You're listening to Strictly Business Podcast with Lindsay Williams. Someone recently asked me to wrap up the year 2024. So I thought about it and I looked at various headlines, various publications, and the headlines that sort of screamed at me were big tech and Bitcoin and chips makers and political change makers, etc. And I thought, well, everyone's doing that. So I thought, well, let's have a look at something a little bit. off the mainstream beaten track.
And I found the Elsewhere in the form of John Bickhardt, a portfolio manager responsible for the 91 Value Fund. He's with me now on the line from New York. I don't want to call you Elsewhere, John, but you've been quietly going about your business since you sent me something about May the 29th, which was the date of the South African general election. Do you remember that piece that you put out, a very brief piece?
I remember it very clearly because that was an omelette that we made for a whole year, basically, was buying South African shares ahead of the election. So it was the most important thing we've really done in the last five years. But you stuck your neck out, didn't you? Because that piece was met with scorn and it was sort of a poo-poo. But goodness me, you've stuck it to them. Yeah, so it was one of those moments where... Yeah. you know, you've got to make hay when the sun shines.
And it was, you know, my experience in running the fund has been, and actually I've been running it nearly 25 years now. And if I go back, most of the money we've made in the last 25 years can really be broken down into like four trades. So you only really get big opportunities maybe every five years. And that was one of those big opportunities when things get unbelievably cheap. when everyone hates it, when everyone's completely out of it. And it's a very extreme situation.
And when that happens, you've got to load up as much as you can because you might have to wait another five years to get another opportunity like that. And South Africa of a year ago was really, was that moment. And as we spoke about six months ago, it was the cheapest. it had ever been in absolute terms. It was the cheapest it had ever been relative to the world. Foreigners had completely sold out of South Africa.
And even locals had massively reduced their positions because of the Reg 28 changes, which got them to take money out. So the way we look at it is valuation was 10 out of 10 positioning. That is how much people have bought and sold was 9 out of 10. And as you say... The fact that when we put that piece out in whatever it was, April, that there were a lot of people who said you're crazy. That was really the sign that you're on to something good.
When people feel confident enough to say you're crazy, and the other word I like to look for is they say it's uninvestable. You know, when people in the market have the confidence, especially in the media, to say X, Y, Z is uninvestable. You know, you only say that when you're so, so sure. And when you're so, so sure, everyone's sure. And everyone's positioned the same way. So that word is a word that really attracts me.
And at the moment, just as an aside, there's one other country in the world that's currently uninvestable. Okay, we'll talk about China in a moment. Because of the recent, I mean, in the last few days before we pre-recorded this podcast, there's been an enormous amount of stimulus. being announced by the Chinese government. We'll come to that. But let's go back six months. You made a bet on South African politics, didn't you?
Yes. So, you know, detractors will say, oh, you made a bet and you got lucky. And I think it's very true that the outcome was lucky in that it was unbelievably good. But if I go back to where we were in April, I'll still stick to the point that... The shares were sufficiently cheap that even if things had gone badly in the election, that is MKEFF alignment with ANC, that we wouldn't have lost money because the shares had already discounted that.
And really, our base case was some sort of bumble through where I think we would have made 20%. But in the end, we did get lucky that, and I know how close it was to not working out so well. But the... The government of national unity was the best case outcome and sometimes you get lucky with these things and you know the outcome was then South African shares went up 40 to 50 percent in rand plus another five in dollars.
So you know if you had a good South African portfolio you've made 50 percent in dollars in six months so forget about Nvidia and Bitcoin and everything. South African shares have beaten them all because they were that cheap and I'll just go back to the thinking. The thinking is... The stock market is not about buying things that everyone agrees with. It's about playing the odds. And the odds were 90-10 that there was going to be a bad outcome in South Africa.
That's what the market had priced in. And I always think the world is 50-50 because the future is basically unknown. So really all we were doing was just playing the odds. And, you know, people who go and it's... People who go to racehorses, they know that if you're playing odds, it's 90, 10, 50, 50, there's an arbitrage there. And that's really all we're doing. And in the end, we actually got the 1090 outcome, which was the government of national unity.
