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‘We’re at the backend of a bubble …’

Rezco Asset Management CIO Rob Spanjaard explains the rationale around four top fund holdings: AB InBev, Discovery, Mondi and Bidcorp.

RYK VAN NIEKERK: Welcome to my weekly Market Commentator podcast, where I speak to the leading investment professionals and fund managers in the country and we try to get an understanding of the perceptions of valuations, and where they see value. We also look at what they are currently buying and, probably more importantly, what they are selling.

My guest today really does not need any introduction. It’s Rob Spanjaard, the chief investment officer of Rezco Asset Management. He has been in this position since 2004. Rob, thank you so much for joining me. I did a bit of research today and was surprised to see that Rezco has only five funds. Is that correct? I would have thought there would be more.

ROB SPANJAARD: Ryk, firstly good afternoon. Good afternoon to all your listeners*… We try to get our best view, so we’re not trying to add. The danger here is five funds become 10 funds, become 20 funds. So we try to keep it to a best view and limit that.

RYK VAN NIEKERK: Many other asset managers actually follow a different approach. I think there are more than 3 000 collective investment-scheme options available to investors today, and it makes it very difficult to choose.

ROB SPANJAARD: You always want to do that. It’s great for marketing, because you have a whole lot of horses in the race and then, after the event, you pull out a fund that’s done particularly well and you tout the performance. The problem is upfront the investors didn’t know which one to choose. So I think you can have a bit of a game with that. Marketing guys in funds always like it. So, if you have 20 or 30 funds, you are always going to have one that’s got stunning performance. If you’ve got five funds you’ve got to be a lot more sharp and on it. But at least the investors know, going forward, what they need to choose.

RYK VAN NIEKERK: Before we look at your funds, I want to discuss your investment approach – and especially the way you use data and technology because you do place a lot of emphasis on technology. Tell us about this approach.

ROB SPANJAARD: ..It’s the world we live in. Data is becoming critically abundant. There’s data for everything. It’s really, because of the internet, freely accessible. At the same time you’ve had another trend, which is that computing power has become very cheap. Obviously our laptops we have got much more powerful. But particularly in the area of cloud.

And on some of our machine-learning models, you’ll fire up [the equivalent of] 70 000 MacBook Pros, and you process a whole lot of kilobytes of data, and you can run that through in one model. That you couldn’t do five years ago. So you need to be able to have the technology to process large data sets and come to an intelligent conclusion. That’s where machine learning becomes very effective. A lot of nonsense is spoken about machine learning, but it’s also a massively useful thing. And the analogy we often give is you find like Google Photos, for example, can recognise pictures of your kids when they’re babies a lot better than you can in a lot of cases. Some machines are getting better at recognising patterns and pictures than people are. But it’s very new. You’ve got to kind of use the data. So we spend a lot of time learning data, processing data. Then our investment team needs … those tools at your fingertips. So obviously, like in our Equity Fund, every time we buy or sell a share, we see what it does to the risk stats of the portfolio. You can do some really detailed calculations on if it moves the risk stats up or down, and are you happy with the result that you would get if you added 5% of share X to the portfolio.

RYK VAN NIEKERK: The ability for these tools to crunch numbers to the extent you have explained – does it flows through to better investment decisions?

ROB SPANJAARD: It’s starting to. Up till now, three or so years ago the world got super excited. You read so many articles about machine learning and that ‘it changes the face of investment’. As with all of these things, it’s actually a lot more complex than you initially think it is. But, like they’ve often said on the internet, you will initially overestimate the impact it makes. If you think around [year] 2000 it was going to change everything – and there was a lot of disappointment, and in the longer term you tend to underestimate the impact it makes. I think where you are now, where you understand the complexity of it, it actually is becoming very useful; but it’s darn hard and darn complex.

RYK VAN NIEKERK: Do you do it in-house, or do you use data from an external [facility]?

ROB SPANJAARD: We’ve got a good team which is called Alis – it sounds like a lady’s name, but it’s Automated Learning Investment Systems. We’ve got quite a hot-shot team run by a guy called Jan Krynauw, who’s probably the leading guy in SA and certainly [of] international guys we’ve talked to. They do some pretty cool stuff, but [they’re] highly focused on learning and understanding and building the systems around it.

Rezco Equity Fund

RYK VAN NIEKERK: I don’t know if you saw, but we published an article on Moneyweb Today, and it ranked the top equity funds in South Africa according to their performance over the past five years. Only funds with assets under management of more than R10 billion were included in this ranking. The top-performing fund was the Coreshares S&P 500. Had you invested R100 000 in this fund five years ago, you would have around R237 000 today.

