Old Mutual Private Client Securities’ investment philosophy

Chief investment officer Dr Andrew Dittberner says: ‘If you’re going to panic, you need to be the first to panic – and that’s the Steinhoff story.’

RYK VAN NIEKERK: Welcome to this week’s edition of the ‘Be a Better Investor’ podcast. It is the podcast where I pick the brains of the top professional investors in the country and we try to understand how they approach investments, and what information they use in their investment process. We talk about their best and worst investments, because even professional investors sometimes get it wrong and hopefully their insights will offer a few nuggets of wisdom to assist normal amateur investors to improve their investment decisions.

My guest today is Dr Andrew Dittberner. He’s of course, the chief investment officer at Old Mutual Private Client Securities. He has been in this hot seat since 2017. Before joining Old Mutual he was a portfolio manager at Citadel and the chief investment officer at Cannon Asset Managers. Andrew, thank you so much for joining me. Let’s start. When did you buy your very, very first share and what was it?

ANDREW DITTBERNER: [Chuckling] Good afternoon, Ryk. That’s a fantastic question and I’d have to go back a very long way, but it would’ve been during varsity days. I think it was Wilson Bayly Holmes – not WBHO, Wilson Bayly Holmes-Ovcon – for no other reason than my father worked there. So I was obviously familiar with the business and I only really started earning money when I was at varsity doing a bit of lecturing and whatnot. That was really the first time that I had the opportunity, I suppose, to buy shares.

That was with the onset, I suppose, of online trading accounts, when they probably just came into being. Before that you needed a stockbroker, which I think was the term used. I bought a share in a company I was familiar with, given that was part of my life as my dad worked there.

RYK VAN NIEKERK: If I remember correctly, the very first share I bought was Naspers, just after it listed. The only reason was because I was delivering newspapers for them every morning at five o’clock. I didn’t keep them, that’s the thing. I bought it at R18. But let’s leave [it at] that.

Many people actually only buy shares because they are familiar with the company, they know the company, they use their products – and not really on sound fundamental investment principles. Do you see this often?

ANDREW DITTBERNER: Yes, I think particularly if you’re trying to get started in investing. My nephew at the moment is in high school and very keen to get into the investing game; he’s starting to understand it, starting to research companies. I actually sat down with him last year and we opened an online account for him. I said to him: “Start with shares that you know.” The beauty today is that you can invest in companies online. Twenty years ago we were restricted, when it came to online trading, to only invest in shares in South Africa, whereas today you can invest in any share literally around the world from your computer.

I said to him exactly that, that just pick the shares or companies that you can relate to. If you like Nike sneakers, or you are on social media – not that that panned out that well at the beginning of this year – but any company that you relate to. Then at least you are interested in it, you’ll follow it. Obviously if you like the product, from an investment case that gives it one good tick. It’s a Peter Lynch investing style. If you like the product, then it’s probably a good company.

RYK VAN NIEKERK: Of course, many asset managers do not follow that approach. You have a very, very sophisticated process and system where you base a lot of the decisions on data and information. Tell us exactly what your current process is, and how do you now evaluate shares on their investability?

ANDREW DITTBERNER: How much time do we have? Old Mutual Wealth Private Clients Securities is not an asset manager, so we are not building unit trusts that have 30/40 shares in them with very long tails of small holdings. We are a private clients business. So we build fairly concentrated portfolios, typically holding only 20 shares or a max of 25 shares. Our starting point is that (a) we’ve got to realise we are not economists.

RYK VAN NIEKERK: Are they local shares or international?

ANDREW DITTBERNER: We’ve got local portfolios and global portfolios. So local equity, local balanced, global equity, global balanced.

RYK VAN NIEKERK: But that 25 – are they spread across?

ANDREW DITTBERNER: When you say spread across, being spread across –?

RYK VAN NIEKERK: Geographies.

ANDREW DITTBERNER: Yeah. On the global equity side, typically developed markets like this. So the US, Europe, Japan typically. But obviously we take the approach of buying businesses that very often have their growth coming from emerging markets. I already used the example of Nike – huge growth coming out of Asia for that business.

