RYK VAN NIEKERK: Welcome to this Financial Advisor podcast and in this series of podcasts I speak to leading South African financial advisors and we talk about the industry, their personal investment philosophies, how they deal with their clients, their views on fees and regulation. My guest today is Charl Botha of Futurewealth Portfolio Management. Charl, welcome to the show, when I opened your website the first thing I saw was the statement ‘We aim to double your money during any five-year given term.’ Obviously it’s not guaranteed but it’s a bold statement.
CHARL BOTHA: Ryk, thanks for having me. I do not measure myself against the benchmark, except the benchmark of real returns. So I think the one aim for any investor should be to beat inflation and I aim to beat inflation with between 8% and 9% during any given year and obviously over five years, assuming South African inflation is about 6%, it comes to around 15%.
RYK VAN NIEKERK: You started around three years ago, have you hit the 9%, 10% per year?
CHARL BOTHA: So, yes, 15% per year I haven’t quite hit that, after Nene-gate we were on target and then Nene-gate put us a bit back. We are about 6% or 7% from a three-year 15% annualized return.
RYK VAN NIEKERK: But you’re not a traditional financial advisor in a sense that you rather compile portfolios of interesting companies and most of them are small and mid-cap companies, tell us about your model and how you serve potential clients.
CHARL BOTHA: I’m on the Click an Advisor section of the Moneyweb website but I mostly do portfolio management. The Futurewealth Portfolio is a model portfolio where I select smaller cap shares, so I look at companies that I can try and understand and that I can buy cheaply, and then I put this into a model portfolio for any person who wishes to join.
RYK VAN NIEKERK: Let’s say I’m a potential investor and I’ve got R1 million, I come to you and I say I want to double my money every five years, what will you do for me?
CHARL BOTHA: I would first of all tell you it’s not guaranteed. Secondly, I, through Mercato Financial Services, which is my partner, will open an account for you at Investec and through our admin will do all those things for you and then we will replicate the portfolio I have selected. So as a portfolio manager I have got certain percentages of each share that I want to buy and we will replicate that portfolio for you.
RYK VAN NIEKERK: So you’ll open an Investec account for me, it’s a stockbroking account and if you have 15 shares in your model portfolio you will go and buy those individual shares in my own name, it’s not a unit trust?
CHARL BOTHA: Exactly, so it’s private segregated accounts.
RYK VAN NIEKERK: Tell me about the model portfolio, what shares do you like?
CHARL BOTHA: As some of the Moneyweb readers will know, I love Rolfes, Master Drilling and Santova, so those are my three biggest positions.
RYK VAN NIEKERK: They have done really well in recent times.
CHARL BOTHA: Recent times, yes. So I’ve had some of them for quite a well, so they haven’t done that well, especially Rolfes hasn’t done that well for quite a while but Santova has been brilliant. Then Master Drilling I’m waiting for other people to realise how good the company is. Then I also have Afrimat, I recently bought Afrimat. I’ve had Adapt IT, which I think may be the next EOH, we’ll see. Then I’ve also got Petmin, I was a little bit early in Petmin but we’ll see what happens with the results coming out now. Then I’ve got a very, very small stake in Esor and I’ve also got a stake in Steinhoff.
RYK VAN NIEKERK: Not quite the mid-cap. But now how do you pick the shares? Do you do your own research?
CHARL BOTHA: Yes, I do my own research. Basically when my friends ask me what do you do for a living, I say that I read. So I spend a lot of time reading and then I spend a lot of time thinking, and I basically want to understand how a company makes money and what is the biggest risk for it not to make money. If I can understand a company and it’s a good company, where a good company is a company that grows its revenue above inflation and it’s return on capital is, let’s say, north of 15%, rule of thumb I’m talking now. If I can get that company at a price that doesn’t imply its greatness of fundamentals then I will buy a stake in it.
RYK VAN NIEKERK: It almost sounds like you are bordering a contrarian philosophy, do you regard yourself as contrarian?
CHARL BOTHA: I do but one must be careful, one mustn’t just be contrarian for contrarian’s sake. So what I do is I don’t easily fit into, let’s say, a growth philosophy or a value philosophy. Essentially what I try and do is I try and buy growth companies at value prices and, as you know, that’s not an easy thing to do because most people pay up for growth companies. So when do growth companies sell at value prices? In my opinion it’s in two ways, small companies usually do sell at value prices because institutional investors cannot buy them, they are too small. So you can buy a number of small companies at value prices but then you must be willing to wait for other people to realise how good it is. So you might have liquidity problems getting out, so you must be right with a small company, that’s the biggest danger. Then the big companies, the only time that you’ll buy an Aspen or Woolworths at really ridiculous prices is when there is an event of such magnitude that people sell in fear. So let’s say a financial crisis or a Brexit in the short term and so on.
