‘If you want opportunity, South Africa is your place’

Gary Booysen shares some insight on strategies for investors during these volatile times.

HANNA BARRY: Welcome to this week’s Market Commentator podcast, Moneyweb’s series of interviews with investment professionals. Our guest this week is Gary Booysen, portfolio manager at Rand Swiss. Gary, welcome to the show, now you were head of trading at Vunani Private Clients, tell us about the decision to go it on your own.

GARY BOOYSEN: Thanks for having me. I worked for Vunani for close on six years, we were bought out right in the beginning when we merged a whole lot of companies together, including Kagisio Online and a few other small brokers. I really helped them grow that business from next to nothing to probably a mid-tier stockbroker. I just decided after seeing how to do it, it was time to do it for myself. So we put in the licencing applications earlier this year, we were approved probably about almost two months ago, so it’s very formative, it’s a very new venture. Like I said, we’ve got the licencing in place and it’s all very exciting and we’ve been onboarding our first clients and we’re working with all the usual partners. It’s a new and exciting venture for us.

HANNA BARRY: Potentially a fairly tough time to start an asset manager or a broker, you could argue, in the current volatile markets, what is Rand Swiss’s value proposition would you say?

GARY BOOYSEN: A lot of guys ask me why Rand Swiss, Gary, it’s an interesting name. The first thing I say is it’s because my wife is Swiss, so she always had to have a bit of say in the company [laughing]…

HANNA BARRY: [Laughing]

GARY BOOYSEN: But really, it’s exactly the feel that we wanted because the whole philosophy behind the company was that most of the clients we talk to their businesses are local, their houses are local, their holiday homes are local, we deal with private clients, so their exposure locally is massive and it’s part of our investment philosophy that you need to take funds offshore to have a properly diversified portfolio. That’s why we look at all sorts of different offshore options to take money out of South Africa and that takes care of the Swiss portion of the name but again, our expertise will always be local – and I’ll tell you a little bit about this product in a bit – but while you can add Google, Apple and Amazon into your portfolio you’ll never quite have the exposure to the companies that you do to local companies. You can’t phone the CEO of Google and get an update on where he thinks the company is going, you can do that in South Africa. So I think I’m very much positive on the outlook for South Africa, maybe with elections coming up soon the politics in South Africa has become a lot more vocal. You’ve seen consumer confidence and business confidence dropping a bit, you’ve seen the rand blown out recently as well. But from my point of view, like you asked me, I’m starting a business in this country because I believe in its future and I think there’s more opportunity in South Africa to make money than overseas but I still think it’s a very wise move for clients to take money offshore and really that’s where you protect your money. But if you want opportunity, South Africa is your place.

HANNA BARRY: Let’s talk about being involved with company management, you raised a good point that as a South African investor you can go to AGMs, you can go to results presentations and really get a feel for the management of a company, why is that important when it comes to investing your money?

GARY BOOYSEN: I think you’ve always got to understand the company that you are investing in. Unless you’re going for pure diversification with ETFs and your investment philosophy is to buy because it’s big, then if you’re buying something like Satrix 40, you’ve got to understand the business that you’re operating in. It’s the only way to generate alpha for clients is to understand the companies and you want to understand where the benefits are for that. So that’s how you generate alpha. If you look at our offshore portfolios we don’t pretend to be experts in offshore, we are not. So what we’ve done and we ran it very successfully at Vunani as well, there they called it the Global Titans Portfolio – we literally bid basket ETF trackers probably with 60% of the fund, somewhere around there, that diversifies it from a portion in the US, a portion in Europe and a portion in China. You take a diversified equity ETF from like the Vanguard S&P Tracker, it’s very low cost for clients but at least then you’re either overweight or you go underweight, depending on your macro view. So we had a view that we thought US earnings were going to be more positive than the European earnings and so we were slightly overweight US and slightly underweight in Europe. We actually were slightly overweight China as well but then neutral weighted as that market started heading to the moon. Then the extra 40%, what we do, our investment philosophy, especially on offshore, we do run it on local stocks as well, we use a quant ranking model, so we look at all the fundamentals of the company, it’s gives us the ability to scan across an enormous amount of stocks that you just can’t do if you’re really doing bottom-up stock picking and go and find opportunities, and then understand those business properly. It’s called a core and explore strategy, so your core would be that ETF basket and then you explore with a couple of exciting companies that your scans have picked up. For example, we also had the view that the US dollar was going to continue to strengthen and so in the investment communities we looked at really trying to find US companies that had their earnings and revenue primarily coming from within the US borders, so not looking at things like exporting companies. We added things like Home Depot and Starbucks and a few others, we then benchmarked that portfolio against MSCI World because obviously we have to know where we stand. This portfolio was doing absolutely fantastically well, we were outperforming MSCI World by 1% every month but again, you also get the currency component, so as the rand was blowing out, compared to local funds it looked absolutely spectacular. Now whether the rand is going to continue to blow out is probably a debate for another day, we can go into that for a long time as well. Yes, definitely, there are different strategies and different was for picking companies depending on which jurisdiction you’re looking at.