Read: What R100k in SA’s biggest equity funds five years ago is worth today

You also have an equity fund that has performed really, really well over the past few years. It does not have R10 billion under management, so it was not included in this ranking. But if you invested R100 000 in this equity fund five years ago, what would the value be today?

ROB SPANJAARD: That number would be about R185 000; it’s quite low-risk stats. That’s what we try to aim for – we don’t want a lot of volatility, so we’re working hard on keeping volatility low. So if you plot it on a matrix with the other funds in the sectors, we want very low volatility stats and risk stats, but we’ve still got the performance. So that fund’s about R1.5 billion. It’s a decent-sized fund….. But yeah, R100 000 will have become R185 000.

RYK VAN NIEKERK: Yeah. That would put you in fifth position. But what is interesting is that of all the other funds the first three are internationally-focused funds, actually index trackers, exchange-traded funds. Your fund is virtually looking exclusively at the local market.

ROB SPANJAARD: Yeah, it is. It’s an SA-only equity fund. So it’s great for a building block, where guys are saying, look, we want to get our offshore exposure some other way, but we want a component in South Africa. So it’s SA-only equity. We’ve got a much smaller set of shares to choose from than when you can choose from the whole world.

RYK VAN NIEKERK: I’m looking at the top 10 shareholdings in the fund. Right at the top with around 8% of the total value of the fund is AB InBev. Then number two is Discovery, number three is Mondi and then Bidcorp. They are not usually the companies you would see. Currently I think a lot of funds or equity funds look at the commodity sector and the financial sector. But just take us through the thinking of the top holdings – AB InBev, Discovery, Mondi and Bidcorp.

ROB SPANJAARD: AB InBev is interesting. We put them in recently at that holding; we think they’ve been pushed down quite a bit, so they’d got quite cheap. It’s a great business that obviously was totally overpriced at one stage, but it’s come back to a nice great value where we’ve been buying it. As you get into opening up from Covid and people start going out again, they’re well positioned for that. That’s what we like about them.

Obviously, we’re reading today there’s a new variant of Delta. If we all go back into lockdown, then you need to change your opinion and sell it. But that’s a current view. I was in London last week. It seems like everything is actually getting a bit back to normal in a lot of the world. Vaccines seem to be working. Discovery we think is a super-interesting one; that business we’ve liked for a long time – the value of their Vitality business. No, if you talk to financial advisors, some people hate Discovery, some people love Discovery. It’s certainly a well-run business.

But their Vitality businesses … we think it’s a no-brainer that eventually over time they’ll spin it off.

Because internationally there is a company called Lemonade, which we’ve tracked for a while, which doesn’t do a fifth of what Vitality does, and it’s got a mega market cap. So we think that you’re getting it free; the international side of the business is potentially valuable and you’re not overpaying for the local business. It’s a good business. Mondi is a nice business. It’s super well run. The whole goods thing, online selling, the cardboard is a lot of the product they’re making. It just positions them really nicely in that environment. We try to look for good businesses, not overpriced. We’re not benchmark-trackers. So you’re trying to look out of the box…. We have a mindset of trying to find businesses, [in our] tailwinds, and Mondi has got that. It can get overpriced, but we think it’s a really decent business.

RYK VAN NIEKERK: And lastly, a Bidcorp.

ROB SPANJAARD: Bidcorp in the end is also an opening-up business. It is strong. A lot of the weaker competitors we think either will have exited or be available to purchase. So, as the world starts to open up, and get back into eating out, Bidcorp is very nicely positioned for that. They’ve got a great tradition through the old Brian Joffe Bidvest, from which obviously Bidcorp spun out … –they integrate businesses so well. Some people buy something and then they just wreck it. But Bidvest, Bidcorp mindset do that so well: so you can go and buy these family-ran businesses – there are so many of them in their sector – and so we think it’s a great opportunity for them.

RYK VAN NIEKERK: I see Bidcorp is up around 18% year to date. AB InBev is down around 11% and there’s also pressure on Discovery – year to date down 10.5%. Mondi has done well, it’s in the green around 10%. But there’s a clear absence of these big internationally focused companies – maybe bar AB InBev – Naspers, Richmond and the like. They are not on the list, which is a bit of a contrarian approach, is it not?

