RYK VAN NIEKERK: Welcome to this Market Commentator podcast: it’s my weekly podcast where I speak to leading investment professionals. My name is Ryk van Niekerk and my guest today is Murray Winckler. He is from Laurium Capital, and he’s talking to us from a game lodge near beautiful Thabazimbi. Murray, thank you so much for joining me.
Let’s just start with a broad overview of the market. We’ve seen a lot of volatility lately. Let’s start with the local market and then maybe your broad impressions of the international environment?
MURRY WINCKLER: Thanks, Ryk and good afternoon everyone. In the local market, as you mention, there’s been huge volatility this year, following the collapse into March and the bottoming around March 23. Markets have rebounded very strongly. And, if we look at our JSE All-Share index year to date, we are probably a couple of percent down for the year. The Capped Swix, which a lot of the pension funds track, is done some 8% or so.
…The rebound and the performance here today have been driven by the resources, and it’s been driven by tech, really Naspers and Prosus. So gold and platinums are strongly up this year, and Naspers is well up.
If we look at domestic SA, which is the banks, insurers, property companies, those are all probably now – after the bounce we’ve seen in the last couple of days – down sort of 30%, 40% year to date. So it’s been very much owning everything other than SA Inc. That’s what happened in our markets year to date.
Obviously that’s been driven on the macro side, which is pretty bad. We saw the GDP number, the quarter-on-quarter number, which is down (51%). But realistically, if we factor in for the full year, we think GDP growth in SA is probably going to be down some 8% to 10% this year. So it’s very bad, and we are probably going to have quite a small bounce-bask next year. So that’s why domestic SA has really struggled to perform this year, where the resources have been doing very well, and global markets are obviously a lot better than South Africa.
Naspers and Prosus
RYK VAN NIEKERK: Murray, let’s look at the holdings within some of your funds. I’m looking at the Laurium Equity Fund fact sheet, and it’s quite evident that you are very bullish on Naspers and Prosus. The combined holding as a percentage of the fund size is close to 21%. Both these shares have performed exceptionally well. Do you remain bullish on these stocks?
MURRY WINCKLER: It’s probably a good thing for our market that Naspers and Prosus are so big. I think in the JSE All-Share index alone, it’s probably 22% or so. In the Capped Swix it’s more like 15%. So we’ve got quite a decent position, sort of bigger than the Capped Swix, which is our benchmark. And I guess the underlying is Tencent itself, which in the long run is trading on about a 28X forward multiple. If you look at the composition and the growth, I think over the next five to 10 years China’s growth rate is going to be very good – and, where they are, we should do extremely well.
What you do on the South African exchange (is) you get a cheap entry into Tencent, and obviously Naspers in particular. Naspers is trading to the underlying some-of-the-parts at about a 50% discount. So there’s a big margin of safety there. And we think that if you look out over the next six months or so, the company is likely to unbundle part of its stake in Prosus, which should narrow that discount and unlock that discount. Prosus itself is trading at about a 30% discount to Tencent. And we think that that will probably also narrow.
As quite a few people might be aware, Prosus is going into the Euro Stock Index on September 18…. There’s a lot of tracker funds that will be coming in there for quite a few billion euros, and probably about 12 days’ trade is needed. In addition to that, as it now goes into the Euro Stoxx 50, we think some active managers will suddenly notice we’ve got this coming in the index, and it’s going to be about 1.5%. Either we can have zero, or do we go and actually take a bigger bet?
So we think there’s quite a decent underpin and that discount of 30% for Prosus will narrow going forward in the coming months. And, over and above that, we think that Naspers’ management (is) trying to sort out tax issues, and we are likely to see the unbundling of some of the Prosus. Naspers currently owns about 73% of Prosus. And it can unbundle, we think, to around 50%. So that unbundling will unlock a lot of that 50% discount. So underlying Tencent is probably fair value.
But, if you’re going into Naspers and Prosus, there’s a lot of capital that over the next six months we think will provide superior performance. So yes, we’re pretty bullish on it.
SA’s banking sector
RYK VAN NIEKERK: The other significant holdings are in Anglo American, MTN, BHP – also big international groups – but also Standard Bank and Absa. Over the past few years the banking sector has been a bit of a dog on the JSE, and has underperformed the rest of the market. But there seems to be renewed interest. We’ve seen a bounce of late. What are your views on the banking sector?
MURRY WINCKLER: If we look at SA Inc as a whole, the area that we found the most attractive is actually the banks. We think it even way more attractive than the retailers. I think that you have seen that we’re down anywhere from 40% to 50% sort of a month ago. And, if you look going forward, we think that if you value these things, we’ve seen earnings results come out in all the major banks. FirstRand in fact (on September 10). Everyone has reported – Absa, Nedbank, Standard Bank – and they’ve taken huge provisions for future bad debts, so the credit-loss ratios have gone up to almost 3% with the credit charges.
Looking forward, these stocks are now trading at a very big discount to their tangible NAV (net asset value), like Nedbank and Absa, in particular, which are the cheapest in our view and have the most upside.
These were trading down at basically 50% and 40% discounts to your tangible NAV.
Obviously the banks’ reputation economy, and the SA economy, don’t look great, but we think that these stocks have been really hammered very hard. And, if you look out over the next 12 months, we would think something like an Absa – which is now after its recent runs, probably at about 0.6 or 0.65 of price to book – we think that it will rally. Sort of 12 months out we could quite easily see it at a 0.9 price to book, or maybe even 1X. So that means there’s probably 50% upside in the stock, even if it doesn’t pay a dividend. And probably mid next year we could see a resumption of dividends. So it is the one sector that we think intrinsically is very under-valued, and sentiment has really knocked them.
