RYK VAN NIEKERK: It’s time for this week’s Market Commentator podcast. It’s the podcast where I speak to the leading investment professionals in the country. My guest today is Alwyn van der Merwe. He is the director of investments at Sanlam Private Wealth and has been with Sanlam for 14 years. Prior to Sanlam, he was a portfolio manager at Old Mutual for nine years. He has been in the industry for more than 25 years, and I think he has seen it all.
Alwyn, thank you so much for joining me. Sanlam Private Wealth – how far is that removed from Sanlam Investments? Are you involved with the management of any of Sanlam’s unit trust portfolios?
ALWYN VAN NIEKERK: Good afternoon, Ryk. Yes, we do manage two unit trust portfolios in South Africa. We have a balanced portfolio, which is a Regulation 28 portfolio. And then we have, let’s call it our flagship portfolio – because that is really where our roots lie – which is a pure South African equity portfolio; it’s called the Sanlam Private Wealth Equity Fund.
But that is actually not our main vehicle where we invest money. Being a private-client asset manager, we try to manage our client’s portfolios on a tailor-made basis, which means that high-net-worth individuals normally have very unique financial or investment needs, and we try to tailor-make a solution for those particular needs.
The reason we have those funds is they have a particular story. The institutional investor, Sanlam Investments, focuses on the management of institutional pension or retirement funds and they also tap into the retail investment market via the unit trust solutions.
What do we share with them? We share the shareholder. So we are one of about 14 independent individual companies within the Sanlam Investments umbrella, but we don’t necessarily share the same investment philosophy; and, in terms of research, we share the same macro research. In other words, we share the same economists. But in terms of equity research and in terms of global research and asset allocation we act completely independently from, let’s say, the mother ship.
RYK VAN NIEKERK: So your core focus is to design and structure individual portfolios for high-net-worth individuals.
ALWYN VAN DER MERWE: Exactly right. I think that’s what you can do, Ryk, if you are really a high-net-worth individual. People used to come to us only for an equity solution, but we find more and more that you need to think more creatively.
So most of the high-net-worth individuals have got a proper multi-asset portfolio that would include South African assets across the asset spectrum. In other words, that would be equities if you think about the traditional asset classes; equities, fixed-interest, property. And on the offshore side, it is exactly the same.
In both cases, you can also add alternative assets for these clients because you must understand that things like ESG [environmental, social and governance] philanthropic purposes and so on also come into play when you deal with high-net-worth individuals. But in the end it’s all aimed to achieve the particular investment needs of the client.
RYK VAN NIEKERK: What criteria are needed to be regarded as a high-net-worth individual?
ALWYN VAN NIEKERK: We take on clients [who are worth] anything from R2 million, which I think is perhaps not enough. If we look at the average size of our clients, they are closer to R6 million and then we can have clients worth up to R2 billion. There’s actually quite a wide range. But nevertheless, I always feel very comfortable if we manage a portfolio of about R10-plus million, because then you can do proper asset allocation and give a client a very cost-effective solution that should match [their] investment needs.
RYK VAN NIEKERK: Let’s talk markets, and especially let’s start with the local market. We’ve seen a correction on the JSE over the past few weeks, and I did a few calculations from January to the end of July. The All Share [index; Alsi] rose by a very decent 15%, but from August to mid-September that was wiped out. I think we were virtually unchanged year to date mid-September, but subsequently we have recovered slightly. Today, year to date, the index is 5% higher. In comparison the S&P 500 year to date is about 19% higher, which is significantly more. How do you see this performance relative to international markets?
ALWYN VAN NIEKERK: Yes, Ryk. To some extent it was concerning, but I think if you look at our market, when we talk about ‘our’ market, when we talk about the All Share index, the All Share index is quite concentrated in the way that it has been populated. After the recent changes that we’ve seen – I think they came in on September 17 – Naspers/Prosus constitutes about 15% of the All Share index; before that Naspers/Prosus at the beginning of the year I think was something like 23% of the All Share index. So it’s extremely concentrated. That is the one.
