Jacobus Oosthuizen on riding the global rollercoaster

0:00Welcome to the Denker Capital Podcast, where our highly experienced team of in-depth thinkers and other experts share their insights on a range of investment-related topics. In this podcast, we have conversations about developments in South African and global markets and what these may mean for investors. We analyze specific stocks and sectors and explore general themes relating to the fundamental principles that underpin sound investment decisions in an ever-changing world.

0:34It's the 31st of October 2022, and in today's episode, Portfolio Manager Yacoubis Oesthazen talks to Nigel Barnes about how we use our process and philosophy to navigate the global environment. Yacoubis uses sector and company-specific examples and tells us what differentiates the Denker Global Equity Fund from its peers. Hello, Yacoubis. Thanks for joining me. I think just for the benefit of listeners, let's, I think, maybe just remind people who you are and how you came to pick up the management

1:06of the Denker Global Equity Fund. Good morning, Nigel. It's great to be with you this morning. Yeah, well, I've been with Denker from its inception, and before that, I was part of a SimGlobal team that was started by Koki Koeman in 2004. That's where the Global Capability started for our firm. And, yeah, so I've been working with Koki since 2006 until 2011, when I became more of a generalist. So I've had a mandate and scope to cover any company or industry in the world.

1:40It's been a fantastic experience. And, yeah, I got the opportunity to take over the fund about two years ago when PMOE retired. Sure. Yeah, so it's been an interesting... So almost a decade of experience working in global equities.

1:58And as you say, almost two years ago, you took over the running of the Denker Global Equity Fund. And that's great. In terms of how things are going, I know it's been obviously an interesting period over the last two years, and lots of things happening in the global environment. How are you invested right now, and why? Maybe you can just give the listeners some feedback there. Yeah. Nigel, it's been a rollercoaster the last two years, as you know, in the market. Just about two years ago, we were coming out of the pandemic, vaccines were kicking in.

2:36And since then, we've seen interest rates starting to pick up, supply chain problems around the world, and now the Ukraine-Russia issue, the inflation monetary tightening taking place. So it's really a very difficult environment to navigate. But I believe our process and philosophy sets us up very well to navigate through this period. So our process forces us to remain very disciplined on valuation. So we've been able to avoid the big landmines, especially the long-duration equities,

3:13the tech stocks that we're trading at, ludicrous valuations with no profitability. But I've come down 70% to 80% over the last year. We've been able to avoid those, and that's mainly due to the valuation discipline. And the other part of our process is around quality and making sure that we invest in companies that grow, share all their value over time. So companies that have competitive advantages, sustainable competitive advantages over a long period of time, that are profitable, that have good management teams,

3:46that are good at capital allocation. So I think that focus enabled us to invest in companies that are actually well-positioned to navigate through this inflationary environment. So companies with pricing power, where the demand for the products is very much inelastic, and companies that are well-run. So we are seeing opportunities in this environment. We have a big chunk of a fund still in technology companies. Our technology companies have held up very well over this period.

4:20Two examples would be Oracle and CDK Global, a company that many investors won't know, a small little mid-cap that actually got bought out by private equity. So these type of technology companies are profitable. They have got high margins, very sticky products, and they were not expensive going into this environment. You know, they were trading at 13 to 15 times PE multiples relative to other technology stocks that were trading at 30 to 50 times.

4:53And they've actually outperformed the market in this environment. And then we've got a big chunk in financials, where it's great we can draw on the experience of Cookie and his financial team. And we've got Barry the Cook feeding those ideas into our fund. Two of our biggest positions there are Arch Capital and Berkshire Hathaway. And these companies are benefiting from a hardening rate cycle. So that means the pricing for insurance is going up, their profitability is going up. And also, they're also benefiting from rising interest rates.

5:25So the investment book is doing better in this environment. And these companies are also have done exceptionally well over the last year. Now, about 15% of a fund is invested in what I like to call quality cyclical companies. And these are companies where we believe a market has become too pessimistic around pricing in the recession risk and where the market isn't differentiating between companies that are well positioned for a recession and those that are not.

5:56Sure. And we can drill down into some examples there later. But, yeah, I would say we are positioned at the moment. Yeah, okay. Thanks, Akiva. That's interesting because, I mean, when you talk about your process and philosophy, it's clearly a very bottom-up focus, which, you know, is on the list of all we know is consistent across the Genka business. Macro awareness, clearly part of that. But I'm going to park that for a second and we can come back to that in a moment. But when you talk about three areas, technology, financials, and your global cyclicals, CDK Global,

6:32tell us a bit more about that business. What do they do? Where are they listed? How did you find that one? You know, give us a bit of the background there. Yeah, Nigel, that's a company that came through our screens. So it just screened very well on quality, you know, on margins, on profitability over time. And it's actually a software company that helps auto dealers manage their business. So like an ERP system for dealers. Okay. It runs the whole business. It runs repairs and maintenance, new car sales, the back office, accounting.

7:07It's got different modules. So it's a company where the product is very sticky. You know, it's very difficult if you run your whole business on their software just to go to a competitor. And unfortunately for us, the company's been bought out. So we don't own it anymore. But that's a good example of the type of companies that we look for. And that was available at a very reasonable valuation. Yeah. And that was a mid-cap, right? It was a mid-cap. It was listed in the US. It had a $5 billion market cap. Okay.

7:37Brilliant. And in terms of the portfolio at the moment, how much is in the mid-cap space, mid and smaller cap space? It's around 5% of the moment. So, I mean, we've had a few of these situations where our mid-caps have actually been bought out. Yeah. And it hasn't been easy to replace them. We are working hard to try and replace them. We are opportunities.