RYK VAN NIEKERK: Why would an investor invest in your model portfolio as opposed to one of the flagship funds of Investec or Coronation and Allan Gray?
CHARL BOTHA: Very good question, I don’t see it as an either or, I see it as people can invest in them and me, in the sense that I might not be for everyone. So let’s say someone has an investment in Allan Gray or has an investment with Coronation, I’m not directly competing with them because I am doing something way different and by doing something way different that could lead to diversification benefits and also people who read some of my things and find that they like it and they might join me because of that.
RYK VAN NIEKERK: Do you only invest in shares or are you looking at other asset classes as well?
CHARL BOTHA: No other asset classes at this point, I don’t know enough about other asset classes, even though the rest of my family is all in property. But one day, as I grow Futurewealth, I may turn it into a holding company, which is the dream, then we’ll look at buying some other things.
RYK VAN NIEKERK: And you only invest in local shares?
CHARL BOTHA: Only in local shares, those are the ones I know, so if I go to America or Europe or anywhere else I’d rather buy an index fund.
RYK VAN NIEKERK: Who would be your typical client?
CHARL BOTHA: The first few clients were family because your family trust you in that sense, and then some friends, and then in the last few months more individuals from outside have joined me and they typically range in age, so you wouldn’t expect older people to invest in a fund like this but there are a few older individuals who do invest. Then there are also friends of mine, professional guys, who have started working, so a number of those as well.
RYK VAN NIEKERK: But it is a slightly more risky investment option because of your investment in smaller companies.
CHARL BOTHA: I’m going to say something that a lot of people might not agree with, I don’t see risk as volatility. So if I go from Cape Town to Joburg and I can go N1 straight or I can visit Port Elizabeth, so big volatility in going to Joburg but we all end in Joburg. So if you don’t have the need for liquidity, so in other words if you don’t need your money in the next year or the next three years or whatever, then my fund might not be as risky as what people think. So in that sense I don’t agree with the major industry that risk equals volatility. So if a person doesn’t need his money then after ten years I believe that if you invest in good companies at a good price why is that more risky?
RYK VAN NIEKERK: But is that your minimum investment period you would recommend, then years?
CHARL BOTHA: Not ten years, I would say minimum three years, so I choose each one of the companies very, very carefully, so I don’t have a lot of shares in the portfolio and each company is chosen with a view that in the next three years we should see some value creation, at least. So a three-year minimum period.
RYK VAN NIEKERK: What is your fee structure?
CHARL BOTHA: I used to have a performance fee but after consideration of all the factors I’ve simplified it and I’ve aligned my interest completely with my clients. So it’s a 2% flat fee. So, for instance, let’s say I make 20% in 2016, then you as an investor will make about 18%.
RYK VAN NIEKERK: But you only take on the upside?
CHARL BOTHA: I only take on the upside, yes, but I’m fully invested in the fund as well, so the only asset I have, apart from the shares, is my car. So if I fail I’ll be living in my car.
RYK VAN NIEKERK: But compare that to some of the index funds, pricing is a very sensitive issue, a lot of investors probably research the fee structures in more detail than they do the historic returns, is it excessive or what value do you add to justify that fee?
CHARL BOTHA: Yes, I think it’s very important that investors are doing that and I think one of the greatest inventions in the financial industry in recent decades is the index fund. Most of us know the stats that three out of four index funds beat active management after fees. So what I’m saying is if you are purely rational and you don’t have any extra information and you know that three out of four funds beat an active guy then if you’ve got R1 million I would put R750 000 into index funds and the other R250 000 I’ll try and find people like Allan Gray, people like Foord and, I believe, people like myself. So in that sense there is room for active management and one needs to be paid for searching out these companies, it’s quite expensive to do this.
RYK VAN NIEKERK: The industry is also very highly regulated and that also makes it expensive for portfolio managers and financial advisors, do you think there is room for a small operation like yours to compete with the likes of Allan Gray?
