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The offshore appeal

David Shapiro on market drivers, favoured stocks and hedge funds.

HANNA BARRY: Welcome to this week’s market commentator podcast, Moneyweb’s series of interviews with investment professionals. No stranger to the Moneyweb community, David Shapiro, deputy chairman of Sasfin Securities, joins us this week.
    David, thanks for your time today. Let’s kick off by starting with the fund that you manage for Sasfin. Tell us about the mandate of that fund.

DAVID SHAPIRO: Over the 10 years that I’ve been managing it we’ve changed our mandate quite a few times. Rather, we haven’t changed it – it has been changed. It originally started life as an infrastructure fund. When I say that, I started it in 2005, wanting to take advantage of what I saw as massive opportunities in infrastructural development.
    As the years went by and as we started to slow down on that, I began to change the mandate to a general fund. I never intended – I always wanted a specialist fund because most of my business is actually managing private wealth, private clients. But I did see an opportunity and that seemed to be the only convenient vehicle that I could find. It’s not a big fund. It has been a very small fund, but having changed the direction we’ve done pretty well. I got the Raging Bull [award] a couple of years ago, even as a value fund and also the best general equity fund. So in 2012 I got that for my three-year performance and then for 2014 got it for five-year performance on a risk-adjusted basis. But even in pure returns, the returns are very strong – over 22%.
    I’ve had a few months here where I haven’t been quite sure where markets are going, and now I am beginning to change the composition of the portfolio. I’m a little more certain of where we should be – and am beginning to make just a few changes now and alter the stocks that I own – and also where we are headed.
    Look, it’s a very open mandate. It’s an equity fund. It allows you to do what you like, but it’s small. But Hanna, one thing – even though my fund is small, I run it as though it is a big fund, mainly because it also represents where I put clients’ money. So it’s scalable. I don’t run it as though because it’s small therefore go for small companies. All the companies we own are large caps, and therefore I could easily double, treble, quadruple the size without any kind of problems at all.

HANNA BARRY: Let’s talk about those large caps – and this is of course Sasfin MET Equity Fund that we are discussing. What stocks are you favouring at the moment, David?

DAVID SHAPIRO: Look, I’ve always been high conviction, so I like to say, listen, these are the top 20 shares that I like and I’m going to split them equally. Sometimes it upsets people because they want proper processes, but I like to look at a number of businesses and say, OK, if I like them I buy them. I don’t like to buy them in different proportions. So from that point of view I’ve got – understand what we do – we’ve probably got 18 to 20 stocks in it at the moment and each one would be round about 4 or 5%. So they are all the top companies – Aspen, Billion, British American Tobacco, Bidvest, Richemont. I’ve got a few trackers in because I could take it offshore, but it’s too much in a small fund like mine to go offshore. It’s just too much stress and too much hard work, so I bought trackers, I bought the EU FTSE and USA trackers. And then I’ve got some big [ones] – Discovery, Famous Brands, FirstRand and so on.
    What I am doing at the moment, I’m quite concerned about the South African market – not about our offshore exposure, but local exposure. I think a lot of the companies are bringing out good results under the circumstances, but not good enough to justify where they should be.
    And then for where there is better value overseas, I start to worry about whether we can hold our course here. A lot of businesses like Life, for example, came back. Yes, there is justification why the results weren’t that good. MTN, Vodacom, companies like that are beginning to worry me in terms of valuation and worrying me as to where they are going to be. I like Vodacom and MTN for dividend purposes. They are giving a nice return and they justify holding them simply for that purpose. But I can’t see the same kind of attraction as when I first bought them.

HANNA BARRY: David, would you say that your concern is more with stocks that are exposed to South Africa’s economy – that it ends with the kind of rhetoric or discussion we are hearing about the market being expensive, and worrying that we are in for a correction because certain stocks are shooting the lights out? Is your concern more around the economy?

DAVID SHAPIRO: We are not going to get a correction. What I mean by that is it’s not going to be a big sell-off that goes nowhere. It just plods sideways. Where do you think Billiton is going to go? I ask you, where is Billiton? Why are we buying Billiton, why are we buying Sasol, why are we buying Anglos or any of them?

HANNA BARRY: I would love to know. Why are you buying Billiton?

