ve had two huge ones that we’ve been reporting on BizNews. Sean Peche knows the financial world. He spent his lifetime, his whole career in this area. And he’s South African, living in the UK. So it gives him a perspective perhaps that is unique for most of us who are living in the beloved country.
Sean, of course, is the founder and the chief investment officer of Ranmore Asset Management. As always, it’s such a pleasure to be talking with you, Sean. We’re going to pick up on quarterly results from the U.S. later, but man, these financial scandals. Let’s start with Craig Warrener. Here’s a fellow who went to St. Stithian’s School, became the chairman of the Old Boys Association. Clearly, he targeted people who were associated with the school in one way or another.
Sports Performance, High Performance Center. He gave them the money to build a very prestigious restaurant. I don’t know if you’ve been to it. It’s called the One and All. Right up on the hill in their precinct in Sandton. And this guy has blown – he’s taken three billion Rand from people, which literally doesn’t exist anymore. He was a day trader who traded in Anglo-American and BHP Billiton. And he was quite happy to tell people that was his modus operandi. Of course he said, he’s so good at this because he focuses there – he will keep making small amounts of money every day, and then over a year, he will give you a really good return. Of course, if it’s too good to be true, it never is.
Sean Peche: Alec, that’s right. And I was very sad to hear that the other day. I was out on a walk and I listened to your interview with Dave Shapiro. And of course, I knew nothing about this guy. I hadn’t seen him, looked him up, couldn’t find him. I think you pointed out he wasn’t on LinkedIn. And it’s really interesting because if you go back to Madoff, you know, Madoff tried to fly below the radar screen and I’d encourage people to watch that Netflix video and Madoff’s modus operandi was look, I’ve got something special, but don’t tell everybody, it’s just for you.
It was that. And what really saddens me is I think it’s so simple to avoid these kinds of scams. Now, take it from whence it comes, okay, because I run a fund, but I run a fund because I believe in the structure. And I run a highly regulated fund because that’s how people are protected. And if investors just took the time to make sure that whatever they’re putting their money in was highly regulated, or not, and you need to be careful about the regulation here.
And what I wanna say is it’s not the entity that’s trying to sell you the thing. That should be regulated, of course, but it’s where your money ends up. Is that regulated? Who is looking after your money? And Dave was talking the other day about portfolio and where are the shares in your name or whose name are they in, et cetera. So that’s like a private portfolio. But of course, if somebody sends, it goes around South Africa saying, send the money over to me, I’ll run a private portfolio. It’s quite compelling because you think, oh, well, I’ll have a few shares in Microsoft and that kind of, it’s nice to have a few of my own shares, I can talk about them at dinner parties etc.
The problem is, A, it’s tax inefficient, because when you take profits you’ve got to pay capital gains because it’s your own name, and secondly, what is the structure? That’s to Dave’s point, are those shares in your own name, are they in an entity, is the entity regulated etc. And what I’d say is, the FSEA has on your interview, they have on their website, you can go in there and you type in the name of the company, the name of the fund, et cetera, and you find them. Now, for me to get regulated or Ranmore to get regulated to market in South Africa, you have to jump over a lot of hoops. They want to know who the non-executive directors are, what’s the fund structure, is the fund regulated, et cetera. And there’s a reason for that. It’s to protect investors. And all these scams that you hear about are in the unregulated space.
So do the work, find out where your money is ending up. Is that regulated? Is the entity regulated? Who’s running it? Is the person who’s running it regulated? And by whom? And if you do that, you should be fine.
Alec Hogg: That’s so interesting. Some years ago, I was a director of Phumelela and Phumelela was – I say was, because it doesn’t exist anymore – it was a horse racing business in the gambling area, which is as regulated as it can get. But I had to go through a probity, or a series of probity questions. It was a massive document that took ages to fill.