The other sector – and the reason why I mention this sector is it is quite correlated – is the resources sector. The resources sector, I think at the moment, if you include Sasol, is about 35% of the index. When commodity prices move in unison up or down it has a massive impact on the market. So what you’ve seen in the pull-back that you refer to is that Naspers came under severe pressure for two reasons. I don’t think the market really liked the corporate action that we’ve seen. Secondly [there is] the news flow out of China, where there are certain regulations being implemented that will have an impact on the earnings stream of Tencent – which is the biggest investment within Naspers/Prosus – and that pulled it down.
And of course, on top of that, what we’ve seen is a phenomenal pull-back in the platinum shares. Most of those platinum shares are probably down about 30% from the highs that they recorded earlier this year.
So, to my mind, I think what it has done is it has given me more confidence about the way forward because, if you think of those two sectors, the resources sector is a bit cheaper and Naspers/Prosus is certainly much, much cheaper.
If you think about Tencent , the forward PE [price-earnings ratio] has now come back into territory where we can talk about the forward price-earnings multiple. On top of that, if you buy Naspers and Prosus, you get them at a substantial discount. So for me, from an investment perspective, I think now is a better time to own them than when we started the year.
Of course, if you’ve seen what those two shares did – Naspers is down 19.6% year to date, and Prosus is down 26% year to date.
Those two shares were the star performers last year when IT shares just went through the roof, and China in particular in the second half of last year was strong and those shares benefitted.
So my answer is yes, I think the market looks more interesting now from an upside perspective than compared to a month ago.
RYK VAN NIEKERK: What would the performance of the Alsi be if you strip out the negative impact of Naspers and Prosus?
ALWYN VAN NIEKERK: My numbers look slightly different from yours year to date – and we did them up to last night; the Alsi, on a total-return basis. So there’s a divvy that comes in there. It is 10.4%. If you exclude Naspers and Prosus from it, the return would have been 16.8%. Now, let’s take that back in rand terms. Let’s take that back to your S&P 500 index – and I’ve got the numbers until right now – it is more or less in line. I think the S&P did something like 19% as I said, excluding that we are sitting with it at 16.8%, which is not a big difference. In fact, it is exactly in line with the MSCI World Index on a year-to-date basis.
RYK VAN NIEKERK: But that’s not the perception. A lot of people continuously state there is value in the JSE. We are not as expensive as international markets. Some asset managers like Ninety One and Allan Gray, and I think Coronation too, have said they believe in the JSE and they believe in local stocks, and some of them are even overweight local stocks relative to the international stocks. Do you think the performance is actually perceived as such, that it’s pretty similar to what we see in the US?
ALWYN VAN NIEKERK: The US of course was a strong market. But if you look at, as I said, the MSCI World on a year-to-date basis, it looks pretty similar if you look at it last year by the way – last year in rand terms – and I don’t think people pay a lot of attention to that. If I’m a South African investor I’m interested in the rand performance. Now, that is just one year we are talking about. But the South African market in rand terms outperformed the world in rand terms, it outperformed the S&P in rand terms.
I don’t think it outperformed the Nasdaq in rand terms last year, but it’s a function of two things. Our market actually did quite well because Naspers and the mining shares did quite well, even despite the very poor start in the first quarter after Covid struck.
But remember that the rand was also strong. So when you convert the dollar returns that those indices made back into rand, it’s attracted about six or 7% from the performance. So I think often when I listen to programmes where people express their views, we’ve a tendency to be a bit biased against their own performance. The reason is that I think that the macroeconomic numbers that come out – and poor policy and regulation in South Africa – make us so negative that we forget that some of these companies are still decent businesses with decent balance sheets. And in the case of the mining companies and one or two others, clearly on the global stage they are world-class companies. Maybe I can give one example, if you don’t mind.
We had a discussion about Anglo American earlier this week, about its investment merits. When we just look back in terms of how the company looked in 2012 and how it looks now, it’s a completely different company. They sold off a lot of their marginal businesses. The balance sheet was exceptionally weak in 2012/13. It is now exceptionally strong.
What they [Anglo American] are doing now is I think acting in a very responsible way when they allocate capital. You can see it in the share price.
If you value those mining companies and spot commodity prices, they should trade at much, much higher levels. But that is not the way we do it. We look at longer-term commodity prices and assumptions. Nevertheless the market has been, I think, very rational when they look at the South African companies.