So we take the approach that we want to identify 20 to 25 high-quality businesses. We recognise we are not economists. We’re not trying to guess what inflation is going to do, or what interest rates are going to do through the course of this year.

Rather, we want to buy businesses that can withstand different economic environments and that can perform in both high-inflation environments, low-inflation environments, and so forth.

The second point is that we’ve also got to … I suppose to be humble, knowing that we actually don’t know what’s going to happen. … if you just think about what happened last year, there was a huge amount of chaos in the markets that no one could have foreseen – whether it was the Chinese regulatory issues; you can’t forget the Ever Given ship that blocked the Suez Canal; we had the WallStreetBets sold at the beginning of the year; and then obviously the different [Covid] variants. Markets are always going to be up and down. Today we’ve got the Ukraine/Russia geopolitical event. So you’ve got to understand that there’s going to be a lot of noise in the markets throughout the year, as there was last year, and there’ll be a lot of up and downs and volatility as a result of that.

But a very simple approach is to identify good businesses, and by ‘good businesses’ we can get into exactly what [they are, but]: don’t overpay for it, make sure we diversify so we can withstand different times of volatility; and then probably the most important ingredient is to be patient.

If we look at our portfolio at the moment, I think last year we turned over just over 10% of the portfolio. In other words we sold and bought about 10% of the value of the portfolio over the year, and that translates into a 10-year holding period. So we try and buy good businesses that we can hold for a long time, see them through the cycle, and see the price appreciate.

RYK VAN NIEKERK: You refer to ‘good companies’ or ‘good businesses’. Can you just spend some time on exactly how you go about identifying those?

ANDREW DITTBERNER: Sure. We’ll probably look at a few qualitative overlays. At first you need decent management teams. So you need a management team that’s got a good track record of capital allocation, not doing bad acquisitions, not overpaying for acquisitions. Typically when management is allocating capital towards acquisitions, we like them to be small, we like management to not overpay for them. Typically we like them to pay cash and not have to raise a huge amount of debt. And then we also like them to be more or less in line with what the business does – not too far outside their core business.

RYK VAN NIEKERK: So that is quite a subjective approach?

ANDREW DITTBERNER: Yes, absolutely. You can’t come push a button on Bloomberg and get that answer. You’ve got to go and see who the management team is. Typically it starts with the CEO, to see how long he’s been at the business or where he was before and what his track record looks like.

We then want to obviously look at the balance sheet. We want to make sure that the company is not too indebted. We not scared of debt. Certain businesses actually do need debt. If you think of asset-heavy businesses, they do require debt to fund assets and such. So we are not looking for companies that don’t have any debt, but we don’t want them to be indebted; we need to pay attention to the interest cover, whether they’re able to service and pay down the debt over time. But we pay specific attention there to make sure the balance sheet’s strong.

We then look at cash flows to make sure that they’re actually earning real revenue and real earnings, not accounting or accrual revenue that may or may not materialise at some point down the line.

Then we obviously want to look at profitability. Companies that are highly profitable, that can turn their revenue into cash: we’ll tick the box twice.

I suppose the last thing – there are probably a lot … of other things, but what’s on the top of my mind right now – is it’s not quantitative, it’s also subjective, I suppose, to a certain extent. But there’s a lot of value placed on intangible assets at the moment, if you really think of intangible assets, like the brand value of a business – a company like Disney, for instance, that has just reported. That’s a business that comes with a huge amount of brand value.

When we think of old-school value business growth type investing, and you go back to Benjamin Graham days – the way of valuing a business then, looking for low multiples – and how you ascribe value to a business today, I think it’s very different because there’s a huge amount of intangible assets.

I’ll just touch on the brand. There’s network effects. If you think about Visa, for instance, the huge network effects that that business has – obviously a network affecting the more users it has, the more valuable that business becomes. The social media companies – and Facebook is obviously a good example of that as well (not that we invested in Facebook or Meta Platforms as it’s called now). But just thinking about different types of intangible value that we can ascribe to businesses.

RYK VAN NIEKERK: Can you maybe highlight a few of the shares or companies you are holding in the portfolios which you believe could go places?

