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[TOP INTERVIEW] Volatile markets can be offering opportunity

‘Volatility isn’t the real risk, but rather under-performance compared to inflation over the long term’: Mia Kruger from Kruger International.

SIMON BROWN: Chatting now with me is Mia Kruger. Let’s time-date this in case something happens. We are recording on December 14, and you’re listening on December 22.  Mia, good morning. I appreciate your early mornings. Having chatted to you many times over the course of 2020 in what has been a wild year, my sense was you were sipping your Nespresso, calm and collected. It was a crazy year, but you managed to navigate it without losing your head – for want of a cliché.

MIA KRUGER: Thank you, Simon. Yes, and I’m actually having Nespresso as we speak again. It’s my morning ritual to have a nice coffee. So we’ve tried, like you said, to be calm. We are very fortunate to have long-standing relationships with our clients, and we’ve coached them through the years about volatility, and that volatility isn’t the real risk, but rather your underperformance compared to inflation over the long term. 

So we didn’t have a lot of upset people phoning us, wondering about the pullback in the market. We also communicated quite frequently with our clients to give them information about the pullback, about the situation, what it means for South Africa, and then what it means for their portfolios. The big thing, I think, is that if you were staying in the market, and you were a longer-term investor with a focus on going through the cycles, then this wasn’t that big a deal for you because we’ve all seen how the market has rebounded. 

SIMON BROWN: That’s a great point. I’ve had, what, five or six crashes in my investing career. In every one we’ve recovered. I like your point. The risk is not volatility. It’s the risk is of underperforming. The other risk is our response to volatility, which is sort of exiting on those worst dark days of March. It really is, you know, staying the course and understanding that perhaps actually volatility is offering opportunity.

MIA KRUGER: Absolutely. That’s such a big lesson. But it all comes down to the emotion around it. People read the media information; it’s so freely available these days. So everyone has the latest information about everything bad happening – and you know how people are. They focus more on the bad news than on the good news. 

So there are so many lessons I’d be able to find that we’ve gone through during this time. We’ve also listened to a lot of presentations and talks on it by well-known authors on the subject. And it’s very, very important, I think, for every person in the financial industry to pay some attention to it and to be cognisant of their own biases, and then also to be aware of biases of the people in the markets around them.

SIMON BROWN: And to manage the emotional response. I take your point. We seem to jump to the negative news rather than the positive news. 

If we go back to those hard lockdowns, valuations were tough. In essence many local stocks, global stocks suddenly saw zero revenue. I suppose the challenge was to just say, well okay, this is not the long-term future. This is going to be short term. Then ask the questions as to when earnings return, which companies are going to be surviving, and sort of look through that noise and that bad news.

MIA KRUGER: Absolutely. And another big thing there was the fact that we didn’t know how short or long term that would be in the beginning. And life, as everyone knew it, and the market as everyone knew it, literally changed 180 degrees in a couple of months. So, you know, it was difficult in terms of foreseeing what the outcome would be, how long it would take the market to recover, whether it would be a V-shaped recovery, what the economic recovery would be and whether the market and the economy would act. 

Similarly, there were so many variables. I think the big thing is, whether everything ends tomorrow or whether everything returns to normal tomorrow, it will have the same impact on your portfolio. So, if you are really that afraid, then you might as well just stick it out because it won’t help you to move everything into cash in such an instance.

There are so many lessons that you just have to talk yourself through, even if you don’t know what the future holds, as none of us do. But, as you also mentioned, I think there was a big shift of attention to what really is important when it comes to valuations. There are so many valuation metrics that people look at and that people consider when making an investment. But some of the big things here were definitely a bigger focus on balance sheets. And, as we know, it was difficult for companies to firstly change their way of doing things. Those companies that managed to do that, that were already more vested and invested in technology and online presence were definitely the winners. We saw that with the whole tech boom that came through this year. 

The other point is that, if you had a strong balance sheet and you were a company that wasn’t focused in that sort of line of online or technology, you at least had the chance to preserve your business during this time – even when you didn’t have an inflow of income – because you had a strong balance sheet.

So those companies actually sort of stood out. And the ones that didn’t have strong balance sheets came into trouble.

SIMON BROWN: Yes. I love that. One of the key features of 2020 has been the balance sheet, which is often overlooked but is hugely important. And we all suddenly went back, looking at assets and liabilities and all of those sort of ratios. 

