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Zwelakhe Mnguni – CIO, Benguela Global Fund Managers

‘Our market is not particularly cheap but it’s not extreme or expensive either. So we are probably around fair value’.

RYK VAN NIEKERK: Welcome to this market commentator podcast our series with leading chief investment officers, fund and portfolio managers. My name is Ryk van Niekerk. Our guest this week is Zwelakhe Mnguni, he’s the Chief Investment Officer of Benguela Global Fund Managers.

Zwelakhe welcome to the show. We’ve just seen the announcement of Mario Draghi in Europe that we will see a comprehensive quantitative easing (QE) program in Europe. How do you think that will affect our markets?

ZWELAKHE MNGUNI: Thanks Ryk. We think that it will probably push asset prices up, so stocks and bonds probably would probably run quite a bit and we think that long-term, the question is how does that QE land on the ground where the real issues are. So the issue of deflation, the issue of economic salvos of Europe…those are the issues that need to be addressed. We still need to see a transmission mechanism that gets that money right into the bottom level. And one of the things that we observed in the last little while was that the banks in Europe were quite reluctant to lend money to businesses and therefore even if guys had entrepreneurial zeal to actually start businesses, they couldn’t do that.

RYK VAN NIEKERK: But if you look at the US program, it ran for about four years – more than four years. When it started everybody thought this is not the best idea, and if you look back at it now it seems to have worked really well. The US economy is actually gaining momentum. One of the side effects is this inflated asset bubble some people also described it as. Do you think the European program is similar enough to cause the same type of effect?

Zwelakhe Mnguni: I wouldn’t think so – Europe is quite well diversified and there are a fair number of opportunities where that capital can be applied. In fact if you look at European stock markets, how they’ve performed relative to the US for example, they underperformed by quite a margin because people were discounting the risk and now that there is quantitative easing coming into the system, I think we might see European markets starting to pick up quite nicely as we’ve seen in the last few days. But I don’t think it’s a bad idea. It’s something that they need to do because it’s either deflation or this. So I think you don’t want to end up in the situation where Japan has been for the last 20 years.

RYK VAN NIEKERK: If we look at the local market, it’s a market which many of us know the best, what do you think the prospects are for 2015?

ZWELAKHE MNGUNI: Ja, I think our market is not particularly cheap but it’s not extreme or expensive either. So we are probably around fair value and we think that for the year 2015, we’d probably do between 5% and 10% in terms of price appreciation and that’s likely because the resources sector which is a meaningful component of our market needs to see price improvements coming through – commodity price improvements coming through for them to actually start showing decent improvement in share prices.

RYK VAN NIEKERK: That’s 5% to 10% real return?

ZWELAKHE MNGUNI: Yes.

RYK VAN NIEKERK: You know, pretty much on the long-term average?

ZWELAKHE MNGUNI: Yes

RYK VAN NIEKERK: You’ve referred to the commodity sector – there is so much turmoil currently. We have a change in the dynamics of the world energy markets and that may shake up the whole commodity sector in many ways. Can you just elaborate exactly what you foresee for our primary commodity markets – the platinum, gold, coal, and iron ore?

ZWELAKHE MNGUNI: Ja, firstly if you look at the energy market itself, certainly in the short-term we probably think that there’ll be a bit of pain, but long-term I cannot see how the world can sustain an oil price of around $50 or even $60, so I don’t think it is sustainable but it will take a while before their system works things out and we can get back to growth again in the price of energy. And then in other commodities, like iron ore – I think we know the situation there so we know that Western Australia has been pumping a lot of iron ore, Rio Tinto, BHP Billiton and to some extent Anglo American – they’ve all been pushing up their volumes and we think the iron ore market could remain under pressure for another year to 18 months as the market works out all the excesses and yes – in other commodities like platinum you actually need to see a bit more of a recovery in Europe for us to see a meaningful improvement in the price of platinum. In fact I was looking at a chart the other day where I saw that palladium has outperformed platinum by a wide margin and it does look like there is a shift in terms of industrial use from increasingly more palladium being used in industrial production, particularly catalytic converters.

