In an almost contradictory environment, with the credit downgrade, higher interest rates and cheap stocks – that could potentially bring you returns – how should investors react? Focus on news flow or fundamental drivers? Cartesian Capital’s Anthea Gardner answers this and more in the latest Market Commentator webinar. Below is an excerpt of the 28-minute interview. To download the audio in full, click here.
WARREN THOMPSON: Welcome to the Market Commentator webinar with Moneyweb. Today I have the great privilege of having Anthea Gardner, the founder of Cartesian Capital, with me. Good to have you with us, Anthea.
ANTHEA GARDNER: Thanks, Warren, good to be here.
WARREN THOMPSON: We’re going to talk a lot about the markets, news flow, where you see value in the market, a little bit about your investment philosophy but it’s going to be quite broad ranging so let’s see where it goes.
Let’s just kick it off with the global environment that we find ourselves in, we’ve got a mad hatter US president, we’ve got a lot of things happening politically in South Africa and I wanted to just try and unpack the role of an investment manager in this environment between separating out news flow and longer-term trends that affect the valuation of companies and other financial instruments. Just from your perspective, I know we spoke a little bit before the webinar about this, but the importance of understanding the short-term news flow versus longer-term drivers in markets – give us your perspective on how you pick and separate those two issues?
ANTHEA GARDNER: Sure, Warren, I think if you’re talking from a trader’s perspective then it’s an absolute must that you’d have to pay attention to the news if you’re a trader but we’re speaking as asset managers now and then it becomes a little bit different. So when we look to buy a share we will base our decision on the fundamentals of the company, is it a good company, does it have good balance sheet, does it have strong management, good cash flow, is it in the right sector for where the environment is at the moment. What happens with news flow is that the market tends to react very quickly and the question is does the news flow affect the fundamentals of the company and that’s always where I make a decision. There are so many examples of it, so I try not to let news flow or knee-jerk reactions impact my investment decisions.
There are so many examples and one of the ones I can think of is PPC, it was such a good example because in 2014 or 2015, when Ketso Gordhan resigned, just before then I had bought some shares based on the fundamentals of the company. Sure, they were in a sector in construction in South Africa where we were looking at lower GDP growth and potentially not so great for the company but they were expanding into Africa, they were building their plant in Ethiopia, in DRC, margins were almost double what they were in South Africa and so it looked like a great story. Then Ketso Gordhan resigned and suddenly I had to make a decision about whether it was a fundamental change in the company or just an employee leaving. Actually at the time – I remember this day so clearly – it’s a very difficult decision to make and there was something about the way he left and how he left that made me sell out my shares and thank goodness because the company has actually never recovered.
Now, if I had stuck to my very firm decision that only fundamentals and those drivers are why I should be owning a share then I probably would have held onto the share for a bit longer or potentially all the way down even.
But I think part of my decision to get out of the share at the time was that I honestly believe that management plays a very strong role in guiding us into what’s going to happen in the business.
So if you’re meeting with a company CEO and he says to you, well, these are our plans for growth in the future, these are our timelines and particularly with PPC as an example, they had set fairly good timelines for when they thought their African plants were going to come online and how much they could produce and where they were going to sell their product, you trust the CEO to do that.
When the CEO suddenly resigns you have to make a decision about those things that he’s telling you. So can the company actually deliver on the drivers or the targets that they’ve given you and so it’s really not an obvious one. I try not to react to news flow but you almost have to listen to it. Invariably the times I do react to news flow are really governance issues and for this I’m thinking of Pinnacle, pretty much around the same time or just months apart actually, one of the directors was accused, I don’t think he was even indicted at the time but he was just accused of taking a bribe. The share price plummeted on the news and then you have to make a decision about whether it’s a company-wide issue or is it just one person in the company. Half the time these shares are driven by sentiment in the market unfortunately. If it was all fundamentals it would be a lot easier.
To download the full interview, click here.