Caylin Conradie:

I’m Caylin Conradie, Head of Marketing at Denker Capital. Today is the 27th of October, and it’s quite fitting that our 25th episode is about the 25th anniversary of the Denker Sanlam Collective Investments (SCI) Equity Fund. We are very proud to have reached this milestone, as not many funds in South Africa boast such an extensive track record. So, today, I’m chatting with Claude van Cuyck, Portfolio Manager of the fund, to gain his insight into what he’s learned over this time managing the fund, how the fund has performed for investors, and his take on the SA equity market. Welcome, Claude.

Claude van Cuyck:      

Thanks, Caylin.

Caylin Conradie:

Let’s start at the beginning. Why was this fund launched?

Claude van Cuyck:      

Caylin, the fund was launched, as you said, 25 years ago, and the real objective here is to compound real wealth for clients over long periods of time, and for us to be able to do that through an active management approach, but at the same time also providing a reasonable level of current income, and that’s via a steady flow of dividends from the fund.

By providing access to really good-quality management, well-managed businesses, good-quality companies at favourable valuations, this allows clients to really grow their real wealth and wealth well ahead of inflation.

Caylin Conradie:

So, you’ve been researching SA equities for over 30 years. You’ve obviously seen quite a lot in this time. I’m keen to hear your take on how the SA listed environment has changed over the years.

Claude van Cuyck:

Caylin, over the 31-year period that I’ve been involved in the markets, the SA listed space and the environment has changed significantly. In 2001, there were over 600 companies listed on the JSE. Since 2000, and the 2001 period where the IT bubble sort of burst after it’s boom in the late 1990s, we lost almost 250 listed companies on the JSE.

So, today, we have just over 300 companies listed, very much closer to what was listed in 1994, and we generally see these listing booms when the economy is really booming and global markets are booming. Then you have these behavioural factors, and in particular, greed, that really drive the listing booms as many private companies come to the market with players, hopefully your participants, hopefully trying to get rich fairly quickly.

We saw this run up to the IT boom in the early 2000s, and between 1997 and 2000. We had 240 new listings and when the bubble burst post 2000, we saw 290 de-listings between 2000 and 2003.

Caylin Conradie:

That is quite a change in listed companies over time. Has that created opportunities for you?

Claude van Cuyck:      

Yes, Caylin. More recently, we’ve seen quite a few de-listings in the SA environment. And, in particular, some really good-quality businesses that have delisted (Distell, for example). Not only Distell – Mediclinic, RB Platinum and Pioneer Foods a little while ago too. Very often, when you go through these delisting periods, these companies tend to be taken out at fairly significant premiums relative to the market. So, we’ve benefitted substantially from that over the last few years.

We were big investors in Mediclinic, we were large investors in RBPlats. We had Alviva, which is a small cap IT company that was taken private at a significant premium. It was taken out at R28, and we initially bought shares at R6. So, that does create opportunities to unlock value for our investors.

Caylin Conradie:

And how has that unlocked value over the 25 years?

Claude van Cuyck:

So, to talk a little bit about the performance of the fund over the last 25 years, the highest fee class of the fund (the R class) has compounded at a rate of 15.7% per annum, net of fees, outperforming its benchmark over that 25-year period per annum by a rate of 1.6%. These returns are as at the end of September 2023. In order to double your money over a five-year period, you need to generate a compound return of 14.9% per annum. So, that means over 25 years you would’ve had five opportunities to double your wealth over that period. Since the fund compounded at a rate of 15.7%, means that a R1 million investment invested 25 years ago would’ve grown to R38.3 million today. And that compares to if you were just purely invested in the market, your R1 million would’ve compounded to R27 million. So, the fund has generated wealth at a rate of 42% higher than that of the market.

If you had compounded at the rate of inflation, which averaged about 5.6% over that 25-year period, your R1 million would have compounded to just under R4 million. So, the fund has actually created ten times more wealth, in real terms, for an investor over that 25-year period.

Caylin Conradie:

And when you say market, what index are you looking at?

Claude van Cuyck:      

In the initial stages, over a large component of that 25-year period, the benchmark was initially the FTSE/JSE All Share Index. At a later stage, we changed that to the FTSE/JSE Capped Swix. Then, over the last number of years, because we were able to invest offshore, we included an MSCI global portion to that benchmark. So, as it sits today, that benchmark is 87.5% the FTSE/JSE Capped Swix and 12.5% the MSCI World Index.