HANNA BARRY: It is a difficult time at the moment in markets, I mentioned that earlier. You mentioned the US, Europe, China, we’ve seen lots of movement in the Chinese markets, Europe as well with the Greek crisis and US corporate earnings reports fairly disappointing this week, how would you recommend that investors approach investing in these volatile times, which strategies do you think are going to win out?

GARY BOOYSEN: I look it more from an advisory and stockbroking point of view, so for me every investor is a different animal and there’s no one strategy that fits every client. I know that from dealing with hundreds and thousands of clients over the years and each person would require different exposure. If you’ve got a longer term view and you’re looking to be in the market for 20, 30 years, you don’t listen to the noise that we’re getting at the moment. Again, and is this going to be a proper correction, it’s difficult to tell, there are plenty of products that you can use to put hedges in place and really bring down your risk if that’s what you’re looking to do. But again, if you’re a long-term investor I believe you should be looking at stocks like Amazon that obviously reported last week as well and its numbers were exceptional, it just showed that companies like Amazon have such a large R&D spend and Amazon is one that swings from profits to losses almost constantly but the reason for that is because they spend so much on R&D and every time the market gets a little bit weary they just pull back on the R&D costs and suddenly you see brilliant earnings coming through. For me to go and invest in things like that and things like Google where they’ve got such a huge research spend that they’re really not struggling. These are not marginal companies perhaps like our South African miners are at the moment, these are companies that if they need to turn on earnings they can but what they’re doing instead is reinvesting in their own businesses, they’re reinvesting in new products. If you look at Google’s earnings it’s one of the reasons they outperformed analysts’ expectations massively as well because they just showed that they could get a handle on their cost and meanwhile they are investing in things like driverless cars, Google Goggles and augmented reality, they can put on the brakes and turn on the earnings if they have to. At this stage they just don’t have to, they’d rather plow it back into improving their own company, now that’s definitely sectors that I would be looking at and that you want to look at for the long term.

HANNA BARRY: Here in South Africa, Gary, which stocks do you like here?

GARY BOOYSEN: Again because we have more of a stockbroking mentality we send out a lot of research to clients. Actually if you go and sign up on our website for free we normally give our ten recommended stocks. So at the moment we are looking pretty conservative, I’ve perennially loved Aspen, I think it’s absolutely fantastic, it hasn’t quite performed for us this year but it’s definitely got to be on the list. I definitely like a company like PSG, if you look at the sum of the parts and its underlying operating businesses, obviously with this ADvTECH, Curro deal going on now it’s going to be enhancing for Curro as well, you look at its Capitec exposure, we think buying the basket through PSG is a lovely way for clients to get exposure to a number of fantastic businesses. Again, in one of our quant scans we actually picked up Steinhoff and Mondi at the beginning of the year as stocks that you just have to hold. Steinhoff we liked ahead of its listing in Frankfurt and we backed it right from the beginning of the year and it’s done fairly well for this year so far, obviously also coming out with a corporate announcement last week that SteinBuild will be buying Iliad. Then ja, even though we’ve had rate hikes recently, in the retailers we still like Mr Price, there’s no question about that, especially with what Woolies is doing with David Jones offshore. That list does tend to change depending on updates from the company but if you’re going for those solid blue chip companies I still think that you’ll be fine.

