A new product for our global small- and mid-cap ideas

Introduction to Denker Capital Podcast

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. It's the start of August and we're excited to introduce a new global

0:38investment product on the podcast today. In this episode, Nigel Barnes chats with Barry DeCock and Shane Tremere about the launch of our new actively managed certificate, the Denker Global Opportunities Portfolio. This portfolio has been designed to capitalize on opportunities in small and mid-cap equities in developed markets. Today, they discuss the features of the product, why we believe global smaller companies are primed for good long-term returns, and how you can access this exciting opportunity. Hello, everyone. Welcome to the latest in the series of Denker Capital Podcasts. It's a while

1:12since we've been online. I am joined today in the room with my production manager, Kaylin, as always. Hello, Kaylin. And by Shane Tremere, CEO of Denker Capital and Barry DeCock, who is the lead portfolio manager on an exciting new product that is being launched by Denker Capital into the market. It is a actively managed certificate or AMC that is going to invest in global, mid and small cap companies.

1:43So I thought what we'd do is just take 10 minutes or so with Shane and Barry. Welcome, guys. Just take 10 minutes or so just to outline or unpack a little bit what an actively managed certificate actually is, how it works, how you might buy it, what it costs. And then Barry can talk to us about what he's going to be investing in as we go forward. So Shane, let's start with you. Tell us

Actively Managed Certificate Explained

2:08about an AMC. How do I invest? What is it? Give us a bit more background. Thanks, Nigel. Yeah, it's quite an exciting new venture for us. AMCs are a relatively new and innovative investment vehicle, similarly to active ETFs. They're relatively new to the South African market, probably 18 to 24 months since they've become a little bit more accessible. And why we

2:40decided to use this for a new product is one, it's innovative. Two, it's relative time to market is a lot quicker than setting up a unit trust. And also accessibility. It's available to anyone who has a stockbroking account. So what an AMC is or an actively managed certificate is in old or many people who've been involved in the markets for a while will remember listed notes. This is a derivative

3:12or a newer version and probably a more transparent version of a listed note. It is a traded security available on the JSE. The difference between it and a unit trust are numerous. One being you are buying access to underlying portfolio of securities managed by a registered portfolio manager. But the issuer of the AMC tends to be a global bank. Okay. So in this case, we're using UBS who issues the

3:44certificate and we play the role of registered portfolio advisor, portfolio manager on the portfolio. Sure. Okay. And so I access it through my stockbroking account so I can trade in and out like a normal stock. Correct. It's a listed security. It's priced on the market, on the JSE. So your stockbroker will be able to pick it up on their screens. Okay. And buy it through the JSE. Okay. And what are the costs? It's all in priced at 1% per annum, which includes administration as well as the

4:21portfolio management fee. We don't charge a performance fee. So I think it's very, very keenly priced. Okay. And is it actually listed already or is this a, there's a, when's the certificate actually listing? It lists on the 7th of August, so in a week's time. Okay. Fantastic. And I mean, this seems to be as a more modern day structure as opposed to a bit of a departure from, you know, in sort of the old mutual fund type structures. Is that fair comment? And who is this really aimed

4:53at in terms of, you know, the sort of advisor or wealth manager base? Good question. I think there's definitely a place for mutual funds and unit trusts, you know, significant portion of the country savings are currently invested in unit trusts and will for, you know, decades to come. I think there has been some innovation and some more efficiencies since with the advent of AMCs, as well as the ETF market. And I think it's just a, an innovation and it comes with certain benefits,

5:25as I've mentioned previously, time to market accessibility, but one should realize that it's an, it's an issued certificate. So there is a counterparty to this and, and that is that there's a bank issuing the note. Okay. Okay. And although this is a invested in global companies, because it's listed locally, it's obviously a RAN based investment. Yeah, correct. So it's a fantastic way of getting access to global companies. And Barry will talk a little bit more about the, the underlying investment

5:56portfolio, but you're buying it with RANs. It gets settled in RANs when you sell. And so there's no foreign allowance clearance required and there's no asset swap required. It's a much quicker way of getting access in real time to a portfolio of global assets. Okay. Brilliant. Thanks, Shane.

Global Opportunities Portfolio Discussion

6:14You mentioned Barry. Barry, welcome. You're actually going to be managing the money in, in global and mid and small cap companies over to you now. Tell us a little bit about, you know, the, the, the product or the portfolio structure, what you're going to be focusing on and why you think this is a great time to be investing. Hi, Nigel. Thanks a lot. We are very excited about this. The, the, the global smaller companies AMC represents a portfolio of sort of our concentrated ideas to smaller companies around the world focused on developed markets. That's an important point. Okay. Typically what we're

6:48looking at is companies between one and 50 billion US dollars in market cap, where the current portfolio we have constructed is as a median market cap of around 19 billion. We think that the, the current opportunity is, is very attractive given the timing and what has happened in markets in recent years, five to 10 years. We all know very well that flows have been skewed very heavily towards the larger end of the market. And what that has done is it's let a lot of very good companies be overlooked by the market. And in that we found a lot of attractive opportunities. We also think we

7:23have the skillset within Denker to be able to execute on a product like this. Sure. And the smaller company AMC is complimentary to the current global offering that we have. So we are, we're quite excited about that. Okay. Okay. Just talking about that, you talk about the complimentary skillset. So the global offering at the moment is a global equity fund and a global financial fund. So are you saying that this is going to be a combination of in the same team that run those two funds are going to be working with you running this new AMC and is it going to be a construction? Yeah. So it's the,