Caylin Conradie:

So, it’s massive outperformance of the benchmark over time.

Claude van Cuyck:

Absolutely.

Caylin Conradie:

Obviously, we hope for investors to be invested for 25 years, but that’s not the case for everyone. So, if we look at shorter-term performance?

Claude van Cuyck:

So, over the shorter term, if we’re looking over the last one, two, three, and five years – the fund has outperformed its benchmark fairly consistently over that period. Over three years, the fund has achieved an annualised return of 16.4%, so slightly higher than the 15.7% compound rate over the 25-year period. Obviously, everything moves in various cycles – we’d love to be able to compound continuously at a rate of 16%. The fund is in the top quintile, top 20% of funds, versus its peers over one and three years, and in the top third over five years.

Caylin Conradie:

Well done on that performance.

Claude van Cuyck:      

Thank you.

Caylin Conradie:

Claude, this fund has been going for a long time, and you’ve been in the industry for a long time. What are some of the successes and challenges that you’ve experienced over your time managing the fund?

Claude van Cuyck:                  

I think let’s start with the challenges. So, it’s fantastic that the fund’s had great performance, but as I said earlier, it doesn’t all come in a straight line. There are periods where you do have challenges, and that’s why investors, I feel, should be invested for the longer term.

On the challenges side, I’ll talk specifically to 2015 and 2017. We had a fairly tough period of performance in late 2015, and that was at a time where we had a fairly large holding in SA banks, where we saw a significant amount of value. But if you can recall, in 2015 we had the Nenegate scandal, and that’s when Jacob Zuma decided to fire the finance minister, Nhlanhla Nene, in December 2015, which was a terrible Christmas present for us.

So, we’ve certainly learned over time that by avoiding mistakes, and particularly avoiding bigger mistakes, you’ve already won half the battle. We experienced some challenges in 2017, as well. We had a fairly tough period of relative performance, and that came down to a holding that we had in Steinhoff. We did react very swiftly to the news when it broke out in December 2017. We immediately sold our investment, because the whole investment case had changed, and we managed to exit at about R19 a share. So, again, that was not a very pleasant Christmas present. But, you’ve got to take the good with the bad and learn from those mistakes.

Caylin Conradie:

So, after two bad Christmas periods, what did you learn? Is there anything you did differently after those periods?

Claude van Cuyck:

Yes, we absolutely did. Although your investment philosophy never changes, or shouldn’t change, that should be embedded in your DNA, your process needs to adjust and needs to evolve to conditions that might change over time. So, through that period, we realised that consistency of performance is crucial to our investors.

As I said earlier, avoiding mistakes is a big part of winning the game I guess, in this environment. So, we brought in very tight risk controls in late 2017, early 2018, into our risk management process. So, we incorporated a proprietary risk management dashboard, or tool, that monitors various company-specific or idiosyncratic risks, as well as market-related risks. And we also incorporated ESG directly into the process in 2020, and that was really to tighten up our responsible investment framework.

Caylin Conradie:

On the risk management dashboard, Claude, what are some of the factors that you look at from a company point of view?

Claude van Cuyck:

So, Caylin, a lot of thought went into that process. And when we look at company-specific risks, and this is an important part of our investment philosophy, as well, is identifying companies that have really good business economics, that have competitive advantages, that are able to generate return on invested capital well above the weighted average cost of capital. Because, if you can identify those companies, you are able to grow the intrinsic value of your underlying investments over time.

So, a lot of time is spent on understanding the business economics, firstly, and the moat of a company. Secondly, we also look at the quality of management. We feel that very often the market underestimates the significance of a really good management team.

We rate our universe of 100 companies, that we follow, very actively across the JSE between an A-rated management company, which is a good-quality management team, and an E-rated company, which is a very poor-quality management team. So, we’ve got the quality of the business economics of a business, the quality of a management team. And then, a third very important factor is understanding the intrinsic value of a business, i.e., do you have a margin of safety when you’re allocating capital?

Caylin Conradie:

And how has looking at these specific factors in a business contributed to success in the past? So, apart from the risk management dashboard?