HANNA BARRY: You mention Steinhoff and its offer to acquire Iliad Africa, that’s a building materials company, for around R1.3bn, what do we know about Iliad?

GARY BOOYSEN: Iliad has probably been a bit of an underperformer in the sector so far. So if you look at the peers, so something like Cashbuild and even Massbuild to a certain extent, it’s actually a sector that’s been doing fairly well, selling products for home improvement. I was listening to the Iliad CEO the other day and he said it’s almost like the food space, it might be a cyclical industry but people will need to build houses, so bricks will sell. I think if you look at the actual deal that that they’re doing it’s going to work very well, their footprint hardly overlaps and it’s going to give Iliad a boost up into the next level. The Iliad management is going to stay on there as well and in the beginning stages it is still going to run as two separate businesses. I think what Steinhoff can do, bring in expertise, is going to be very, very good for the company and I think it’s a good deal for shareholders.

HANNA BARRY: If Curro does buy ADvTECH we will have a very sizeable private education company on our hands but at the moment Curro and ADvTECH management not seeing eye to eye it seems, who would be the big winners in this deal if it were to go through?

GARY BOOYSEN: Well, to be honest, I think the shareholders of both companies because you’ve got Curro trading on very, very lofty multiples at the moment and ADvTECH far more reasonably priced, like I said, it’s agoing to be earnings accretive to Curro. At the same time, when Curro came out with the R13 or thereabout offer it’s an enormous premium to where ADvTECH is trading. So for ADvTECH shareholders I think it’s an excellent opportunity. Curro has made the offer in a way that 50% of it is going to be underwritten by cash and they’ve already spoken to Kagiso Asset Management and to Coronation, they both seem willing to take Curro scrips. Between the two of them I think they own 45% of the company, so that really means that if the offer does come in but there’s a lot of talk about whether this is a real offer and obviously Frank Thompson’s come out and said that this is not a real offer, we don’t need to take it to shareholders yet. But it does look like shareholders will be able to get a cash or scrip option. I think either way it’s a good deal for ADvTECH shareholders, you can either take cash at a massive premium to the ruling price or you can take Curro scrip, which I still think, despite the very high multiple that the stock is trading on, it still has a very bright future, if you look at the potential for private sector low-cost schooling expansion in South Africa, it’s still enormous. If you look at their target, I think it’s 80 schools by 2020, it can really turn on the money taps. Some guys have said that there might be Competition Commission issues but I really don’t see that being an issue to the deal, as there’s still a lot of room to grow in South Africa. Obviously you’ve got government as a competitor, you’ve got plenty of independent private schools that aren’t listed groups as competitors and the market, even if you had a merged vehicle between Curro and ADvTECH it would still be a small player in the overall market and plenty of room to grow. I think to be honest a win for all shareholders in a very exciting sector.

HANNA BARRY: Certainly a deal to keep watching. Let’s talk a bit about Krugerrands, this is something that you do offer to clients, as do many other brokers, you pointed out to me earlier. The gold price has, of course, come under significant pressure lately and is really off its highs of nearly I think US$1900/fine ounce, around 2011, not that long ago, why is gold still a good investment? Is it still a good investment and are we going to see the price of gold recover?

