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Double-digit earnings in a single-digit environment

PSG Konsult has over a long period produced double-digit alpha in its various businesses, notes CEO Francois Gouws.

NOMPU SIZIBA: The PSG Konsult reported healthy half-year financial results for the six months ended August. The financial advisor and fund manager reported headline earnings per share up 18.1% to 21.5 cents. The company says its gross written insurance premiums business was up by 25% to just over R2 billion, and it managed to increase assets under management by 19% to R230 billion.

Well, to tell us more I’m joined on the line by Francois Gouws, the CEO at PSG Konsult. Francois, your numbers look favourable, despite an environment that you’ve described as being full of economic headwinds. Just tell us about the drivers behind the improved numbers.

FRANCOIS GOUWS: Yes, economic conditions have been difficult, and markets have been tricky. So the last year or so was an equity cash and bond market, which gave single-digit returns. And of course we produced earnings that were up by 18%. I think the key contributors to the strong results have been inflows in our wealth business of about R7 billion, and our asset-management business about R4 billion, which is about 7% of all flows.

And then we had quite rapid growth in our insurance business – with quite strong growth in written premiums – which is up by 75%.

NOMPU SIZIBA: Yes, I was going to touch on that. So your written premiums up 25%. What areas do you insure, and with such growth levels do you think you are taking a bit of market share?

FRANCOIS GOUWS: We are definitely taking market share. Our focus has been on the commercial end of the market, so a number of years ago we changed our emphasis away from the personal lines side of the market. That’s a brutally competitive area in the market, and mostly serviced out of call centres. On the commercial end we mostly insure or work with small and medium-sized enterprises. Of course, those enterprises can’t be serviced out of call centres; we service them through advisors, and that’s with roughly 316 advisors that we’ve got spread across all the metropolitan areas and also the rural areas in South Africa. That’s been a competitive advantage, and I think underpins the strong growth which you talk about.

NOMPU SIZIBA: How have you managed your cost profile in the period under review/

FRANCOIS GOUWS: As you know, if markets are slow and economic growth is slow and your costs are accelerating on the personnel side at double-digits, and then you’ve got regulatory and other expenses, it’s incredibly difficult to show positive returns for shareholders. I think that’s what you’ve seen in the sector generally. So I think the only lever that you have available, given the economic conditions and poor markets, is if you get net new flows. And in our case that’s what has offset this very strong cost pressure that you’ve seen, both in terms of consumers plus inflation and the personal cost side and also in other expenses, including regulatory expenses.

NOMPU SIZIBA: Speaking about returns, I see that your return on equity came in at about 22%. How does that fare compare to the previous year?

FRANCOIS GOUWS: We’ve consistently produced return on equity above 20% for more or less 20 years. It’s a demonstration of the strong growth in the firm. I think there’s another critical factor – most companies when they produce returns on equity above 20% usually carry quite a fair amount of debt with it. But our firm has absolutely zero debt and is in a very strong cash position. So that must speak to the strength of our business model, which is basically the fact that we are advice-led whereas most other financial services companies in South Africa are product-led.

NOMPU SIZIBA: You talk about your business model. You are having to compete with the likes of Satrix and the Sygnias of this world, whose fees are far lower because they are not stock-pickers as such. So what is your competitive strategy around fees, and what kind of growth did you see in your various fees in the period under review?

FRANCOIS GOUWS: Part of the reason why competitors focus on passive management is because they can’t do active management. Active management is a highly technical, very difficult area, and you really have to differentiate by demonstrating over a long period of time that you can do double-digit alpha; and that’s we’ve done across our various businesses. As far as fee pressure is concerned we haven’t really observed any changes in fees and, in fact, from what we see, there is more competition in relation to service and in terms of underlying products than anything else.

NOMPU SIZIBA: You did touch on it earlier – I see under your PSG Wealth, assets under management rose by 12% to R182 billion-plus. That’s pretty good going. Are you looking to boost that number by double-digits each year?

FRANCOIS GOUWS: That’s what we’ve done in the past. It’s of course very difficult to predict how that will go into the future, because that number is underpinned not just by net new flows, but it’s also underpinned by actual performance of the market. So I think those are the two factors that, if you go back over time, the growth has always been double-digit and naturally we hope to replicate that.

NOMPU SIZIBA: The local equities market has been performing in really lacklustre fashion, if I can put it that way, for quite some time. So what investment strategies have you guys been employing to ensure that your clients get that return on their capital?

FRANCOIS GOUWS: In terms of all of our businesses we adopt a risk-based approach, and it’s fine. Avoid areas where there is likely underperformance, and those are typically higher valuations. You’ve seen that in a number of rand-hedge and international counters in the South African market. Equally there are other parts of the market, particularly the financial and industrial market, where companies are exposed to the domestic economy but of course have been going through very, very difficult times at very, very low valuations and extremely affected prices.

So we at PSG feel that we will be coming off a very low base from an economic growth point of view, and there are countless opportunities on the domestic side to make money out of. Yes, we extend that to the South African bond market.

NOMPU SIZIBA: I think it’s a good thing that you are optimistic about investing in South African assets or capital assets, because now we see in developed markets like the United States some serious selloffs there, and one wonders whether it’s the beginning of a correction. Is that economy beginning to overheat – and perhaps there is a correction? And of course we can see higher bond yield over in the United States. So perhaps it is a good idea to be focused on the local economy as well.

FRANCOIS GOUWS: Markets, particularly US markets, and particularly technology stocks in the US, have been in an elongated bull market of almost 10 years or so, and it’s quite natural that you are going to have adjustments from time to time, particular now that short-term rates are picking up and also longer-term US rates. So the US economy has also been very, very strong, and unemployment rates are at record lows, which typically foretells that you are getting towards the end of the economic upswing in the year.

Usually what happens is the US leads the rest of the world in terms of growth, and you would expect that European and emerging markets follow that. So we are probably exactly where we ought to be in terms of the upward cycle, and that’s at the lower end of growth. I think the cycle will develop in a typical cyclical way. And South African markets, along with other emerging markets, in our view will benefit.

NOMPU SIZIBA: I’m quite comfortable asking other leaders this question, but maybe not you because I guess if you had the answer to this question, you’d be filthy rich. But the question I want to ask is: What’s your outlook for your business over the next six months to 12 months? Of course a lot will depend on what happens with the markets, which you can’t really predict. But what is your outlook?

FRANCOIS GOUWS: We try not to predict on a six- and 12-month basis. Much of the results that you see is the consequence of decisions that have been taken three and five years ago in the firm. So we believe in marginal gains, we believe in incrementally improving our business day by day, week by week, month by month, and we’ve done that for a very long period of time. As you’ve mentioned, our return on equity has remained consistently high for 20-odd years. And I think that’s a good indicator of being positive when other people are perhaps not that positive, and then opportunities arise when other people are perhaps negative. So we are not going to predict the future, but we are confident in the ability of our business to grow, whatever the economic conditions.

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