DAVID SHAPIRO: I’m not. The point I’m making is everybody buys it because they are trying to second-guess where the commodity cycle is. Where are commodity prices? Why would you buy Sasol at these levels? It’s a great company. I have absolutely no issues with management, but when the oil price was at $100, $110, $120/barrel, they had very good expansion projects. They were expanding. They had a huge capital expenditure programme. Suddenly oil is at $60 and everything has changed. Now they say, Oh, we can’t do that, we can’t do this, we’ve got to cut back here. So the whole approach has changed. It’s not a bad company but they can’t do what they could do when oil was at $110.
    I think the same thing applies to Anglos and to Billiton. When the iron ore price was double the price, the way they approached this was completely different. And more and more supply is coming on and it’s unlikely that we are going to see prices up. So you look around and say, why are we holding Billiton?
    Hanna, one of the big difficulties here is that we live in a culture that was weaned, that was brought up on mining, and that’s why we still have gold bulls here, and we still have platinum bulls. People continue to hold on to these stocks because there is just so much entrenched in your DNA that if you sell them you raise all kinds of hell – “Why are you selling my Sasol, why are you selling my Billiton? Why Anglos?” Well, you know, Anglos is not the same kind of Anglos you knew when the Oppenheimers were running it, when they ran the economy. Today it’s – I don’t know – No 10, 12, on the pecking order here. It’s way down there. It doesn’t even make the top 10. It’s smaller than FirstRand; it’s the same size as Steinhoff – can you believe it? Anglo American equals Steinhoff. So that’s what you have to get through when you try and change portfolios like this. But I am questioning them.

HANNA BARRY: More broadly, David, what is driving the JSE and what going to see it either continue its upward thrust or, as you say, sort of plod sideways?

DAVID SHAPIRO: I sit in meetings all the time and I think it was Bill Gross who coined the phrase: “It’s the cleanest dirty shirt”. So what we do is we sit and try and figure out what’s OK. In fact, I’ve been in discussions where there’s been a suggestion by some of these miners – because the downside has been pitched – that they can’t go down further. I say, is that why we are buying them, because they are giving us rich protection on the downside? I don’t like companies like that. I like to buy companies where management is trying to grow the top line. They are trying all the time to find new ways of growing the top line. That’s why I’m a little nervous of banks in an economy that’s growing 2% – eventually it has to hurt somewhere. People first of all are not going to borrow. Secondly, if they do borrow, they are probably borrowing to eat, not to expand businesses and somewhere they are going to find problems with that. So then they try to cut costs or they start increasing fees here and there in order to grow the top line, but there is no dynamism behind it.

HANNA BARRY: And your FirstRand holding?

DAVID SHAPIRO: I’ve done very, very well, and I think the bank is doing incredibly well. But it’s grabbing market share from everybody else. This is not a criticism. You don’t want management to get all upset. I’m saying what it’s doing – we are not operating an economy that’s running away – that’s doing things. Companies like Aspen – Stephen Saad all the time is looking for new deals. You know what I mean? Even a Bidvest, a Richemont, Discovery, Famous Brands, which companies I have – [and] Naspers. They are always looking and they are also operating areas that are growing and doing well. China is growing at, what, 6, 7%, India is going to grow at 8%. All those countries underneath there in Asia are growing, so you’ve got an expanding market. Europe is trying to grow, America is trying to grow. So there are markets that are strong and you want to go into companies that are to operate or benefit from that.
    When I look at Africa, call it the southern hemisphere for want of a better word, Australia is battling along because of falling commodity prices. The whole of Africa is battling. We know that Nigeria is having issues with oil. We know that Angola is having big issues because the oil price has fallen. They can’t get money out. And Africa sells raw materials.

HANNA BARRY: Does that mean that exposure to companies that have offshore investments is the way for investors to go – South African investors?

DAVID SHAPIRO: That’s my thinking. What I’m saying to you is no secret, I say it all the time. When people ask me “What’s your asset allocation?” I say 100% offshore. The reason is because there are far better companies. If you look at a company like L’Oréal, for example, 3.5% of their revenue goes back into R&D – research and development. They are looking for new products, new products for the Chinese market, new products for the South American market. It’s Garnier, it’s L’Oréal, it’s Lancôme, and they are going into markets, expanding. We don’t have companies like that. Alliance, Daimler, Roche, Novartis – pharmaceutical companies. Yes, we’ve got Aspen. Then we’ve got Nestlé constantly upgrading its brand, always looking for new ways to make money. And so on. Even Airbus I like – why? Because if you want to buy a new Airbus you’ve got to wait five years, six years. So you can’t afford not to put your order in. Even though the oil price is down, they are coming out with aircraft. First the Chinese – luxury goods are 30, 40, 50% cheaper in Europe than they are in China, so what happens? The Chinese travel. They get their bags and go and buy all the luxury goods. And also they are becoming wealthy – they are going to see the world. So air travel is exploding and there are only two aircraft that you can travel on – a Boeing or an Airbus. There is a huge waiting list. And eventually for these companies the benefits will come through. Airbus is like 30, 40% up this year already. Sure, they have issues like their military aircraft had problems and it affects the share price. But Hanna, you get the point. These are businesses which are growing 15, 20% per annum. We are not getting that here. We sell metals and we kind of service. We’ve lost that dynamism. We used to have it; we haven’t got it any more.

HANNA BARRY: Let’s talk about what’s going to then drive the JSE going forward. David, you joined the stock market in 1972 – that’s more than 30 years ago.

DAVID SHAPIRO: Your parents weren’t even married then!

HANNA BARRY: Exactly. You are right – they weren’t. What do you predict might drive the JSE – change in development over the next 40 years?

