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Market Commentator Weekly: Ian Liddle – CIO, Allan Gray

Gold mining stocks, listed property and small caps.

HILTON TARRANT: Our Market Commentator Weekly podcast kicked off today. The full interviews with chief investment officers, fund or portfolio managers will be on Moneyweb at the start of the week, either on Mondays or on Tuesdays. We’re likely to be interviewing each institution about once every two months or once a quarter.
     Our first guest is Ian Liddle, chief investment officer of Allan Gray. As mentioned, the full interview is on Moneyweb, as well as on our apps, Moneyweb TALK and Moneyweb NOW. That’s for iPhone, iPad as well as Android and Blackberry devices.
   I spoke with Ian on Friday morning. We spoke about what happens when quantitative easing ends – that’s the big question on everybody’s mind, including Warren Buffett’s. We spoke about valuations of markets at the moment, both global markets and the JSE. We spoke about investing offshore. I also asked Ian about Allan Gray’s holdings on behalf of its clients in AngloGold Ashanti and Harmony, both noticeable holdings. At the end of last year it still held around 5% of each company.
IAN LIDDLE: I’d prefer not to answer on those two specific companies, but maybe talk in general on what we’ve been doing with our positions in the mining stocks. Certainly the two companies you mentioned have not been our finest investments; they’ve been terrible investments and one has to say that we erred in investing capital in them in the first place.
    So I guess when it comes to the mining stock generally, what we have to do is constantly re-evaluate the value of the company, the intrinsic value as opposed to its share price. That’s why we have a full investment team of very smart young analysts here in Cape Town and hopefully an environment that’s conducive to independent opinions and people questioning assumptions that we’ve held to previously.
   So in the case of some mining companies we have reduced our position over the last year or so, maybe not at these levels but at the higher levels, say, towards the second half of last year. But in others we’ve added to our position. But we’re constantly re-evaluating and I think to be fair we would say that our intrinsic value for South African mining companies is lower today than it would have been a year ago. …

HILTON TARRANT: Ian, your views on property as an asset class? I ask this specifically in relation to your Balanced Fund and also I guess in relation to the performance of listed property as an asset class over the past 12, 18 months.

IAN LIDDLE: Gee, it’s probably over the last 12 years one would say that it’s been a fantastic investment, and we were very full of property 12 years ago when the listed sector was much smaller, and unfortunately substantially reduced our property positions, with the benefit of hindsight, way too early. So we have some residual exposure to selected property counters, but not a big exposure now. And the reason for that is that the yields are certainly low compared to history. And I think the one thing one has to watch out for with properties, and why you have to do research into the individual stocks and not just on the sector, is that the risk with any one property if, let’s say you think you’re getting a 7% yield today, is how much maintenance is required on that property and when is that maintenance required, because certainly if you do no maintenance, in 20 years’ time you’re probably going to have a very old building, which is not going to be able to command the same kind of rent. That’s possibly the thing to watch out [for] with property companies –you might be kidding yourself that the yield that’s quoted is what you’re going to get over a very long period of time.

HILTON TARRANT: Ian, just to close off with, we have seen a number of institutions taking positions in some of the smaller caps on the JSE. I’m thinking of companies perhaps sub-R1bn market cap, even around the R1bn mark, maybe a little bit more than that. This hunt for value among the smaller caps – how would you approach this generally because people, I guess, do ask themselves some questions when they see that a specific institution has taken a 5% stake or a 10% stake in a very small business.

IAN LIDDLE: We, of course, are always on the lookout for value in small-cap companies and it’s something that we spend time on. And our analysts write reports on small caps and we regularly evaluate them. But once again I wouldn’t make a general statement that small caps are cheap or expensive. I think there are some that we find very attractive value. And, given that we’re a mainstream asset manager, if you buy that small cap aggressively your shareholding tends to ramp up quite quickly. So an institution can become a relatively big shareholder in that small company without it becoming an over-sized position in the portfolio.

HILTON TARRANT: And in terms of liquidity of these businesses and being able to reduce your exposure in a particular small cap, does that come into the equation as well?

IAN LIDDLE: Liquidity is part of it, but I think a much bigger consideration is value. So if you’re buying in a small-cap stock at a discount to its intrinsic value, you probably won’t have a problem selling it in future. Certainly our experience has been that with small caps and mid-caps that we’ve bought over the last decade or last 15 years, where we’ve got it right and we’ve done our sums right and we’ve bought them at a discount to intrinsic value, and although they appeared illiquid at the time, they’ve been very easy to sell – and actually regrettably too easy to sell, because many of them continued to go up after we’d sold out completely.

HILTON TARRANT: Our thanks to Ian Liddle, the chief investment officer of Allan Gray.

Simon, very interesting comments about small caps towards the end there. I suppose you only need to get most of them right.

SIMON BROWN: You do. I worry about liquidity, and Allan Gray is a billion times larger than I ever will be. I suppose in the sense that you are going to get it wrong sometimes, when you get it right that liquidity will arrive. And that’s part of your reward. There’s a couple of components. One is that extra liquidity pushes the price – that you’ve spotted [something] undervalued. You’ve then just got to really get your buying right. And you will occasionally get it wrong and that’s really going to hurt. But I remember in ’08/09 the small-cap Stanlib Fund. Sort of a year ago, which is three, four years after the event, they were still trying to sell some of the small caps they got caught with because of lack of liquidity.

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