8:04One that we like at the moment is AshDead. We actually sold it out of the portfolio last year when it became very expensive. When it pulled back during the year, we bought it back now recently. And that's an interesting small company because the largest business is listed on London Stock Exchange. But the main business is actually in the US. It's an equipment rental business called Sunbelt, the second largest equipment rental business in the US. And we think they're very well positioned for the coming capital investment that's required

8:36in the US. If you just think about the electricity grid in the US that has to be renewed, that has to be adjusted to accommodate renewables. So, trillions of dollars of capital spend that has to come in the US. Other capital investment that's required in the US is semiconductor production facilities that have to be built. Sure. As the US wants to become less dependent on Taiwan for their semi-chips, there's billions of dollars of capital spend. And you need AshDead's equipment to work on these projects.

9:10Okay. Brilliant. All right. I mean, again, I think it will interest the listener that you've got a 5% or so holding in mid-small cap, which is a differentiator. On the financial side, you're Arch and the good old favourite, Berkshire Hathaway. Your view on Berkshire Hathaway at the moment, how do you think things are going there? I think things are going very well. They've got very clear on the succession planning for Warren and Charlie, a very good manager

9:41that they've identified as a new CEO. And I think, Greg Abel, by the way, and I think that company has been set up over many years for a period like this. You know, Warren has lived through the 60s or through the 70s of inflationary environment. So that's always been top of mind in the way they set up a company, how they do make their investments. It's well diversified. As I mentioned earlier, the insurance part of the business is now benefiting from the

10:11hardening cycle. There's a lack of capital in the insurance. So they're benefiting from that. You know, it's a fantastic company doing ROEs of between 8% to 10%. It's undervalued, so they're buying back shares. So effectively, your shareholder growth per share will probably be between 8% and 12% per minimum of a loss for the next couple of years. I think in this type of environment, that's a very good return in dollars if you can do

10:41that. So, you know, it's a really good investment. Okay, great. Let's just move on then and just talk about the macro. Macro aware is, I think, the best way to describe, you know, your thinking, which is that, is it consistent across the Denker business? Just in terms of the macro picture, what's, you know, how do you see things at the moment, you know, we're getting towards the end of the year, we're looking into next year, you know, the future's behind a closed door. We know that, but, you know, how are you thinking?

11:12What's keeping you awake at night? Well, Nigel, I think it's been no surprise. It's all about inflation. You have to take it very seriously because we're probably at a 30, 40-year inflection point in the economic environment. You know, so I think we've been quite aware of this for a number of years. Again, it comes to your valuation discipline because we were living in this environment where interest rates and inflation was abnormally low. We had to be very disciplined in the discount rates that you use on your valuation.

11:47And as I mentioned earlier also, the companies that you choose, you have to be very certain that they can navigate this environment. You know, they have to have pricing power. They have to have a good competitive position. If you are a commodity company, if you have a commodity product or service and you're not differentiated, you are really going to struggle in this environment. Yeah, so I think that is the main thing. It is not our competence to try and forecast inflation and when it will turn, but we can see

12:19that it's going to be very difficult for the governments, US government and the Fed to bring it under control. I think the Fed is very hawkish in their talk, but whether they will actually be able to raise interest rates enough to really bring it under control, I think we have our doubts around that. Sure. Especially while the government is spending so much. You know, so there is a disconnect between what the Fed is saying and what the US government is doing. So we think we have to be prepared for an inflationary environment for the medium term.

12:53Yeah. Okay. And you're comfortable that the portfolio is positioned with that key macro concern in mind. Exactly. So we won't position a portfolio for that environment, but we make sure that from a risk point of view that we are well diversified and again, from a fundamental point of view in companies that are able to navigate through this environment. Yeah. And number of stocks in the portfolio at the moment? It's just more than 50 stocks. Okay. Yeah. So I think it's well diversified.

13:25We are totally unconstrained. So we've got a very high active share of 80%. So by investing in the fund, you get something totally different from the benchmark. Yeah. But we think we've got good risk management and valuation discipline. So you're getting something which is probably cheaper than the market and companies that we believe are actually better than the average company in the market. Yeah. Because I think that's your challenge, isn't it? I mean, over the last few years here in South Africa, we've seen, you know, very many of

13:57the large global asset management firms getting funds registered and approved here and giving the, you know, the financial intermediary or the discretionary manager much more access to those bigger names. But I think the way you've summed it up there for me would be that if you're looking for something that's slightly different alongside some of those big names, that your fund would be, you know, an interesting holding there because of the slightly different portfolio

14:32construction or stocks within that portfolio, including some of the mid and small caps. So thank you for that. Let's finish up. I mean, over the last two years, I was looking at the feeder fund, which, you know, it's great that you've got a feeder fund option for investors as well as the hard currency option. I think I'm right in saying it's the Denker Global Equity Feeder Fund. And I was looking at the A1 class and, you know, you're comfortably sort of ahead of the category average there since you took over Yukova.

15:03So that's great to see. And I think what we'll do is within the transcript of this podcast, we'll put in a couple of charts on performance. So thank you. It's great to catch up and, you know, wishing you every success for the end of the year and really appreciate your feedback. Yukova, thanks a lot. Thanks, Natal.

15:27Thank you for listening to this episode. We hope you found it interesting. If you would like to join us again, please subscribe for more investment insights. To find out more about our team and the funds we offer, please visit our website at denkercapital.com. The opinions expressed in this podcast are those of the participants and do not necessarily represent those of Dengar Capital. This podcast does not take the circumstances of a particular person or entity into account and is not advised in relation to an investment.

15:58Please do not rely on any information without appropriate advice from an independent financial advisor. The value of investments may go down as well as up and past performance is not a guide to future performance. Denker Capital is an authorized financial services provider in South Africa. Please visit denkercapital.com forward slash disclaimers for the full disclaimer relating to the global fund mentioned in this episode.