Claude van Cuyck:      

We’ve had a number of successes over the years. But, just to remind investors, we should never rest on our laurels with past successes. We clearly need to focus on future opportunities. We’re only as good as our last successful investment. Success is not only measured by what you earn in the portfolio. It’s also about what you’ve been able to avoid -avoiding some of the disasters.

To tie that back into the risk management process, if you are able to identify over-valued sectors or companies, or identify poor-quality businesses, you are able to eliminate that risk factor when you’re making your investment decision. So, if I go back to 2008, the run-up to the resources bubble where commodity prices were at extreme levels, driven by huge demand from China, we felt that the resources sector in 2008 was hugely overvalued.

At that time, resources were almost 50% of the FTSE/JSE All Share Index. We had less than 10% of our clients’ capital allocated to resources over that period. So, just by avoiding a significantly overvalued sector, you were able to really protect a fairly large amount of capital for your clients. So, I just wanted to contextualise that. It’s also about avoiding disasters.

Then, we’ve had other successful investments. So, I’ll talk about two in particular on the small cap side. Combined Motor Holdings, we’ve owned the company in the portfolio for many, many years. And over the past 15 years, it’s increased value almost 17-fold. It has had two of the oldest serving directors on the JSE. The CEO, Jebb McIntosh, was appointed in 1976.  It’s a simple business. It’s an auto retailer. It’s got a car hire business to it. It’s a fantastic business. It generates extremely high return on invested capital, certainly relative to its cost of capital, and it’s been able to compound a huge amount of value for us over the years.

I’ll also highlight another company, which is Altron, which unlocked significant value, where we took a very active approach to unlock value. We engaged with Value Capital Partners in early 2017, and together with some other shareholders, we were able to drive significant shareholder value creation. In March 2017, Altron’s share price was R7 a share. It had a market cap of less than R3 billion. Three years later, by Feb 2020, the share price had gone from R7 to R23, from a market cap of just under R3 billion to R8.5 billion. And then, subsequent to that Feb 2020 period, they unbundled Bytes Technology Group and listed that in the UK. And the current market capitalisation of Bytes Technology Group is R26 billion. So, you took a R3 billion investment in 2017 to well over R30 billion investment opportunity, which was more than a tenfold increase in value over that period. So, that also added significant value. And these are the types of opportunities, that we’re looking for.

Caylin Conradie:

When did you invest in Altron?

Claude van Cuyck:

We had invested in Altron prior to that. I can’t recall our exact entry level. But it probably was in the order of R8 or R9 a share on average when we invested. By the time we had exited that investment, it was almost a tenfold increase in value.

Caylin Conradie:

You spoke earlier about avoiding resources. It must take quite a lot of discipline to do the opposite to what everyone else is doing in times like that.

Claude van Cuyck:

Yes, absolutely. I think it talks to some of the behavioural factors of investing. The biggest mistake will be if you get sucked up into this sort of greed scenario where markets are performing incredibly well, there’s a huge amount of momentum, and you get sucked into that, and vice versa.

You need to have that discipline as a portfolio manager. When times are tough, that is when you have your best long-term investment opportunities. And when there’s a bubble emerging, you need to have the fortitude to say, look, I don’t want to get involved in that bubble. It can last for a fairly long period of time, so you need that discipline.

Caylin Conradie:

Obviously, discipline comes from experience, which is something that you and your team have. Could you tell us what else differentiates this fund from the rest?

Claude van Cuyck:

That talks clearly to what you believe your competitive advantages will be relative to your peers. So, there are three that we can clearly highlight.

As a smaller boutique asset manager, we have a much broader universe of stocks available to us to choose from. So, we actively cover 100 stocks. Many of your larger peers, purely from a liquidity point of view, will only be able to really invest in the top 40 stocks. So, that small- and mid-cap space is a significant differentiator for us, where we can tap into opportunities. So, our top ten relative positions often differ quite substantially from our peers. Over time, we’ve probably averaged about 30% of the capital allocated to that mid- and small-cap area of the market that is under-researched.

The second point, is the experience of the investment team. We’re focused and we’re passionate about generating great returns for our clients. I’ve been focused on local equities for a 31-year period. My colleague, Jan Meintjes, who I’ve worked with for many, many years has been in the market for 28 years, and we’ve got a great team of analysts that support us. So, with that, I think our clients can benefit from the stock-picking skills of the team across mid, large and small caps.