You mentioned lessons. I’ve been in the market for decades, but we’re still learning. I learnt a bunch this year. That oil can go negative still boggles my brain. Did you come away with perhaps some lessons that make you smarter after 2020?

MIA KRUGER: Yes. I think that the oil one was definitely one for all of us., No one knew that that was even possible, but it just shows you the market can go in very strange directions. We saw rates a couple of years ago go negative. So yes. I think, firstly,  we learnt that anything can change at any time and that the future is more uncertain than anyone knows. But the fact is, it won’t benefit you to be afraid of it and to actually move your assets and move your long-term planning financial goals back to cash just because of uncertainty. So that’s a big thing I think that a lot of people learnt when they saw this rebound and didn’t participate in it. 

And then another thing. Many people had a lot of time on their hands. I was very fortunate and I realised that I really love my job because I was fortunate enough to work throughout, But I did also spend some time and learn some Portuguese. So there were other areas of things that I also learnt.  But in the market, the big thing for me was where your focus lies. 

Portfolio construction for me over the last couple of years has just come to the forefront in terms of how you diversify and how you structure your portfolio, which I think at the end of the day becomes the biggest, biggest reason for under- or overperformance over the long term.

SIMON BROWN: I learnt a lot this year, but Portuguese was not one of them. Truthfully, I struggle with English, so I stick to one language. 

We spoke a couple of times over the year around green, renewable investments into infrastructure globally – their offerings. Locally Kruger International brought one to market. This is going to be a huge growth area, particularly those looking for the green –  the “e” and the ESG [Environmental, Social, and Corporate Governance], but also dependable earnings and dividend flow. 

I get a sense we’ve got an IPO coming to the JSE next year, I think around February, March. This is going to be one of the themes of the next couple of years as we look at new products coming to market.

MIA KRUGER: Absolutely, Simon. I think until now in South Africa, for sure, it’s only been an area where institutional investors like pension funds and big private-equity players could participate. But the big thing for Kruger International, for us, was to bring this to our clients, to make it more accessible to a retail investor and make it more mainstream, and bring it into a very-regulated and well-known financial structure that people trust and that people can feel comfortable within South Africa – which is at the end of the day the collective investment schemes. So we worked really hard on this project. It was a project that took us two years, but we’ve been very conservative in our estimations on the earnings side. We are working on a rough earnings estimation of about IRR about 9% above inflation, which is better than you can get in the bonds – and that’s conservative.

So we’ve just been sort of upset to the positive side, really, during our first dividend declaration that was also announced on the 4AX exchange for the Gaia Fund 1 company that holds the Tsitsikamma Wind Farm that we invested in. Our dividend now in the first month, the estimate looks like it’s going to over-compensate us by 147% towards what we estimated. So we are very, very fortunate to be in this position and we are very happy that our clients can participate in this great opportunity.

SIMON BROWN: That sort of number makes me think of Airbnb, but that’s totally different. 

The last question for you. Looking forward to next year, what’s on your radar?  What are you particularly focusing on, worried about, or perhaps looking forward to?

MIA KRUGER: I think, Simon, the biggest – I wouldn’t call it a worry – thing that I’ve come to realise is that the market movement could very well be what I would term a sideways crash, where we don’t see a correction but we just see the market with high volatility around uncertainties; there are so many in the market; how the vaccines will play out is, for instance, one of them. And then, just considering the fact that it could be a case of the market moving sideways and actually catching up with earnings, rather than seeing big moves to the downside and big recoveries again. 

So I think if you weren’t in the market, this is the biggest worry for you. And the focus for us remains to be ahead of the curve in terms of portfolio construction, in terms of how we manage assets and how we access all the various asset classes. That’s been one of our themes for the past 10 years. 

And then definitely, as you mentioned, renewable energy and infrastructure in South Africa. We want to be a part of building up South Africa. We want to be a part of the good story of being good to the environment around us, being good to all stakeholders and communities. That’s something that we really would like to pay more attention to, and we’d like to include in our portfolios going forward.

SIMON BROWN: And those sideways markets – I take your point on that – in some senses, they’re worse than crashes, because they grind on and they’re emotionally difficult. 

We’ll leave that there. Mia Krueger, director at Kruger International, I really appreciate your early mornings over the year and I hope you have a great holiday. 



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