And it was very carefully checked by the regulator before you could become a director of that company. Now, if you take it one step further, the regulations of handling people’s money like you do, clearly, there are lots and lots of checks and balances to it. And yet in Warren’s point of view, he was exactly as you said earlier: hey, I’ve got something for you. I’m a day trader. I trade in these two stocks. You’ve heard of BHP Billiton and Anglo American, of course. And I just give you good returns because I’m really good at it.
It’s in an unregulated trust. No one would have asked him that. They just would have gone forward and said, okay, this guy’s got something for me.
Sean Peche: Alec, absolutely. And I think the other thing which is quite interesting. So Irish usage, you have to have an independent administrator. So we don’t send our month-end statements to the clients. That’s what Madoff did. Because Madoff sent to say, oh, by the way, you had a great month last month, 1%. Well, he made those numbers up. If you’ve got an independent administrator, they’re looking at the pot, they can see the shares, they calculate the NAV every day, they send it to the clients. We’re not marking our own homework. It’s very important.
This guy was marking his own homework, clearly. Those returns, he was telling people, this is what I earned, or this is what you earned, but there was nothing behind that. And so those two things, who’s marking the homework? And is the entity regulated? And the FSEA, you have to jump over those hoops for good reasons. So make sure that where your money ends up is regulated.
Alec Hogg: And by the way, that’s exactly what he was doing. He was making up the returns and then sending them through WhatsApps, I think, or certainly SMSes, and preying on a small little group of people, elite private school old boys, parents of kids in that school. He was the guy who put together the restaurant there that only you can go to, et cetera, et cetera. It was a full on scam, I suppose, with parallels to Madoff. Didn’t he prey on the rich and famous of the New York society?
Sean Peche: Absolutely. Now what was interesting is Madoff’s entity was regulated, okay, but by a different regulator, but it’s where the money ends up. So that’s the key thing. It’s really avoidable and what I think is bad for these guys is it affects the whole industry, it makes people distrust the financial services industry and that’s not right.
Alec Hogg: And then the second scam that we reported on yesterday was to do with Hannes Strydom, the Springbok lock in 1995, who had guys within his firm, – his general manager and a group, a little criminal syndicate within his firm – who were stealing prescribed drugs, passing them on to drug dealers. And then when finally this all came to light because it was very easy to hide this through incorrect stock takes, etc. If you’re the one doing the numbers, they blamed him, went to carte blanche, ran a 20 minute expose’ on the Springbok player who owned the company and accused him of being a drug dealer effectively by taking prescribed medicines and selling them into the drug market.
It took Paul O’Sullivan going into Strydom’s business to uncover this, which he did over a period of a few months. But really, it’s not the first time I’ve heard of this. Tony Cottrell, who you know well, dropped me a voice note this morning to say, well, this is what happened in this company. This is what happened in that company, which he knows intimately, which of course never made the media. Why might it be that South Africa seems to be cursed by this kind of behaviour?
Sean Peche: You know, Alec, I don’t know the answer to that question because you look at the number of Bitcoin scandals there are. I don’t know if it’s people are desperate, it’s an entrepreneurial society. Maybe it’s that people are desperate to try and survive and are after quick returns. It’s the old ESOPS fable, slow and steady wins the race. It’s slow and steady wins the race.
It comes back to that point, if it’s too good to be true, it probably isn’t.
Alec Hogg: Slow and steady was supposedly winning the race for Craig Warriner’s clients, but there too, every year he was showing growth, which is very difficult in the financial markets.
Sean Peche: It is. It is. And you know, you look back there and I had clients who were caught by Madoff and they say, listen, it’s a great story. And it’s like, no, all my money is in my fund. I’m not putting my money in anybody else’s fund, especially not one that looks too good to be true. I remember a former boss used to say clients don’t like volatility. He says they don’t like it. They’re going to get it and you have to accept it. If you want to generate real returns, I’m afraid you’re gonna have to accept an amount of volatility, and you should embrace that volatility, because when you get the volatility, at least you know you’re not being scammed.
Alec Hogg: Sean, what does regulation cost you? Is there any way of quantifying? Because clearly that’s protection for the people who invest with Ranmore. What is that regulation, how much do you have to earn to pay for the regulatory requirements?