And that's when you make outsized returns. But even if there'd been a normal result, let's say, which was a bumble through, you still would have made money on that trade. Yeah, because of the valuations of the stocks that we're going to talk about in a moment. But you're not overtly contrarian, are you? You're not just saying, well, everyone else says this, so I'm going to say that. That's not you. I mean, it may be a little bit just in the back of your mind, John. Be honest.
You want to be the contrarian, don't you? No. So because being a contrarian is where you make the money. So you're right. So definitely the starting point is 100% contrarian. So every idea that I get will be everyone thinks this, so there could be an opportunity here. And then you go and look.
at the valuation to see they really are as cheap as they are and then you look at what could happen to unlock that valuation and you know so being contrarian about buying kodak say 15 years ago was not a clever thing because and i remember actually looking at kodak and saying oh everyone hates kodak and then within half an hour looking at the share you realize well everyone's negative because it is the end of the line and then that's that's no good you know and to be honest Zimbabwe is an
interesting thing, like to be contrarian and invest in Zimbabwe now, but that's also a step too far. So just being blindly contrarian 10%, 20% of the time is not going to work out. You've got to take out that 10%, 15% of contrarian bets. That's just not going to work because actually people all agree with it, but unfortunately it's true. Okay. Let's talk about your positioning before.
May the 29th and after May the 29th did it change or had you positioned yourself for the government of national unity and the inflow of capital and the optimism that ensued? So basically for a whole 12 or 18 months prior to May we continually bought South African shares and we bought mainly the mid caps and the small caps not the large caps so we didn't actually buy first ran.
and Sunlum and Mr. Price, we bought the second liners like Spa and Reunet, Netcare, Life Healthcare, because we thought they were cheaper, which they were. And because we're not running 100 billion rand, but a lesser amount, we can actually buy those shares. So, and I remember that year up to May is that basically there were a lot of days that I felt like I was the only buyer in these mid-cap shares because liquidity dried up on the JSC and everyone was negative.
first about Eskim and then the election. And there were only sellers, so you could really just sit on the bid and every day the shares went down another 2% and you bought some more. So it took a whole year to build that position. And we were then positioned, come May 29, for a reasonable outcome. And the market thought it would be a bad outcome and the rest is history. So come May 27...
You know, the way to look at the JSE is roughly half the JSE is South African shares, like shares exposed to South Africa, and half are offshore ran hedges, like Richemont and Naspers, and commodity shares. And when we got to the election, basically, we've got 70% of the fund is in South Africa, 30% is offshore, and of the 70s, 65% was only in South African shares, and we had no ran hedges. We'd hedged out the currency and we had no commodity shares.
So we had a massive overweight position and obviously that worked out. And so your question now, what did we do? So the answer is, as you would expect, in the last six months, we gradually reduced that position. Your overweight position, which was such a winning one for you. So what have you got into now? Which brings me neatly to my next question, is your current positioning? Because you've done well and you're sitting back with your feet up and saying, OK.
I've done very, very well for my clients at 91. Now, where do I go from here? And that is the big question. The next six months can completely destroy your last six months or last year. So the first thing is obviously. I mean, and that's something we very, and actually two weeks after election, I sat down and went through the top 10 shares and I objectively looked and said, these are the levels I want to sell it.
You know, because the trouble is you get sucked into, you know, market rises, everything's going up, you sort of forget to sell because you get caught up in that. And so we've got, we had very strict sell levels. So the truth is we've, we've probably sold off the top of my head, 70% of our overweight position. We've sold all the spars, all the roinets, all the life health cares, half the net cares. We've sold all the electrons. So we've sold a lot and we've reduced that.
And that's very important because when things go up 50%, obviously, you've got to have less of it than you had before. In some cases, we sold it all. And so that's a very important thing. We can't now give up the gains we made because we've realized 70% of the profits. And then with the money. What we've been buying is quite interesting because this is kind of a new idea, new as in a few months old. So I've looked at South Africa and I think now, so that was the SA Inc. trade.