7:58it's the exact same team of, of, of analysts looking at the, at the funnel constructing the fund. We've got nine people looking at it full time. Okay. We, we also have Koki Koiman and Jacobus Oerstesen, who managed the respective global financial and global equity products, are working on the fund. And there's about an 80% overlap in terms of holdings across the funds of stocks that are either held in the global financial fund or the global equity fund that are in this new product with the balance being some newer ideas. What's important is that Denker does have a long track

8:30record of investing globally, but also in smaller company space. So, so we have quite a well researched universe already to work from. So it's not as though we're looking at companies we've never seen before and are, and are kind of new to. So we have a lot of conviction in what is in the portfolio currently. Okay. And if I'm an investor, you know, why now, why is the timing right? So, so there's three sort of, there's three reasons we'd like to highlight in terms of why we think this space, the smaller company space is primed for, for good long-term returns. Number one is

9:03historically, and what we think will continue to happen is over the long run, smaller companies tend to offer a better earnings growth over time. And that is because they're either in smaller industries, growing industries, or they're able to take market share from, from larger players. Number two, and I touched on it earlier, the starting valuations are very attractive. If you look at the MSCI mid cap index against the MSCI world index, it's at a 20, the relative valuation of those two indices, the MSCI mid cap index is at a 20 year low. It's at a 15% discount to the, to the larger

9:36index, whereas historically it's traded at a premium because of the better underlying earnings growth it tends to generate. Okay. The other reason we like the space is that it tends to be relatively under-researched. So a lot of analysts have little incentive to look at one to 10 billion or one to $20 billion companies when you have big companies that are really dominating the market. So we didn't exercise where we broke up the market by market cap and looked at the number of analysts, sell side analysts covering the, the respective market cap buckets. And at $100 billion plus market

10:10cap, you typically have over 30 analysts. These are smart analysts looking at the companies. So, and, and if you, as you drop down market cap size, it's fewer and fewer analysts, typically between one and zero and $1 billion market cap companies, you have less than three analysts looking at the companies with many, many companies having no analysts. So that, that provides opportunities for mispricing as nobody really, really has eyes on it. And then lastly, we just think it's, it's a good time for investors to diversify a little bit from the heavily concentrated nature

10:42of the market. And importantly, it's not just equity markets that are concentrated, equity funds are also concentrated. So we think this provides something different to investors and over the long run, we're quite confident in the ability to generate good long-term returns. Okay. Fantastic. I think we were just talking before recording this pod that, you know, obviously you did quite a lot of back testing and bits and pieces in the buildup to, to the launch. How's the portfolio going to look in terms of, you know, sort of kickoff in terms of, you know, sector and geographical weights and, and maybe give us a flavor of, you know, one or two

11:16businesses that, that might feature in the, in the new portfolio. Sure. Thanks Nigel. So the portfolio is, as I mentioned initially, heavily developed market focused, entirely developed market focused. That is a difference from, from some of our other portfolios, the global financial in particular, which has more of an EM component, 20% EM component. Within the new AMC product, we'll have heavily weighted towards the US. UK is also a big overweight and then Europe. Those are the three. Okay. We, we have a large financials component in the AMC. We find significant mispricing there at

11:51the moment. We think the outlook is, is attractive for those businesses. And the fund is fairly concentrated. We have about 40 holdings with the top 10 representing 40% of the portfolio and the top 20 representing seven, 70% of the portfolio. So sort of to give you an indication of some of the businesses you might find in there. We've got a company called Essent Group, which is a mortgage insurance business from the US. Excellent long-term track record. We've known the business since 2015.

12:21It listed in 2013. That business has compounded, shale, valued over 18% per annum since listing. We have visited the business at their premises in the US many times. We think that they are very, very well-placed, well-capitalized to continue to generate through the cycle, mid-teen returns and the stock is trading at book value. So we're very, very, very sort of excited by that. And it makes, that's certainly within, within our top 10 holdings. If you look at our top 10 on average, you see quite a profitable portfolio. So in terms of return on equity or

12:56return on assets or return on invested capital, we have figures sort of well over 15% across all those metrics. So a return on assets of 12% for the portfolio, which is very attractive. And put together, we have the portfolio trading at about just under 14 times our forward earnings projection. So again, we think starting valuation is very attractive. Balance sheets, core focus of our investment process are in good shape for our companies and the outlook looks good for fund and main growth. Okay, brilliant. All right. Thanks, Barry. Thanks, guys. That's great. So,

13:29you know, just to conclude, I think, you know, what you're saying, Barry, is you feel, you know, valuations timing looks really good. Nice portfolio of differentiated companies, especially for somebody perhaps holding, you know, global equity, large caps, this would be a nice compliment to that. Shane, you've talked about the efficiencies, pricing, and, you know, how people get access from the 7th of August via JSE listing. So thanks, guys. Appreciate your time. Good luck, Barry, with the, with the portfolio and I hope it all goes well. Thanks. Thank you for listening to this episode. We hope you found it interesting. If you would like to join

14:07us 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. For the full disclosure specific to this episode, please find the episode on our insights page at www.denkercapital.com.