DAVID SHAPIRO: The reason that we are doing what we are doing is because of big companies like our offshore businesses. I think even 20 years ago the top 10 companies were all mining companies, and they only accounted for maybe 25% of the JSE. Today your top 10 companies are all offshore businesses that are operating offshore – and that’s why we are where we are. They make up well over 50, 605 of the JSE.
    So if you get a Steinhoff or a British American Tobacco, Breweries, Naspers, Richemont, even MTN is 50% Nigeria, when you get companies like that on the market – Aspen, who else is going, Bidvest, Mondi, Mediclinic. Mediclinic is 65% outside of our country – those are all the top businesses within the top 20. 30 shares. And because of that the JSE plugs forward. If we take away those businesses – in other words, the JSE that we know, Nicky Newton-King’s JSE, without these offshore businesses we wouldn’t exist.

HANNA BARRY: Let’s move on to retail hedge funds.

DAVID SHAPIRO: What’s a retail hedge fund?

HANNA BARRY: [Laughs] Well, as on April 1 hedge funds are now regulated under the Collective Investment Scheme Control Act. So in a similar way to unit trusts they can be offered to retail investors, as long as they meet certain criteria. When might a retail investor want to include a hedge fund in his portfolio?

DAVID SHAPIRO: Do your homework. You see, the hardest thing is to do your homework because hedge funds depend on their mandates, the mandates of the hedge funds. I’ve got nothing against hedge funds. I think, No 1, they tend to be trading funds and one can see – honestly, it’s not difficult to trade and to be a hedge fund. The beauty about hedge funds is that they are not long-only – in other words, they can go short as well, and therefore protect your downside. Hedge funds today as we know them are far different from the hedge funds that were started originally by an Australian whose name just leave me for the meantime, and his whole reason was to take what he called the beta out of the market – in other words, only get alpha. In other words, he used to protect himself by going short of a few stocks and long. In this way you took the volatility out of the market. We’ve changed to a point now where hedge funds suggest that your returns are going to be a lot better than you can get on the market. So it depends on what they do. But general hedge funds were exactly that – they were there to ensure that you were hedged.

HANNA BARRY: Yes, absolutely.

DAVID SHAPIRO: Hedged against market volatility.

HANNA BARRY: I think Alfred Winslow Jones came up with hedge funds.

DAVID SHAPIRO: Alfred Winslow Jones was an Australian, ja. And if you look at that, his concept of what a hedge fund was and where they are today is completely different. So if you want a trading fund, that’s a different story. So understand what you are buying.

HANNA BARRY: Do your homework.

DAVID SHAPIRO: Absolutely. Do your homework, understand. Also there was a two-and-twenty rule which still a lot of fund managers apply. The two-and-twenty rule was you pay 2% up front, and they take 20% of the profits. So I think you also have to be careful of what your net returns are. What they can do is publish the gross returns, but what you get is completely different. So before you go blindly into what a hedge fund is, try and understand – understand the track record of the people who are running it. It’s very, very important. There are shrewd people here. There are some very, very shrewd people around here.

HANNA BARRY: To put your money with, you mean?

DAVID SHAPIRO: Ja. Also I don’t like keeping my money in for a long time with people. I don’t want to say “I want out” and then six months later they pay me back. The one thing that I value very highly is liquidity. So if I want out of the market today, I am gone. Consider that as well. Don’t tie yourself up.

HANNA BARRY: Returns – some suggest we are unlikely to see the same returns over the next few decades that we have seen in the last. What advice would you give, David, to someone like me who is just beginning to invest on the exchange or in unit trusts and beginning to build their wealth base in these volatile times?

DAVID SHAPIRO: You don’t need to be clever, honestly. We try and confuse you and we try and be clever, but you don’t have to be. You know what a good company is. Why? Because you’ve been on the radio, you are doing it every day. You are reading. So you are easily able to distinguish what makes up a good company and what doesn’t – you know, if you look at SA Breweries, what they’ve delivered consistently over the last decade-plus. Even a Richemont, which is a luxury-goods company, their track record is superb. So all you have to do as a young person is buy yourself a good quality companies. Of course, you have to keep monitoring because MTN a few years ago is not MTN today, or Anglos of yesteryear is not what it is today. But when they start changing, then you switch to something else. So Sasol – if the oil price falls, Sasol at $100/barrel is not the same as Sasol at $60/barrel, even though management is very good. So somewhere along the line you have to keep up.

HANNA BARRY: Find the good and the growing companies.

DAVID SHAPIRO: Just find quality companies. Don’t ever follow the rule of putting it in the bottom drawer – that doesn’t work. Every day you’ve got ask “Is the reason I bought the company still valid? Is it still a good company?

HANNA BARRY: There we go. That’s David Shapiro, deputy chairman of Sasfin Securities.

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” We’ve lost that dynamism. We used to have it; we haven’t got it any more.” Well what do you expect with AA/BBEEE a process that just wants to steal from the dynamic, intelligent and hardworking. AA/BBEE is an absolute disaster for SA under any objective measurement.

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