GARY BOOYSEN: Gold is always a difficult one, I trade gold but it’s very seldom that I recommend gold to clients as an investment vehicle, I’d far rather go and buy a company that has a management team that wakes up every morning and tries to think how best to make me money than a metal that’s literally going to be buffeted by the winds of supply and demand. In gold’s case it’s not even an industrial metal, it’s a metal that’s almost purely sentiment driven. So I think a lot of the selloff that we’ve seen recently is obviously…about two weeks ago China released some data on their Central Bank buying, I think they bought 600 tons of gold, the first time that we’ve had numbers released like that since 2009. I think a lot of people are pointing and saying that perhaps that was not quite as much as everyone had hoped they been buying and that put a lot of pressure on the price. There’s also been some speculation about market manipulation in gold as well, especially coming out of China because of the volumes that are going through during very, very thin times in the market, trying to put pressure on it. But for me, gold as an investment, you can look at it as a hedge but I think that there are better ways to get hedges into your portfolios. These days we’ve got very complex and very cheap methods of hedging portfolios, so to go and buy gold as something to diversify your portfolio I think there are better options. But like you said, it’s something that very few clients actually know that most stockbrokers can buy and sell Krugerrands, there is a double onscreen for tenths, halves and full Krugers and because it is very thinly traded quite often those prices move around and it’s very easy to work out what the fair value of a Krugerrand is if you take spot gold and times it by the rand and you’ll get where the midpoint of the double should be. But like I said, that double pushes out and sometimes you can get quite an opportunity, you’ll get your Krugerrand for R500 or 600 cheaper, whether you are buying or selling.

HANNA BARRY: Foreign Exchange Trading, that’s another popular product among stockbrokers, it’s come under significant regulatory scrutiny off the back of some corrupt practices in this arena but I’m surprised at how many retail investors I meet who trade in forex. Can a retail investor really make money off forex trading?

GARY BOOYSEN: You can definitely make money but can you make money consistently I think is the question you want to ask.

HANNA BARRY: You can lose more money that’s for sure [laughing].

GARY BOOYSEN: The problem with currency trading is that I think it has mass appeal to the retail market because you might not understand one of these small cap companies, you don’t know how to look at it in the right way. But almost everyone has a view on where the exchange rate is going, it’s something that you get in almost every news bulletin, where is the exchange rate going, it’s a very talked about instrument. So it becomes popular because clients feel that they understand it. The way forex trading works, the gearing is obviously a lot higher than even geared stock products. Typically if you’re trading single-stock futures off CFDs in South Africa you’re probably getting about ten times gearing on your position, which obviously means if you buy a share it goes up 5%, you’re going to net a 50% return in your portfolio. With currency trading that can be as high as, I’ve seen 100, 200, even 500 times geared, so you get this massive exposure for a very small margin deposit, which ups the risk massively and I think clients don’t understand quite the impact that a violent move in the currencies can have. I say retail clients but you saw a lot of international currency brokers also getting burnt when the Swiss National Bank changed their policy and we saw some of the biggest brokers in the world going out of business and we saw brokers not honouring their commitments because obviously they said it was impossible for them to trade the underlyings. Ja, it’s definitely not a sector for the faint hearted.

HANNA BARRY: Absolutely not, I think you make a very good point there. Finally, Gary, what’s the one think that you are watching most closely at the moment in markets?

GARY BOOYSEN: I don’t want to say the Fed hike because I think everyone is watching to see when the Fed hike…if and when it’s going to be, I thought that it’s going to be towards the end of next year but Yellen seems determined to at least make a token hike this year.

HANNA BARRY: Interesting view.

GARY BOOYSEN: Ja, I think it’s quite contrarian but I think definitely at the moment all eyes on the US. Greece has taken a bit of a backseat. With all the market-saving moves China has made as well I think the focus has come off China. As we’ve been expecting, as the US earnings season starts to ramp up the focus is going back onto how are these companies doing, what sort of condition is the consumer in and are they still making money.

HANNA BARRY: Quickly, why do you think the Fed will only hike rates at the end of next year?

GARY BOOYSEN: No, not at the end, I think you’re going to see a rate hike, well, it’s been my view for a long time that you’ll see it at the beginning of 2016. Again, I don’t think there’s enough inflation in the system, I’m starting to believe that Janet Yellen will do one small token rate hike this year just to maintain Fed credibility. But I don’t believe that there’s enough inflation in the US system, the dollar is too strong at the moment and I don’t think that they need to hike yet. Ja, 2016, we’ve seen it and we’ve been talking about is there going to be a Fed rate hike all the way through 2014, it continually gets pushed out, we haven’t had it pushed out yet but I think there’s still room for the analysts to reassess their opinion one more time.

HANNA BARRY: Gary Booysen is a portfolio manager at Rand Swiss.

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