So we think that in the short-term our commodities might remain under pressure, but the share prices have already discounted a fair amount of that and we think it would probably, in the next 12 months, we should start to get a direction of where these commodities are going.

RYK VAN NIEKERK: If you look at the overall market where do you think investors should go and try and find value?

ZWELAKHE MNGUNI: Ja, that’s quite a tough question, but I would think if you look around the financial sector, some banks have run quite a bit – FirstRand has run quite a bit. But banks like Standard Bank, like Barclays there is still a bit of opportunity there. But we also think that companies like Richemont that have been hit hard, in the short-term, I think the next 12 – 24 months, Richemont will probably struggle. But long-term it’s a very good business, very solid brands and it’s a business that is bound to rebound at some point in the future, so for the long-term I would consider something like that.

But definitely in the resources space I would probably consider something like Glencore which we like because half of their profits are derived from selling other people’s commodities, so they don’t have to dig a mine or anything and that is quite a big benefit from a capital point of view, because they’ve got very low capital relative to their profits.

RYK VAN NIEKERK: Sasol – you had some strong views on the energy prices which at the current levels are not sustainable. When do you think investors should start to look at Sasol?

ZWELAKHE MNGUNI: I think Sasol is reasonably priced now – it’s actually not too bad from a valuation point of view. Sasol has got one significant advantage in that it takes very basic commodities like gas and coal and converts them into crude or energy products – liquid energy products – so it’s a business that’s delivering those products at a very low cost relative to their peers who are using crude. So I would definitely say at current levels, Sasol would be quite an interesting prospect.

RYK VAN NIEKERK: I just want to quickly talk about Benguela – it’s a new fund manager which you started at the beginning of last year. How was your first year in business and how blue is the sky?

ZWELAKHE MNGUNI: It was tough, a lot of hard work, a lot of sleepless nights and it takes a while to set up a business. It takes a while to hire people but we are fully set up now. We’ve been interacting with clients for the past six to seven months because we got our licence in April, and we’ve been progressing quite nicely along the business deal open pipeline.

RYK VAN NIEKERK: Who are your clients, who are you looking to target?

ZWELAKHE MNGUNI: We are looking for pension funds, provident funds, we are also looking for people like insurers and further down the line, we’d look at retail clients, and we basically offer them equity management services, both in South Africa and global. So in global we’ve got a five months just registered in Mauritius and it’s a fund investor globally ex South Africa, and we think there is very good opportunity to implement our process across the global markets – there are lots of opportunities there.

RYK VAN NIEKERK: What is your investment strategy?

ZWELAKHE MNGUNI: We look at quality, so we believe that investing in businesses one has to get a good perspective of quality and that quality for us levels in the risk profile, so we believe that by buying high quality businesses one can generate decent returns for investors. In fact we’ve done a number of studies that have confirmed our alpha thesis.

RYK VAN NIEKERK: You currently have two funds – can you quickly give us a perspective of what they intend to achieve.

ZWELAKHE MNGUNI: We basically intend to achieve in South Africa, to deliver returns that are superior to the all share benchmark or the Shareholder Weighted (SWIX) Index and globally we benchmark ourselves against the msci All Country World Index. But the basic thing is to provide our clients with capital preservation and gradual and consistent growth in their capital.

RYK VAN NIEKERK: Zwelakhe what sets your investment philosophy apart from other niche players in the market?

ZWELAKHE MNGUNI: I think we believed that our philosophy is quite entrepreneurial in its approach. So we actually look at businesses from an approach of a business and entrepreneur so we tend to look at things that drive risk for a business – for example we look at business risk, we look at financial risk, we look at the operating environment of the business and we take those things and combine them into a quality score and then we can tell you on any given day we think this company is high quality or low quality. And based on that quality, we are able to actually allocate capital better by focusing matching the risk of the business to the potential return and try to make sure that we never pay more than what we need to pay for a business.

RYK VAN NIEKERK: Thank you Zwelakhe, good luck for 2015. It’s always very difficult, especially if you’re in your second year of fund manager.

ZWELAKHE MNGUNI: Thank you very much.

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