We’re excited to introduce a new addition to our investment offering. The Denker Global Opportunities Portfolio is an actively managed certificate, or AMC, designed to capitalise on opportunities in small- and mid-cap equities in developed markets. Our seasoned global investment experts, Kokkie Kooyman and Jacobus Oosthuizen, along with Barry de Kock, will manage the portfolio.
In our latest podcast, Nigel Barnes chats with Barry de Kock and our CEO, Shane Tremeer. They discuss the features of the Denker Global Opportunities Portfolio, the reasons behind its launch, why we believe global smaller companies are primed for good long-term returns, and how you can access this opportunity.
Nigel Barnes:
Hello, everyone. Welcome to the latest in a series of Denker Capital podcasts. I am joined today by Shane Tremeer, CEO of Denker Capital, and Barry de Kock, who is the lead portfolio manager on an exciting new product that is being launched by Denker Capital.
It is an actively managed certificate, or AMC, that is going to invest in global mid- and small-cap companies. So, I thought we’d chat to Shane and Barry about the product. Welcome, guys.
Shane Tremeer:
Thank you.
Nigel Barnes:
Let’s unpack what an actively managed certificate is, how it works, how you might buy it, and what it costs. Shane, let’s start with you. Give us a bit more background.
Shane Tremeer:
Thanks, Nigel. Yes, 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, it’s probably 18 to 24 months since they’ve become a little bit more accessible. And why we decided to use this for a new product is: (1) it’s innovative; (2) its relative time to market is a lot quicker than setting up a unit trust; and (3) accessibility. It’s available to anyone who has a stockbroking account.
An AMC, or an actively managed certificate, is a derivative or a newer version, and probably a more transparent version, of a listed note. It’s a traded security available on the JSE.
The differences between an AMC and a unit trust are numerous. One being that, as an investor, you are buying access to an underlying portfolio of securities, managed by a registered portfolio manager, but the issuer of the AMC tends to be a global bank. In this case, we’re using UBS, who issues the certificate. And we play the role of registered portfolio advisor, portfolio manager on the portfolio.
Nigel Barnes:
So, I access it through my stockbroking account, and I can trade like a normal stock?
Shane Tremeer:
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 these screens and buy it through the JSE.
Nigel Barnes:
Okay. And what are the costs?
Shane Tremeer:
It’s, all in, priced at 1% per annum, which includes administration as well as the portfolio management fee. We don’t charge a performance fee. So, I think it’s very keenly priced.
Nigel Barnes:
When’s the certificate actually listing?
Shane Tremeer:
It lists on 7 August.
Nigel Barnes:
Fantastic. This seems to be a more modern-day structure as opposed to, and a bit of a departure from, the old mutual fund-type structures. Is that a fair comment? And who is this really aimed at in terms of the advisor or wealth manager base?
Shane Tremeer:
Yes, good question. I think there’s definitely a place for mutual funds and unit trusts in a significant portion of the country. Savings are currently invested in unit trusts and will be for decades to come. I think there has been some innovation and some more efficiencies with the advent of AMCs, as well as the ETF market.
I think it’s just an innovation, and it comes with certain benefits, as I’ve mentioned previously, time to market and accessibility. But one should realise that it’s an issued certificate, so there is a counterparty to this, and that is that there’s a bank issuing the note.
Nigel Barnes:
Although this is invested in global companies, because it’s listed locally, it’s obviously a Rand-based investment?
Shane Tremeer:
Yes. Correct. It’s a fantastic way of getting access to global companies. And Barry will talk a little bit more about the underlying investment portfolio. But you’re buying it with Rands. It gets settled in Rands when you sell. So there’s no foreign allowance clearance required, and there’s no asset swap required.
Nigel Barnes:
Brilliant.
Shane Tremeer:
It’s a much quicker way of getting access in real time to a portfolio of global assets.
Nigel Barnes:
Thanks, Shane. You mentioned Barry. Barry, welcome. You’re going to be managing the money in global and mid- and small-cap companies AMC. Over to you now.
Tell us a little bit about 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.
Barry de Kock:
Hi, Nigel. We are very excited about this. The Denker Global Opportunities Portfolio represents a portfolio of our concentrated ideas to smaller companies around the world, focused on developed markets. Typically, what we’re looking at is companies between $1 billion and $30 billion in market cap, where the current portfolio we have constructed has a median market cap of around $19 billion.
We think that the current opportunity is very attractive, given the timing and what has happened in markets in recent years – five to 10 years. We 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’ve found a lot of attractive opportunities. We also think we have the skill set within Denker to be able to execute on a product like this well.
The AMC is complementary to the current global offering that we have. So, we are quite excited about it.
Nigel Barnes:
You talk about the complementary skill set. So, the global offering at the moment is the Denker Global Equity Fund and the Denker Global Financial Fund. Is this going to be a combination of the same teams that run those two funds who are going to be working with you, running this new AMC? And is it going to be a construction from those portfolios?
Barry de Kock:
Yes, it’s the exact same team of analysts looking at the portfolio. We’ve got nine people looking at it full time. We also have Kokkie Kooyman and Jacobus Oosthuizen, who manage the respective Denker Global Financial and Denker Global Equity funds, working on the AMC. And there’s about an 80% overlap in terms of holdings across the funds, 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 Capital does have a long track record of investing globally, but also in the smaller company space. 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 new to. We have a lot of conviction in what is in the portfolio currently.