Sean Peche: Oh look, Alec, it does cost a few basis points. And so you can imagine that as part of the sales thing, we’ll run a private portfolio, you don’t have to worry about non-executive directors, you don’t have to worry about auditors, the costs are lower. So it does cost a few basis points. When you’re a small fund, it costs more.
But you know, I’ll tell you what, you take that three billion Rand, I’m sure those people would have been happy to pay a few basis points a year, to have somebody look over their shoulder and make sure that the fund manager is acting in accordance with the mandate, is doing what they said they would do and that their investors are protected. It’s a small price to pay.
Alec Hogg: So you’ve given us some warning flags. Make sure that wherever you’re putting your money, it is regulated. Be very cautious of anything which seems too good to be true. Any others that investors should be looking for?
Sean Peche: Liquidity. Daily liquidity. If you want your money, it’s your money, you can take it. You know, what is the lockup? I am amazed at some of the lockups of hedge funds and all that sort of stuff. You’ve got to give them three months notice and all of this stuff. I mean, it’s unbelievable. We run a daily liquid fund, as most of the funds out there that are regulated in South Africa are daily liquid. So you send through a redemption or whatever.
It’s priced tomorrow morning, it’s a nice price, and you got your money in a few days time. And that’s how you wanna be.
Alec Hogg: Thanks for those insights, Sean. Let’s move on to the matters of the moment. It’s quarterly season in the United States. We’ve had a number of big companies who have, particularly the tech companies, who have reported already. What stands out for you?
Sean Peche: Well, I mean, it’s a challenging month, Alec. And if you look, the market’s down 4% this month. That’s the world index. OK. Mid caps are down 6%, small caps are down 7%. So I think when it gets breezy, if you go out sailing, you’re going to get wet. And what’s interesting, I’ll just run through the big cap, mega cap tech. We’ve had most of them. We haven’t had Apple. Apple’s next week. Don’t expect much from Apple. Everything I hear about the iPhone 15. And when I wander around and chat to people and things like that. It’s not selling as fast as the 14. So that seems to corroborate what’s happening out there.
But just quickly, Microsoft revenue up 13%, okay, 12% constant currency, earnings up 28, free cash flow flat. Google revenue up 11, earnings up 41, free cash flow up 24, Meta revenue up 23, EPS up 162 or for low base, free cash flow up 40. Amazon revenue up 13. EPS up 3.35%, again, off a low base. Tesla revenue up 9, earnings down 37, free cash flow down 74.
Now, what’s quite interesting, one of the things that’s been inflating the earnings for some of these tech companies is a number of them extended the useful life of their hardware. So instead of depreciating over say three years, they depreciate over four years which means your depreciation charge comes down. But I think what stands out for me, is that revenue growth 11, 10, 9, 30, these businesses are maturing. And the question is, well, why has the response been so bad because in many cases that, you know, Microsoft came out first, great numbers, and the stock was up, and then you had Google and it was down 9% and Meta was up initially, and then it was down and Amazon’s up a little bit and Tesla’s been down non-stop since the results.
People always look into the conference calls and say, of course, it’s not just about what the results are. It’s what do they say about the future? And remember with these companies that are so well followed, you have all these algorithms flying around that beats looking for key words. Unpredictable consumer landscape is the key thing. You talk about advertising, Meta and Google, those are important.
And companies are quite cautious about what’s going on in the Middle East, what’s happening with interest rates being so high and consumer discretionary income is a factor. And so if consumer discretionary income is being challenged, what does that mean for the advertising of the companies that are trying to appeal to those users? So I think that’s one of the points. That’s probably the main point that’s depressed these stocks. And I think there are many fund managers around the world who are sitting going, these results are amazing. Why are these stocks down?
And I think it’s a few reasons. One is the outlook’s been pretty tepid. Two, that businesses are maturing, as I’ve just mentioned with the revenue growth. Three, you’ve got competition. Look at Tesla, they only earned 3.7 billion of free cash flow. You look at what the European car companies are saying. There’s lots of competition. I mean, 3.7 billion, this market cap, 650 billion.