If the news flow is a bit better that opens us up for a positive surprise.
RYK VAN NIEKERK: I just want to go back to your explanation of the performances. If I’m an investor, and if I compare the JSE performance with international markets, I look at the main indices and I do the sum, our market moved 10% versus another market moving more or less than that, is that not the best way to compare it, or should one go about comparing relative performances?
ALWYN VAN NIEKERK: Whatever you … do is you should compare the performance in constant currencies. Let’s say you’re a US investor; if I live in the US I must use US dollars. If I’m a South African investor, I must use South African rands. So if you earn anything overseas, convert it into the local currency. That is the first thing. And then you’ve got to make your call.
But Ryk, your point is certainly valid. If you look back since the global financial crisis, there’s no doubt that the South African equity market lagged overseas equities. There’s no doubt about it. But it doesn’t mean to say that within particular calendar years the JSE performed quite well in whatever currency you think about. That is the first thing.
Just remember one thing. When you position portfolios, you position them, hopefully, for the prospective returns or the future returns that you are likely to generate. I think what you’ve seen – and you spoke about the valuation and the views of some other asset managers in South Africa – if you look at, let’s say, the forward price-earnings multiple of the South African market at the moment, it trades on a forward multiple of below 10 times. Now, it’s a long time since I’ve seen it there.
Having said that, we’ve had a phenomenal recovery in earnings in South Africa.
Not many people know it but if you think about the banks, and again think about the results a big component of the resources companies put out – it’s a massive recovery in earnings. So the recovering earnings are there, and that of course brings that price-earnings multiple down. If you compare it against the Nasdaq, for instance, the Nasdaq is trading at a multiple of about 30 times. So it’s three times more expensive than the South African market. It is to my mind priced for perfection.
So if you see any disappointments in some of the very high-profile companies that we talk about every day, then the risk is that you get what we call in investment terms the so-called ‘double whammy’. You get earnings disappointments plus you get a rating disappointment – and those are the two things that drive the performance.
We’re not saying that it’s going to happen, but we are saying that the risks are starting to build there. So the valuation itself in South Africa should provide you with some sense of security from a prospective point of view, where I think the amber lights are certainly going on when you talk about the Nasdaq. Even when, on a top-level basis, you talk about the S&P, which is by far the most expensive market in the world at the moment.
RYK VAN NIEKERK: Let’s talk about shares. Which shares are you currently buying?.
ALWYN VAN NIEKERK: [Chuckling] There’s a big debate whether we should use the weakness in some of these money shares to add more. It’s always a question of how much you should have. If you compete against the index, you can’t ignore the index because that is your investment objective – to beat the index. So if you are positive about a sector, then you should be overweight relative to your benchmark.
But in our case we don’t think it is prudent to have 35% in mining shares, despite the fact that you might have a very positive outlook on the shares. I think you should have a substantial amount of mining shares in the portfolio because I don’t think they are expensive – but some of the commodity prices are quite high.
Maybe I should talk about what we have a big weight in. We still hold quite a big exposure in Sasol. We added when the market thought that the company was sub-par. I think under the new management – they had an open day yesterday [Wednesday, September 23] – it is quite clear that the management takes capital allocation quite seriously, and the market is not paying anything for the self-help that is still available in Sasol. So we have quite a big weight there and, even with fresh money, I think you can probably buy at these levels. But I think one must understand that the share price performance will be volatile because it follows the oil price on a daily basis – which, you can argue, right or not, is not relevant.
We love the banks, but they’re starting to look full now.
RYK VAN NIEKERK: Any one in particular?
ALWYN VAN NIEKERK: We bought Absa for the first time. You mentioned that I’ve been with Sanlam for 14 years. We never owned Absa until last year. So we bought Absa and it worked very well for us.
The quality one of course – apart from Capitec, which is the obvious one but it’s too expensive for our style; that’s not saying it’s not a great company, it’s just too expensive for our style – the quality one that I think is a longer-term one that we would like to hold for our clients is FirstRand. The company still produces a return on equity of 18%, which is seriously high, and it tells you something about how well the company is managed.