Nigel Barnes:
Okay. And if I’m an investor, why now? Why is the timing right today?
Barry de Kock:
There are three reasons we’d like to highlight in terms of why we think this space, the smaller company space, is primed for good long-term returns.
- Historically, 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 are able to take market share from larger players.
- The starting valuations are very attractive. If you look at the MSCI Mid Cap Index against the MSCI World Index, 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 larger index, whereas historically, it’s traded at a premium because of the better underlying earnings growth it tends to generate.
- The other reason we like the space is that it tends to be relatively under-researched. A lot of analysts have little incentive to look at $1 billion to $10 billion or $1 billion to $20 billion companies when you have big companies that are really dominating the market. We did an exercise where we broke up the market by market cap and looked at the number of analysts, sell-side analysts covering the respective market cap buckets. And at $100 billion-plus market cap, you typically have over 30 analysts. These are smart analysts looking at the companies. And as you drop down market cap size, it’s fewer and fewer analysts. Typically, between 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 provides opportunities for mispricing, as nobody really has eyes on it.
- Lastly, we just think it’s a good time for investors to diversify a little bit from the heavily concentrated nature of 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.
Nigel Barnes:
We were just talking before recording this pod about you doing quite a lot of back testing and bits and pieces in the build-up to the launch. How’s the portfolio going to look at kick-off in terms of sector and geographical weights? And maybe give us a flavour of one or two businesses that might feature in the new portfolio.
Barry de Kock:
Sure.
- So, the portfolio is, as I mentioned initially, entirely developed market focused. That is the difference from some of our other portfolios, the global financial fund in particular, which has a 20% emerging market component.
- Within the new AMC product, it’ll be heavily weighted towards the US. UK is also a big overweight, and then Europe. Those are the three.
- We have a large financials component in the US. We find significant mispricing there at the moment and think the outlook is attractive for those businesses.
- And, the portfolio is fairly concentrated. We have about 40 holdings, with the top 10 representing 40% of the portfolio and the top 20 representing 70% of the portfolio.
To give you an indication of some of the types of businesses you might find in the portfolio, one example is a company called Essent Group which is a mortgage insurance business from the US. It has an excellent long-term track record. We’ve known the business since 2015. It listed in 2013. That business has compounded shareholder value at over 18% per annum since listing.
We’ve visited the business at their premises in the US many times. We think that they are very, very well placed, and well capitalised to continue to generate through-the-cycle, mid-teen returns, and the stock is trading at book value. So we’re very, very, very excited by that. And that’s certainly within our top 10 holdings.
If you look at our top 10, on average, you see quite a profitable portfolio. In terms of return on equity or return on assets or return on invested capital, we have figures well over 15% across all those metrics, 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 14x our forward earnings projection.
So again, we think starting valuations are very attractive. The balance sheets, a core focus of our investment process, are in good shape for our companies, and the outlook looks good for fundamentals.
Nigel Barnes:
Brilliant. Thanks, Barry. To conclude, I think what you’re saying, Barry, is you feel valuations and timing look really good, and it’s a nice portfolio of differentiated companies. Especially for somebody perhaps holding global equity large caps – this would be a nice complement to that.
Shane, you’ve talked about the efficiencies, the pricing and how investors can get access from 7 August via the JSE listing.
Thanks, guys. Appreciate your time.
For more information, and to access the Denker Global Opportunities Portfolio, please chat to your wealth advisor or stockbroker. The relevant product codes are included below.
ISIN: ZAE000337614
Alpha Code: DNKGLO
Product Short Name: UBS DNKGLO
Product Long Name: UBS AMC DNK GLOBAL OPP
For more information, please contact us at investorrelations@denkercapital.com
Disclaimer:
The opinions expressed in this podcast are those of the participants and do not necessarily represent those of Denker Capital. This podcast does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment. Please do not rely on any information without appropriate advice from an independent financial adviser. 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 authorised financial services provider in South Africa (FSP number 47075). The opinions expressed are not guaranteed to occur.
This information does not constitute financial advice as contemplated in terms of the South African Financial Advisory and Intermediary Services Act of 2002 (FAIS Act). Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision as not all investments are suitable for all investors.
The Denker Global Financial Fund and Denker Global Equity Fund are sub-funds of Sanlam Universal Funds Plc, a company incorporated with limited liability as an open-ended umbrella investment company with variable capital and segregated liability between sub-funds under the laws of Ireland and authorised by the Central Bank. The Manager of the funds is Sanlam Asset Management (Ireland) Limited (Beech House, Beech Hill Road, Dublin 4, Ireland, Tel + 353 1 205 3510, Fax + 353 1 205 3521) which is authorised by the Central Bank of Ireland, as a UCITS Management Company, and an Alternative Investment Fund Manager, and licensed as a Financial Service Provider in terms of Section 8 of the FAIS Act. Sanlam Collective Investments (RF) (Pty) Ltd is the South African Representative Office for these funds. Deemed authorised and regulated by the Financial Conduct Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website (notes 1, 3 and 4).
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