So, as you rightly say, we’ve seen a very strong rebound in the last week-and-a-half (to September 11). If we look at Absa, it’s probably close to 20% up for the month. Standard Bank and FirstRand are probably more between 10 and 15%, but there has been a pretty decent bounce. I think a lot of people are underweight SA Ink. And – as we’ve seen in the last week – with the slightest bit of interest stocks start rallying. The liquidity is very thin down at these levels, so you can see very big rapid moves.
So we are betting on banks. It’s the one place in South Africa that will probably perform the best of the larger-cap stocks, anyway, over the next 12 months.
Poor hedge fund performance
RYK VAN NIEKERK: Laurium is also one of the leading hedge-fund managers in the country. Now, we’ve seen a lot of volatility over the past year, and that should be a prime environment for hedge funds. But I see your Equity Fund actually outperformed some of your hedge funds; specifically I’m looking at the Laurium Long Short Fund. What happened?
MURRY WINCKLER: I must say, in the last 12 months our hedge funds have not done that well. Generally in our hedge we run R2.5 billion in total, the hedge assets, so it’s about 10% of our total assets of R25 billion. Our hedge funds typically don’t do international, while some of our funds do do international stocks. We take quite a lot of mid-cap stocks … and some smaller-cap stocks on our long book, and have actually been quite hurt with Covid and the collapse in SA Inc, the numbers. No one’s very interested, really, in the mid-caps and particularly the smaller caps. So you’ve seen some of those stocks perform extremely poorly and, through Covid, domestic stocks have really got a smack.
We don’t hold any gold stocks in our hedge funds. We find the volatility in forecasting quite difficult, so we have zero of that. And platinum, in fact, as well. We don’t own any in platinum (in our hedge funds) … we hold [it] in our Equity Fund.
So those are the two big things.
We obviously own Naspers which has been very, very good. We do own the diversifieds BHP Billiton and Anglo in our hedge fund. But really the performance on the long book I guess has been gold and platinum, which have really driven the market. And we do own some Naspers. But our net position in Naspers is about 8% in our hedge funds.
So some of the biggest stocks that have really performed on the long side … our performance has been pretty pedestrian. And then, I guess, the mid-caps in particular. So year to date I think our main hedge fund, the major standard long short hedge fund, is probably very similar to the return on our equity fund, which is disappointing for us (versus) where we would have expected it to be. And our Aggressive Fund has done worse than that. So our Aggressive Fund, I guess, had even more on the mid-cap, smaller cap stocks, and a few of them have really struggled. So the hedge has pretty tough whereas, I guess, most of our funds, and our Multi Strat Fund and Flexible Fund which have offshore, have obviously had quite a big tailwind with the currency weakening. Both funds are up close to R5 billion year to date (with) some of the offshore funds. But yes, the hedge’s performance has been a bit disappointing from our side.
Consumer goods and services
RYK VAN NIEKERK: I’m looking at the Laurium Long Short Fund, and I see you are quite short on the consumer goods and services segment. Of course you don’t reveal which companies you are short, but why are you a bit bearish on the consumer goods and services sector?
MURRY WINCKLER: If we look at the construction of our hedge funds, domestic SA, we’ve had quite a lot of banks. We are long on the banks and we have been short retailers. I guess, if I look at the broad scene, the individual stocks over the period, it’s pretty much stock-picking, but that would be a theme. We have had some of the retail stocks where we’ve been short, and some of them have performed quite well. In the last couple of weeks we’ve covered a bit of our shorts – one or two, fortunately. And then on the other consumer side, there is probably one that we have been short – Richemont – for a while now, definitely two months. So that’s probably coming up in that category as well. But domestic is, I guess, a couple of the retailers where we’ve been short, which haven’t done particularly well.
And this year, other than obviously in terms of the poor performance, the shorts have been good – other than in the last month when we’ve seen a decent bounce back in some of them.
So the consumer side is good. We think the economy is sort of down 10% this year; (but will) bounce back next year, probably with GDP around 3% – and we think the consumer is under quite a lot of pressure. Some of the valuations we’ve seen have got pretty attractive, something like The Foschini Group, which we were short at one stage. And when they announced … that they were acquiring part of the Edcon Group, we closed our shorts and actually went long the stock, until we were long that. But we’ve generally been short on the consumer side, the SA Inc.
Hedge fund approach
RYK VAN NIEKERK: Well, Murray, we are living in a crazy world. I think one day we’ll look back at what happened over the past six months or a year, and remember it for different reasons. But it’s the ideal environment for hedge funds. There’s a lot of volatility around. But how actively do you change positions in your hedge fund? Is it a fire-and-forget type of approach, or do you trade very actively?
MURRY WINCKLER: It would depend. I guess, if we look at our main Long Short Fund, if we just take in how much we are running at the moment in that fund – probably 50% net long … so, broadly speaking, if we had R100 million, we’d buy stocks and be long those, and then we would short R50 million of stocks. So our net exposure is R50 million. Then we hope that our longs, R100 million, beat our shorts. So that obviously is pretty important in the hedge fund.
And, if we look at that, then our total book, sort of our gross exposure, when you take your longs plus your shorts, takes you to R150 million. So we buy 1.5 times gross exposure from the hedge fund point of view. And in a year we would turn that over probably by 1.5 times in a year. So it’s quite active. If I look at our long-only funds, probably 35% of the fund would be turned over a year, where our hedge funds would probably be a good five times as much. So we are far more active in our hedge fund.
RYK VAN NIEKERK: Murray, thank you so much for your time today. That was Murray Winckler from Laurium Capital.