CHARL BOTHA: I enjoy what I do and I believe, given my record, and future interviews and things like this maybe it will grow to a level where I can make a decent living. So I’m not primarily in this for the money, it sounds crazy but that’s true, so the money is the affect for the love I have for trying to find good companies.
RYK VAN NIEKERK: How easy is it or difficult is it to beat the market? We had a fund manager in the US, his name is Don Brown, he has beaten the S&P 500 Index since 1969, he only did not beat that index on two occasions in two years, which is a phenomenal investment track record. But if you look at the South African Environment, about 20% to 25% of fund managers actually beat the indices, is it really that difficult?
CHARL BOTHA: It is difficult, the reason why is you need to understand what the market is, so the market is not some abstract thing in outer space, it’s basically all the smart people thinking what are the best shares and the market is the average of all their thinking. So per definition it’s going to be difficult to be better than the average because you are part of that crowd. So one must also be careful of saying 20% to 25% of people beat the market but not looking more closely, who are the people who are in the 25%. So if you find somebody like an Allan Gray or a Foord that’s there almost every year, even though they are the minority it shows that they are doing something that is working. In my case I’m a little bit ahead of the market but it’s a very short period, so it could be statistically just an anomaly, I would like to believe that it’s not but one must be honest.
RYK VAN NIEKERK: One thing that I think is always missing in the debate of active versus passive is the risk profile, sometimes the index would do 10% and a fund manager would do 8% but the 8% was achieved at a much lower risk and that must count for something, how do you factor risk into your investments?
CHARL BOTHA: You are a very important point and especially fund managers who see risk as volatility. If a person, like you said, made 8% it would most likely be because some of his clients do have a liquidity constraint, so that is a very important factor for them. In my funds liquidity constraints aren’t a big factor, so I don’t worry about, let’s say, 10%, 20%, 30% drawdowns, so in that sense my risk management is am I going to lose capital after inflation over the long term. So what are the chances that I’ve picked a company that’s not a good business or I pay too much for it. I would like to believe that over every three years, five years, seven years, ten years if you pick a good company at a good price, risk will take care of itself.
RYK VAN NIEKERK: It’s the Warren Buffett model, rule number one of investments is don’t lose money.
CHARL BOTHA: Exactly.
RYK VAN NIEKERK: Just currently in the market, how do you read the market, what do you think is the biggest risk to South African investors in the local market at the moment?
CHARL BOTHA: That’s a good question, we as human beings we like a story, so I also do a bit of studies of the brain on the side and the brain isn’t really built for truth, it’s built for coherence. So what I mean by that is the story of Little Red Riding Hood makes sense but it’s not necessarily true. You ask me what’s the reason, there may be one reason, there may be five reasons, there may be 7000 reasons, so I can’t say what the exact reason is but there are a few markers in the global economy that makes me a bit jittery. The first one is if you look at most international bond markets, they are yielding negative rates, and then a lot of the stock markets are at historical highs. So now you are in a situation where you are going to lose money if you hold developed market bond, except if one thing happens, except if huge deflation happens in the world. So if huge deflation happens in the world you will make money.
RYK VAN NIEKERK: You’ll get a real return, yes.
CHARL BOTHA: So the bond market, which historically is a very sophisticated market because you are lending people money and you want to be paid back, this sophisticated market, which is very important in world finance, even more so I would suggest than some equity markets, is suggesting that we are heading for deflation. Now you must think to yourself, how could that happen and then an answer appears.
RYK VAN NIEKERK: But how would international deflation affect local investors?
CHARL BOTHA: How it would affect local investors is in the following sense, so you would have, let’s say, repercussions in China and because China is a big consumer of a lot of our goods we will be affected through the resources chain or we will be affected through Europe, which is also a big trading partner and decreasing trade with us. So basically we are too small to not be not influenced by these big events outside of our control. So those are the biggest worries that I have globally.
RYK VAN NIEKERK: What is the minimum amount investors should invest with you or an amount that you would accept?
CHARL BOTHA: So to minimize costs because trading costs are also a big thing, R100 000 is suggested as the minimum.
RYK VAN NIEKERK: Charl, good luck with your venture and good luck with Futurewealth, it’s not often that you see an individual or a small company taking on the big guns but it seems like you’ve got an interesting model, good luck.
CHARL BOTHA: Thanks a lot, Ryk.
RYK VAN NIEKERK: That was Charl Botha of Futurewealth Portfolio Management.