ANDREW DITTBERNER: Okay. We’ve got a couple of businesses that probably fly beneath the radar, not very well known businesses that I like to talk to. Zoetis is one. It actually did spectacularly well last year, and it has come under a bit of pressure this year, which is absolutely fine. As I say, you’ve got to take the downs with the ups. But Zoetis is effectively the biggest healthcare provider for animals, both livestock and pet animals, in the world. They produce medication, vaccines, food additives, they do precision livestock farming, and so forth. The beauty about Zoetis, besides the fact that it’s the leader in this market, is it’s effectively a pharmaceutical business for animals.

There are a couple of trends that are taking place at the moment. When you think about how people are having fewer kids, spending more time at home, and we’ve seen the number of households who own pets increase, the trends are moving higher and higher every single year. So it’s got that nice tailwind behind it from an industry perspective.

RYK VAN NIEKERK: Is that a US company?

ANDREW DITTBERNER: It’s a US-listed business, yes, but it operates here. It’s present in I think 160-odd countries around the world. I think there’s maybe 200 countries in the world, so it’s present in most countries. And then also you’ve got a rising middle class which is consuming more protein and wanting high-quality protein, and that talks to the livestock side of the business. The thing we really like about this business is that, unlike pharmaceutical companies that have patent cliffs, these businesses in the animal healthcare space don’t.

So if you think about a pharmaceutical business that spends a lot of money on R&D, researching new drugs, medications and so on, they get the patent awarded for X amount of years, and then at the end of that patent period, it falls off the cliff and the generics come out and you’ve got huge competition. These guys don’t face that.

Once they’ve got a blockbuster drug in place, it’s there forever effectively. So they don’t have to spend as much on R&D as your pharmaceutical businesses do, although they do still spend quite a bit; but it’s closer to 10%, rather than I think about 20% for pharmaceutical companies, 20% of revenue. I think that puts them in good stead. And also then your younger companies, up-and-coming companies, have to compete and have to spend a huge amount, so it makes it fairly difficult for them to compete on an ongoing basis.

Then also their clientele – they’re selling to you and me, they’re not selling to big corporations, and that gives them pricing power. Their client doesn’t have negotiating power coming the other way. So that’s a fantastic business that you are probably fairly unfamiliar with. It doesn’t grab the headlines like many of the other larger tech-type companies, but it’s one that we really like.

RYK VAN NIEKERK: Which shares do you like on the JSE currently?

ANDREW DITTBERNER: On the JSE at the moment we’ve taken a bit of a barbell approach to it. I think there are some fantastic businesses listed on the JSE that operate in South Africa, as they’ve come to be known: ‘SA Inc shares’. So we really like a number of those too that stand out, that everyone will be familiar with: Shoprite and Mr Price are two of the retailers that we really like at the moment.

We like the banks. So we’ve got what we think are the higher quality banks in the form of FirstRand and Standard Bank. We think the banks still trade significantly below the valuations that they were on pre-Covid. We think in the fullness of time they’re going to get back there. So we do like a lot of SA Inc shares. But these are what we think are your higher quality type SA Inc companies.

On the other side we’ve got your offshore, you can call them rand-hedge type companies, that we believe are generating high-quality earnings abroad. Familiar names would be the likes of Richemont, you mentioned Naspers earlier; Prosus obviously came under a bit of pressure. We just added a bit more there, because we think that the China story looks a lot more compelling this year. You’ve got valuations looking much better. The regulator taking his foot off the gas, their economy is easing from a monetary policy perspective, while the rest of the world is tightening.

And activity levels in China at the moment are low. So the probability of a surprise to the upside I think is far better.

Then Bidcorp and Ninety One are smaller companies that have globally diversified revenue streams, which we think is really attractive.

We’ve also got a few mining companies, although we [are] fairly underweight mining – or resource companies – at the moment, just given what’s happened in China. We’ve actually just recently sold down BHP a bit, it’s obviously hugely exposed to iron ore. And we know the outlook; the Chinese economy I suppose is slowing down a bit. So while we like the China offshore equity story, as I mentioned in Prosus/Naspers or Tencent, the exposure to the direct economy through resources, we just like a bit at the moment.