And actually, if you look at the valuation of SA Inc. now, especially the large cap shares, First Rand, Mr. Price, Capitec, Clix, they are fully valued in my opinion. They've all risen 40%. And if you look at their valuations compared to long-term history. They're now in line to above where they have been in the long term. So I'm not saying you can't still make some money and there's going to be good earnings momentum as the economy improves and there's price momentum in the shares.
But this is a word that people don't, I feel some people don't like it, the easy money. I think there is such a thing as easy money in the stock market. The easy money has been made, which is that first 50%. Hold those shares from here is going to be, Things have to go well in South Africa, which they probably will, but it's not the same as nine months ago because, you know, things didn't have to go well. Now they have to go well. So the risks are much higher.
Okay, so what you're saying is the government of national unity, which is a lovely idea, and it's a great word and everything, and the whole world says, look at South Africa again. It's the rainbow nation, and we're going to have a look at it. You've had a look at it. You've made money out of it for your clients at 91, but now comes the real. work. It's like Syria today. I mean, I don't want to bring politics into it. But Syria says, we've got rid of this barbaric regime.
And now we're going to celebrate a bit. But the hard work starts. And with South African stocks, the hard work starts now. That's my opinion. Yes. And the big thing is, I mean, I personally think the GNU will hold for the next three or four years and that the economy will recover and everything will go well. But the point is, if I'm wrong about that. there is downside. And whereas in April, if I was wrong about that, there was no downside.
And the first and most important thing is to take out the downside. And so we basically moved on a lot from that. And the next thing that we bought is what I would call the second derivative of the SA Inc. trade.
So if you think the financial and industrials have rallied as bond yields have fallen in South Africa and... as the outlook for economic growth has improved and the basically the shares valuations have moved back to the long-term average so that's great but the one area of the market that looks interesting to me are south african commodity companies that is not anglos and bulletin which are not south african commodity but
commodity companies based in south africa that have has suffered in the last five years because of the poor logistics in south africa for example because for example There are three stocks that we have, Exaro, African Rainbow Minerals, and Tungela. So these produce manganese iron ore and coal, and they have lost significant volumes because of the rail and port situation.
And if you like the improving South Africa, I think the second derivative of that trade is in these stocks, which have not, in fact, they have fallen since in the last six months because people don't want ran hedges. Anyone's busy buying first rand. These shares are actually lower than where they are on unbelievably low valuations. We're talking 9%, 10%, 11%, 12% dividend yields. Three times, four times cash flow is what they trade on. They're selling iron ore, manganese, and coal.
And the prices of those commodities are somewhat depressed. They're not right at the bottom, but they're close to the bottom of the top. But most importantly, they're going to benefit as South African logistics improve. As... And I think that, if you like, Transnate is where Eskimo was three years ago.
The SA government has already made a momentous change as in outsourcing 70% of the Durban Harbour to a foreign company, a logistics company, which I think the market doesn't appreciate what a change that is to have public-private partnerships in logistics in South Africa. So what I'm saying is these companies are on very attractive valuations and in my opinion in the next three years their volumes are going to improve.
through the railway lines, through the iron ore railway line and the coal railway line, the ports are going to get better. And even if the metal prices don't move up, the extra volumes that they will get will result in earnings. What you've got here is a domestic situation in South Africa whereby logistics hopefully start to become a more important part of the companies that you've spoken about. It becomes an important part of their lives. In other words, they can get their stuff.
out of the country. But the other thing is, of course, is the international aspect. And you mentioned it earlier, and you mentioned the word uninvestable. And then you said the country's name, and it was China. Please tell me about that. So the good thing about this commodity trade is I actually, I don't think China has to do much better. So as it happens, most of the coal actually goes to India, but the iron ore and the manganese does go to China.
So if China had to completely collapse, this would be a problem. But It doesn't need to do incredibly well because the price of all three of those metals is low already. So all we need is China to bumble through, and I think those metals are hanging around. So in buying those three shares, if the metal prices were the same as they are today in three years'time, that would be sufficient for me to still make the investment case. So it's not really a pro-China bet.