ROB SPANJAARD: Just pointing out, one of the things that’s important in this environment, where shares are moving around, Discovery is a great one, as you rightly said, where [it’s really not] done much over the last year. My numbers have got it up slightly, call it a couple of percent. But we didn’t like it – we used to previously own it, and then we said, look, wow, third-wave Covid, what’s it going to do to their life insurance business? You just need to not be there for a while. So we actually weren’t in the share. But when it kind of got down to the R120, it became very attractive. Now it’s closer to R140. So there is a feature of our market where sometimes you need to take your profits and not to sit with things forever.

Naspers is an interesting share. We have held very small amounts over the years. It’s two reasons: one is an ESG (environmental, social governance) problem. Environmentally they are superb; governance is a bit of a problem. They report to the Chinese government. You’ve got to be disturbed by the governance thing, where you might start getting run by utilities. That’s disturbed us for a while. Naspers doesn’t report to the Chinese government. Its biggest holding, which is obviously Tencent, [is in] China, but the way Naspers owns Tencent is through the BIE structure, with which I won’t bore your listeners. It’s a very scary way to own something. You don’t really own anything, as you could probably do a whole session on BIE structures and have some debates on it. But we want to really own a part of the company. Whenever we buy a company, we want to own a piece of that and we don’t think Naspers properly owns their piece of Tencent. It has some notional interest in IP which we don’t like, especially in an environment where the Chinese government has got really, really aggressive. That’s why we wouldn’t want to own Naspers.

We are happy to own some of the big [ones], the Anglos, the Bilitons. We like those things. …we’ve had a lot of commodity shares at times. We think China’s slowing down their property sector, which they have to do; it’s become a bit of a Ponzi scheme. It becomes very tricky for iron ore and some of those, which has been important particularly in Billiton, which is a really big share in South Africa, less so in Anglos. But it is a headwind, even for Anglos, and if there’s a bit of a slowdown in China, probably you don’t want to be completely [in it]. We’ve got some commodities, but you want to trim those back.

RYK VAN NIEKERK: One of your other interesting funds is your Value Trend Fund. What you achieved really well was that, prior to the crash of the world markets in March last year, you moved a lot of your equity exposure over to bonds and cash, and you actually protected value during that crash. But you didn’t get back in to benefit from the bounce we saw afterwards. Just take us through the thinking there.

ROB SPANJAARD: We prepare to be active asset allocators, which is very rare in South Africa. In fact, I don’t know anyone else who’s prepared to do it. You see trouble coming, you leave the party. So most of our competitors would stay in, no matter what the outlook. We are happy. We did it before the global financial crisis. We took all our clients out of the market. We did it before Coronavirus, we took everyone out, and then we to some degree got back in – and with the risk control we did well. It did really, really well till October. Then our concern was there were other variants rolling out and with the stimulus that had been done, it had become sort of crazy in America – the amount of stimulus going into the American presidential election. We said there’s going to be inflation, so we’re very worried about inflation rearing its head.

Now, why inflation is important is it means the central bank in this case, particularly in the US, is very dominant in world markets. It has to slow inflation down. You can have a hang of a party until there’s inflation, and then someone’s going to wind the party up. So we got very concerned [at the] beginning of the year; we predicted inflation superbly. Yet the [US] Fed has decided to be blind about inflation and, even by their own admission [have] just been wrong. Now inflation is a problem. You’ve got headline inflation over 6.2%. Now, if you add another 0.2% on it – listeners have to really understand that’s the worst headline inflation; there was a little blip in 1990, otherwise it pulls you back to 1982. You’ve got this inflation that no one really believed possible. Everyone believed it was impossible.

Your core infection, which is stripping out energy, is also back – never been this high since 1990. [Last week] they announced the initial jobless claims, which were surprising because it was the lowest initial jobless claims since 1969. So it’s a bizarre thing in an environment where the Fed is still printing money and interest rates are zero. So we’ve been right on inflation. It’s a bit of a pain[ful] trade-off. Our funds have really struggled this year, [we’ve] a good record of getting our clients out of trouble and we feel the party has just become really dangerous. That’s our view. Time is going to tell.

Certainly inflation – as predicted in all the research we’ve done at the beginning of the year – is accelerating very fast, in the US particularly and in Europe. It’s only a matter of time before they have to do something about it.

RYK VAN NIEKERK: What are you doing to mitigate this?

