The world is changing fast and to keep up you need local knowledge with global context.
Top financial advisor David Melvill makes reference to Charles Dicken’s ‘Tale of Two Cities’ when introducing his note on John Biccard’s grossly underperforming Value Fund. “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.” And in a very real sense this is how he finds the markets. And for the adventurous and opportunity seeker, Melvill argues it may well be the “best of times” to enter the Resource sector, which may yet offer splendid returns and one day some may look back and say “it was the spring of hope.” Although on the other hand lies a grizzly bear, if it has not already made its appearance on the market, which could easily depict it’s the “worst of times.” And that prognosis is not good for the general market, where it could easily enter “the winter of despair.” It’s a fascinating depiction of current market conditions, and his advice. Jump in. But it all depends on how you see the forthcoming season, a ‘winter of despair’ or the ‘spring of hope’. – Stuart Lowman
By David Melvill*
I listened to an excellent radio interview on Fine Business Radio with Lindsay
Williams, the host, and John Biccard, the fund manager for Investec’s Value Fund, in the week.
John Biccard, Investec’s Value Fund manager discount to their net asset value.
Up to now it has been an extremely difficult time for him, and he has underperformed the rest of the market. (I checked the fund performance over the last 3 years).
1 year -7,5%
2 year – 0,44%
3 year 4,66%
It does mean however that we are buying into a fund that is relatively cheap and therefore offering a very good entry level for us.
There are very few true Value managers left. Most other fund managers would be called Growth (or Momentum) managers. They largely follow the “herd” when it comes to investing and would stick to the Index as their guide. John has refused to follow the market, as he says, “It is just too expensive.”
John has not seen value in the Industrial and Financial sectors. (Their price to earnings ratios are just too high). Because he has resisted buying into them, his fund has hugely underperformed the market as a result. While it must be painful for him, he knows eventually he will be vindicated for his belief and approach.
What does he hold in his fund?
- 30% in gold shares
- 15% in platinum shares
- 5% in Arcelor Mittal shares (steel)
- 35% Offshore
- 15% in cash
Does that offer us an opportunity?
You bet. This fund has underperformed up to now. However this last week we witnessed a huge turn around. Resources powered their way back up. Is this is a turnaround time for resources? I think it is, if so, then the Value fund is extremely well positioned for growth.
What should we do?
I wish to suggest that we move 15% of our cash into his fund. I have every confidence in John’s ability, he is an astute fund manager.
What else did John have to say?
- “Overseas big stocks like Apple and Google have lead the S&P 500 upwards,” John has stayed away from them.
- “The big performers in SA have been Naspers, SAB and Richemont. (Outside of them our JSE has been in decline, these have hidden the bear market).”
- “Gold shares are the most out of favour with the market. For instance, AngloGold has fallen from R 500 to R 100, this is largely because it has had too much debt.”
- “Bonds are offering low yields – there is no growth in the world.”
- “Like Japan, there is a massive bust coming,” John says
- He adds, “The US did not take the “medicine,” they have just continued “kicking the can down the road.”
- “With extremely low interest rates and massive expansion policies applied already, there are just “no tools” left to fight this time.”
- “Japan’s bonds have low rates, the shares have high PE’s, and they are priced for growth, there is none.”
- “The Chinese are devaluing their Yuan.” (In order to be more competitive).
- “The Fed separated itself from QE, they have raised interest rates, but the US policy is just too tight.”
- “There are NO real interest rates.”
- “Emerging markets are collapsing as there’s a shortage of dollars.”
- “Ours is a reflationary policy.”
There are only really two options:-
Pay off the debt, that is an austerity policy (but this leads to political suicide)
Print money – QE (the only remaining real option).
- Regarding gold, John says, “The US policy is driving the price.”
- Regarding platinum, John says, “There is going to be a massive shortage in about 7 years’ time.” “There is less platinum coming out of recycling.” He sees a collapse in supply as SA mines will be old and not able to meet the demand.”
- “PGM’s are not being replaced with other metals.”
- “The electric car only makes up about 3% of the market, and while oil remains low, it will not be an option.”
- The banks are on very low PE’s, but John is waiting for the foreigners to go first, then the shares will be in “capitulation,” only then will he be a buyer, the PE’s could be 6 then.
In conclusion, John says the gold shares have had a good run already, and he believes they will run a lot more still, as they have been so “badly beaten up.” The general market however is now in proper declines. This could lead to “the winter of despair.”
I resonate with his thinking and expressions, and therefore I strongly wish to support his fund. We could not be joining the fund at a better time.
- David Melvill has practised as a financial advisor for 30 years. He used to present Financial Focus, a weekly program for approximately 3 years on both Link FM (East London) and CCFM radio (Cape Town) community radio stations. He is largely contrarian in his advice, thanks to the wonderful inputs and mentoring from the economist, Peter George. He believes in the diversification of assets and has a passion for gold, as a currency – the purest form of money. He too sees the value of investing in gold still in the ground through the gold mining shares, as these are leveraged and can give excellent returns when the fundamentals are in their favour. David is fascinated by the history of gold, he loves hiking in the mountains, good red wine and pizza as well as the joy of being alive.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.