 

Retail investor mistakes

RYK VAN NIEKERK: Yeah. So it’s a big focus on blue-chip companies.

Let’s talk about retail investors. What do you think are the biggest mistakes retail investors make?

ANDREW DITTBERNER: I think the one that jumps immediately to the top of my mind is the momentum trend-following. People love to talk about businesses that are doing well, and buying businesses that are doing well. We know the momentum story. There are a million academic articles on this that talk to ‘If a company does well, it continues to do well’ and ‘Companies that do poorly continue to do poorly’.

But I think from a patience perspective, fear and greed, as we always talk about – when companies fall 20%, 30%, 40% it’s very easy to think, well, it’s going to zero and you want to get out. Ultimately what happens is you typically get out at exactly the wrong time. I’ve been guilty of this in the past, and I’m sure I’ll be guilty of this in the future as well.

You do get it wrong: you think that there’s something materially wrong with the business and you get out and then actually the business turns around and recovers.

So I think it’s important – when you’re holding a share that is going only in one direction and [that] is down – to take a step back, reassess. Is it a company-specific problem or is it a general industry-wide problem or is it a market problem? Markets, evaluation perspective, too highly valued? We are not a unit trust so it’s not that easy to buy and sell without tax implications, so we fully appreciate that at times companies are going to get overvalued and we might take some weight off.

But if we still like the business we’ll be willing to stick it out, understanding it’s going to come down to probably a fairer value and at that point we can maybe add some more. But yeah, I think that’s probably the biggest mistake, getting caught up in your emotions.

RYK VAN NIEKERK: Kumba and Sasol come to mind because they had significant declines a few years ago, Kumba before Sasol. I know many people got out – and they both rebounded very, very strongly.

ANDREW DITTBERNER: Sasol had a number of issues going against it. Thankfully we didn’t hold Sasol, so I didn’t have that headache on my hands. That’s purely because I think there was a Lake Charles issue that we didn’t like. We had actually sold Sasol a few years before that.

But then you get the example of Steinhoff and people panic. If you’re going to panic, you need to be the first to panic, and that’s the Steinhoff story.

…when that news [of the accounting scandal] broke, Steinhoff very quickly went from, I think, R60 or R50 down to R20 when it opened that next morning. I remember at the time people said no, you can’t sell at R20, it was just R60 yesterday. But subsequently I think it went down to below R1 at some point.

Yes, it has recovered a bit now, but that’s the opposite of the Sasol/Kumba story. That’s why it’s important to assess at a company level. It’s obviously probably more art and science, and the benefit of hindsight’s easy.

RYK VAN NIEKERK: And a bit of luck.

ANDREW DITTBERNER: Exactly. But you’ve got to try and understand what’s happening in the business. Is this a permanent destruction of capital in the case of Steinhoff, or is this fixable and have investors just panicked and this has just got ridiculously cheap?

RYK VAN NIEKERK: Just lastly, what was your best investment ever, and what was your biggest miss?

ANDREW DITTBERNER: I can tell you what my biggest mistake was off the top of my head. That’s one that sits very clear in my mind and it was actually not buying something but selling something.

I sold Amazon probably five, six years ago. That was undoubtedly my biggest mistake, not understanding at the time Amazon Web Services was a bit of a power tree; not understanding exactly where that business was going, and exiting Amazon.

I can’t remember the price, but it was ridiculously cheap when you see what it is today. That was the biggest mistake that just jumps to mind.

It’s difficult to pinpoint what was my best investment. We’ve had a number of fantastic investments over time. I’ve been with Private Client Securities now for five years and I think of a number of the companies that sit in our Global Equity portfolio. There are many – Visa is one that jumps to mind. It’s just been a fantastic success. I spoke about Zoetis earlier, although it’s fairly new in the portfolio; again, it has done incredibly well. As I said, its pulled back quite strongly this year. But it’s difficult to put a finger on one share that I’d say was my ultimate best investment.

RYK VAN NIEKERK: Andrew, thanks so much for your time and insights. That was Dr Andrew Dittberner. He’s of course the chief investment officer of Old Mutual Private Client Securities.

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