And then if you drop down, we added more to Prosus and Naspers in this weakness that we’ve seen, and we still think that’s great value. So for new money, when new clients come in, we will continue to buy Prosus and Naspers. Of course there was a serious response to the uncertainty about the regulation in China, and that is likely to be an overhang for a while; but that gives us time to buy longer term. Tencent is a great company and that is the major asset, and hopefully the Naspers management can also add value with some of their other investments.
Then maybe one company that needs to be mentioned, the one that people seldom want to talk about, is our exposure to British American Tobacco.
We simply think it is just way, way too cheap. What does it mean when we say it’s way too cheap? Maybe I will use two examples to explain how cheap it is, and then investors or potential investors must decide whether the fact that it is that cheap justifies investment in a company where the big part of their business is traditional cigarettes [and] the volume is declining by roughly 3% per annum.
But of the two valuation measures that I would like to highlight the first is the dividend yield in pound terms. It’s close to 8% at the moment. So if you believe that they can in any way grow the earnings over the next 10 years, then you get 7% or almost 8% in sterling terms today. With about an 80/85% payout ratio, they will pay out 85% of the growth in earnings for the next 10 years. When we do our calculations, if you hold on to that share, in 10 years’ time, based on our assumptions, you will get the share price – which is, let’s say, R535 – back in dividends and share buy-backs. And then you still sit with the share.
For our clients and particularly clients who are looking for an income, and a growing income because they still squeeze cost efficiencies out of that company, if you look at the history in the last five years, they’ve been growing the earnings anything between five and 10%, which is above inflation by the way – significantly so in sterling terms – then we still sit with it. But it is a very boring company. People are very uncertain; it’s certainly not the flavour of the day and it’s been a major underperformer over the last year as well, particularly if you measure since the beginning of the second quarter of last year. Of course, after Covid hit and the market actually collapsed, British American Tobacco was one of the better-performing shares, although it also lost some value.
RYK VAN NIEKERK: It’s not in many ESG portfolios.
ALWYN VAN NIEKERK: No.
RYK VAN NIEKERK: Just lastly, I’m looking at your Private Wealth Equity Fund, the one we spoke about earlier. The top five shareholdings are Prosus, BHP, Anglo American, Richemont and British American Tobacco. They are five massive companies with the majority of the income offshore – a massive international and foreign exposure.
What does that say about your position regarding SA Inc stocks, companies that are really dependent on the local market? Do you still prefer the locally listed big companies, or are you looking internally?
ALWYN VAN NIEKERK: Part of those big holdings tells us something about the market cap of those shares. If you drill down into another layer in the portfolio, if you talk about SA Inc in this particular portfolio, we’ve got about a 15% exposure to South African banks. Apart from the African exposure in some of those banks, the bulk of the earnings come from South Africa.
We have exposure to retailers. We’ve got exposure to Pepkor, which is about 2.5% in the portfolio. We’ve exposure to Shoprite, which is about 3% in the portfolio. Again, they’re not entirely South African, but the bulk of the earnings would come from South Africa.
In terms of smaller counters, we always have a problem, Ryk, that is very difficult: many of the smaller counters are pure SA Inc plays, and if the liquidity is not there – remember we try to build focused portfolios and there are only, I think, 20 or 21 shares in this portfolio – then we can’t build decent positions in those smaller stocks; you’ve got to get your performance from the bigger stocks. A lot of the earnings come from offshore as well.
We’ve probably [got] about 3% in Aspen, but at least it’s got its roots in South Africa. So it’s not that we are shying away.
I think for a fund with a focus on smaller caps there are lots of bargains in South Africa that you can have, but you’ve got to be patient.
There’s not a big appetite for it at the moment. The two of us spoke about that, I think last week, when we looked at shares being delisted from the market: if you don’t need capital you may just as well delist and get rid of the admin burden that has been associated with listing on the JSE.
RYK VAN NIEKERK: Or look at private equity as a model.
Alwyn, thank you so much for your time. I really appreciate it. And thanks for sharing your insights.
ALWYN VAN NIEKERK: Most welcome, Ryk. Thank you very much for having me.
RYK VAN NIEKERK: That was Alwyn van der Merwe, the director of investments at Sanlam Private Wealth.