You’ve got new competition from Amazon. Amazon’s advertising business is doing well. Well, they’re stealing stuff from Meta and Google. So they’re all playing in each other’s sandpits. And then you’ve got CapEx, which is high. I mean Amazon in the last three years, negative free cash flow of 13 billion and they’ve got a hundred and forty billion of debt and lease liabilities. So those are some of the challenges and then you look at the valuations. Microsoft two and a half percent free cash flow yield.
Bonsai Yielding 5, as I said in a recent interview. With Meta, the last three years, they’ve earned 100 billion. They spent 103 billion on buybacks, okay? But the share counts only down 10%. So basically these businesses, I would argue that many of these businesses have been run for employees. Okay, we’re using all the cash to buyback shares from our employees who exercise the options. And then the cash balance is a low.
So now Microsoft has been making most of its cash on buying Activision. 63 analysts are following Microsoft. So when you’re trying to game the system and there’s 63 analysts out there, you know, it’s challenging.
Read more: Numbers not the narrative – Sean Peche
Alec Hogg: Very hard to find some angle that is going to give you better returns, whereas the small caps down by 7%, isn’t that the place that you’d be looking at to have better value or better returns on the investments that you make today?
Sean Peche: Yeah, that’s what I think. And that’s where we nicely position in some of the smaller mid caps. And I always like to talk about, you know, I love innocent bystanders, ones that are just getting caught up in the whirlwind that the big techs are getting hit great and the small guys are getting hit just in sympathy. But actually they’re getting hit and relayed. There’s no situate. It’s not related. I did think it was quite interesting. A couple of other things.
You might find this quite interesting, but there are lots of sophisticated IT companies I mentioned the algorithms out there looking, trawling and what are they called? Scraping the conference call transcripts, looking for words. Google mentioned AI 83 times, okay, in the conference call. Microsoft 61 times. So the management teams are, of course the management team know this now, and they are now making sure that they use the right words to game the system. Using it 83 times, use the phrase AI 83 times and then Gen AI and all this other stuff. So that’s been interesting.
I’d also just be careful, it’s another good time to just reiterate my caution about themes. You know, a few years ago, ESG was all the rage, wind power, et cetera, and it might be interesting. Siemens Energy, which is one of the leaders there, was 34 euros in early 21. It’s now 7 and they’re basically applying for state aid, okay? And this is in wind energy and the theme is still there. We still need to build wind turbines, et cetera. Solar edge, solar edge was 390 in late 21, it’s now 83. Okay, so what I’d encourage people, and this is what I always think is, you always got to find the positives. The world is not just about tech.
Deutsche Bank was up 9% the other day when Google was down, or Alphabet was down 9%. And so who’s looking at Deutsche Bank? Everyone’s focused over there. You know, it’s a bit like, well, let’s use a rugby analogy. It’s like you think the ball is going to go down the back line. Everyone’s watching the back line. Meanwhile, the scrummy runs around and scores on the blind side. It’s like, ah, should have been watching Deutsche Bank on the blind side. So the only action is not in tech. And remember that the spotlight is in tech.
We’ve got 2% in technology, we have practically nothing there because everybody’s following it, everybody’s focused on it. What’s the likelihood that that’s where the opportunity is? And we’d argue pretty little. So, lots of other companies out there doing well. Carrefour had like-for-like revenue up 9% yesterday. Things on eight times earnings. 8%, not too far from where the Googles and the Metas are, and you’re paying a fraction of the price.
Alec Hogg: Sean Peche bringing some, well, good balance to the approach, as you always do. Before you go, Sean, what are you guys doing for the World Cup final?
Sean Peche: Yes Alec, it’s going to be fun. I mean, the country needs it so badly. So we are holding thumbs. We’re going to have some fun over here. Dig out my Springbok shirt and let’s hold thumbs and hope we win.
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