ROB SPANJAARD: We are trying to hedge our equity. We’ve got inverse positions on US long bonds. So, if rates go up, the funds make money. You are trying to not have much duration. In fact, we’ve got negative duration and very, very low equity exposure. Now it’s a pain[ful] trade, because it always costs a little bit to hedge. But we think it’s right and it works out. I’ll give you the example of Dollar Tree, which is one of those American dollar companies. They sell everything for a dollar. There was a good FT article. They’ve raised most of their prices to $1.25. Now the problem on it, when the party ends, it ends hard because everyone believes the party carries on forever. So sit it out, take the pain. We’re happy to do it because the facts are agreeing with us. But it’s always going to be a bit of a pain[ful] trade. But I think it’s the later stage of a bubble, and the facts are backing up our thinking. So we’re happy to stay with that. And for our clients we are mostly their shock-absorber in their portfolio, and that really works well for our client base. So a struggling performance now, but it changes very quickly.

RYK VAN NIEKERK: The later stages of a bubble – can you maybe expand on that and what are you doing to really mitigate that risk?

ROB SPANJAARD: Well, later stages of a bubble – and I think the last one was 2000 – the market has started ignoring valuation. Valuation doesn’t matter, only idiots would look at valuation; and you get the sort of mantra that we have now that’ equities only go up’. In fact, ‘borrow money and buy equities’. There is no alternative (‘Tina’) and the market encourages you to take more and more risk.

It’s hard to be different. We are prepared to do that.

Corona was wonderful because you could see it was developing very quickly. We could get out, then two weeks later, you were very, very right. This has taken months, taken most of this year, but just sit and try to be risk-off; don’t hold risky assets. In other words, don’t have bond duration, and be really careful of equity exposure at this juncture, which is very contrary to what a lot of people think – because equities have just been so good to you this last year that people are in love with them.

RYK VAN NIEKERK: Absolutely. And the local market, the JSE, has hit several all-time highs in recent weeks. Do you think the JSE is also overvalued to the same extent?

ROB SPANJAARD: Yes. We correlate very closely to the international markets. We’re not on a different planet. So the international markets falling, take us with it. We are being swept up by that same mindset, and we’ve got some of our own home-grown problems. Our local economy is not great. Fortunately we’ve got some good international shares that you could buy that are listed here. But you are being swept along. That big pop on Richemont’s share price over the last two or three weeks is up 30%, 40%. That’s an international share. Our miners, a lot of our market cap of the JSE is international. It goes with the international economy. So we get swept along either up, which we are loving now. In fact, we did an interesting piece a while ago on how closely our market correlates with the Russell, which is an American small-cap index, the Russell 2000. We correlate, you can see every dip: we move, they move. That’s world markets that you get these correlations across markets. So we never expect we’re going to be something different, which is why I’m saying the Equity Fund, that fund obviously always has to be fully invested. But we try to get the beaten-down volatility stats of the shares that we own that will fall less than the market falls.

RYK VAN NIEKERK: That’s an interesting scenario, but professional fund managers would say, ‘Don’t try and time the market’. Do you regard this as reacting to signals or trying to time the market?

ROB SPANJAARD: The timing means you try to jump in and out. But the point we make – and maybe we are dumb, because it’d be a lot easier just to keep everything in the market – who does it otherwise? That’s the question we ask. Is it that the dentist in Sandton who is supposed to work out when he should be in risk assets and how much risk to be taking? We think fund managers are paid to do it. It’s a fund – the financial advisor’s supposed to do it. So what happens is you get this environment where everyone just stays static in asset allocation.

We think fund managers are paid to do it and should man up and do it. Now not everyone would agree with us on that, but if not us, if we don’t do it, then who does do it?

That’s always an interesting debate. The market’s been in a bull market pretty much since the GFC [global financial crisis], almost, in South Africa. What’s it taught you? Have maximum risk and don’t even think about it, which won’t always be the correct answer.

RYK VAN NIEKERK: So what are you selling and what are you buying?

ROB SPANJAARD: In the Equity Fund we are trimming back a little bit on some of the retailers. They’ve done okay, we had decent returns, but we’ve been trimming holdings a little bit. The South African economy is probably struggling a little bit more than the market’s been realising. So we’ve cut back a little bit over there. Buying – we’ve actually put in a holding of physical gold into the equity fund, Gold ETF. It’s an interesting one because gold can get sucked along by all this money creation in the system. We held some gold last year and haven’t been there for a while. But it’s looking like investors are starting to buy physical gold again as an alternative.

RYK VAN NIEKERK: That’s interesting. Rob, thank you so much for your time today, and for sharing your insights.

ROB SPANJAARD: Thank you to you. And thanks to your listeners.

RYK VAN NIEKERK: That was Rob Spanjaard, the chief investment officer at Rezco Asset Management.

*This interview was recorded last week

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