It's more a very cheap valuations and a bet that... Things will get better at Transnet rather than worse. And by the way, we've seen some green shoots already. There's been no real improvement on the iron ore line. But on the coal line, interestingly, the last three months, before any significant outsourcing, volumes are up 15% on that line to Richards Bay off a very low base. But that's the first time coal volumes have improved in five years.
So I think we've hit the bottom, and that's the most important thing. As a fund manager, just as a very quick aside, do you speak to government and you say, look, I'm invested in South Africa and I want to know what the logistic situation is, what is happening with Transnet, etc. Do you go through that due diligence? So the data is quite easy to get with a month or two lag. So we look at the data all the time of the volumes through Transnet and we look at that.
And then obviously, I mean, a month, six weeks ago. The whole South African delegation came through New York, and I did go and listen to their stories. And the Minister of Electricity was there, and the head of Transnet was there. And, I mean, it's a one-hour presentation, but you can get a feeling for, you know, do they have a plan? Does it look like it's got a reasonable chance? And I came away from those meetings thinking they have a plan and they have a reasonable chance.
And the important thing is to go back to it. similar to the South African thing. The share prices say they've got no chance. That's the gap. It's not that people are actually thinking they have a chance. The truth is, if the volumes don't improve, I don't think you'll lose money in shares like Xero and African Rainbow. But if they do get it right, those dividend yields can go from 10-11% to 6%. That means you double your money. Very compelling argument. You've still got ABSA there, haven't you?
Is that still your big holding, ABSA? Yes. So the biggest three holdings in the fund are ABSA, 10%, ACI, which is kind of a very specific South African situation, which incidentally hasn't risen a cent since 10% in ACI, and 10% in XRNL. So the portfolio is quite different to six months ago.
Those three, we might have had... three or four in abso nothing in acr nothing sorry so that gives you an idea of how much we change so 30 of the portfolio is just in those three shares which those are our best three ideas at the moment and abso you see is finally got going on you know there's another example of their their trading update of a week ago you know it wasn't brilliant but it was the share price went up six percent it wasn't
brilliant but look how sensitive is it is to the upside john yeah and actually in the last week it's gone up 13% because it was so hated. And so people looked at it and said, well, it's not so bad. It's bad, but it's not so bad. And it was, if you can believe, Abster was like... 40% behind the other banks over the last year. It was almost like it wasn't a bank.
So we've got the one bank still absent, which is, you know, it's really not enough closer to fair value, but it's still on a 7% of the yield. So there's no real reason to sell. Very good. Now, John, when you go to bed and you listen to the traffic on the Upper West Side of New York City, is there anything that keeps you awake apart from the traffic?
I think the only thing it keeps, there's not much in South Africa because the valuations are, I think internationally there are some boring signs that, and it's not geopolitics, I think it's just the valuation of the U.S. market is absolutely crazy. And the U.S. is 70% of the world index now. And so many people run money overseas or have their money invested overseas.
They will land up, you know, if you take your money offshore and you give it to... a manager, 70% of your money will find its way into the US market. And the valuation is crazily high and the West is really bankrupt. And I don't think inflation is dead. I think it's coming back. And, you know, so that's what would worry me. But I'm not really invested in those.
But there is a it feels and the exuberance we've seen since Trump's election has just taken a very expensive market to crazy and the crypto I mean, what I'm saying, that level of speculation in offshore markets in things like crypto and tech is unprecedented. And that's what... Well, if something happens... Along the lines of the two asset classes that you've just mentioned, then that probably plays into your hands long term. Short term, of course, everyone will suffer.
But anyway, let's not speculate on that. That's for another interview in the future. John, thank you very much for your time. Great insight. John Bickard is portfolio manager responsible for the 91 Value Fund. The views and opinions expressed in these podcasts are those of Lindsay Williams and various contributors and do not reflect the policy, position, or opinion of any other agency, organization, employer, or company associated with StrictlyBusinessPodcast.com.
Assumptions made on the analyses are not reflective of the position of any other entity other than the speaker or the author. And since we are critically thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold us to them in perpetuity.