Thirdly, there are very few boutique asset managers that have an extensive and integrated global equity team available to them. We’ve run global equity funds for decades. Kokkie Kooyman’s been around for over 30 years. Our global equity team has managed funds for a long period of time. And now we are able to invest up to 45% of our assets globally. So, we need to be able to tap into really good-quality global opportunities. So, I think that is a significant differentiator for us, as well.

Caylin Conradie:

With all these skills in the team, what opportunities are you seeing at the moment?

Claude van Cuyck:

I think, Caylin, we’re seeing a lot more opportunity at this point in the SA equity market relative to global, just given the fact that there’s a lot of negative news, certainly in SA at the moment. And that’s a function of the obvious consumer pressures that we’re seeing on the back of high inflation, higher interest rates, our Eskom challenges which have had a dramatic impact on domestic SA.

So, long-term opportunities are generated, as I mentioned a little bit earlier, when the environment is fairly tough. You see the breadth of opportunities increase dramatically. You see a lot of good-quality businesses de-rating significantly and offering a lot of investment opportunities. So, if we look at the investment universe of 100 stocks that we have, the median price-to-earnings multiple of that universe currently is about 9.5x, with a median dividend yield of approximately 5%.

In the context of seeing pretty decent-value opportunities in SA, the likes of a Mr Price, Italtile, Pepkor, Hudaco, all of these companies are trading anywhere between a 7.5x price-to-earnings multiple to a 10x multiple. So, we’re seeing a lot of opportunity there.

I’ll give a few other examples. Sun International, we’ve built up a reasonable position there over time. They’re recovering post-Covid as consumers return to their gambling habits, as hotel occupancies are increasing. The likes of Famous Brands, consumers are now eating out a lot more post the Covid recovery. You’re seeing more travel. The quick-service restaurant environment is improving, people are dining out. So, those are some of the opportunities. The banks in South Africa remain relatively cheap, trading anywhere between 7x and 9x multiples.

We also have to look at our banks in the context of global opportunities because, as I mentioned, we can invest up to 45% offshore. So, we do see some opportunity in local banks, but we also see a lot of opportunity in Kokkie’s global financial fund, so we’ve got about 7% of the fund exposed to the Denker Global Financial Fund, which is very well diversified across developed and developing market banks, and insurers and asset managers.

Caylin Conradie:         

Well, I think we’re looking forward to seeing how these opportunities play out for investors. Claude, to finish off, I’ve got one last question for you. If an investor had to sit in on one of your investment meetings, what is the one thing you’d like them to take away from it?

Claude van Cuyck:      

Caylin, I think in line with our company vision, and it might sound a little bit corny, but our company vision is: to be our clients’ greatest discovery. And if a client was sitting in one of our meetings, I would like to convince them and show that we are able to create real wealth for our clients over time, and to do that by identifying fantastic investment opportunities that can compound wealth over time.

And we would do that with the robust debate that we have within the team. In all of our team meetings, we are focused on one thing at the end of the day, and that is identifying and searching for these great long-term investment opportunities. So, hopefully they’ll walk out of that meeting and realise that we are our clients’ greatest discovery.

Caylin Conradie:         

I’m not on the investment team, and it is very clear to me that the team is very passionate and skilled at what they do. Thank you so much for your time today. It’s been very interesting taking a trip down memory lane with you. We’ll chat again soon.

Claude van Cuyck:      

Thanks Caylin, and yes, thanks for the opportunity to talk about the fund.

Disclaimer:

Annualised performance since inception:

Source: Morningstar, 30 September 2023. Inception date: 1 October 1998. Returns are net of fees. Returns for periods longer than one year are annualised. The highest annual calendar year returns over the last 10 years was 24.4% and the lowest was –15.5%. The R class has an annual management fee of 1.55% (incl. VAT), a maximum initial advice fee of 3.45%, a maximum annual advice fee of 1.15% and a performance fee of 20%.

The information in this podcast belongs to Denker Capital (Pty) Ltd and Sanlam Collective Investments (RF) (Pty) Ltd. The information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. Although all reasonable steps have been taken to ensure the information in this podcast is accurate, Denker Capital and Sanlam Collective Investments do not accept any responsibility for any claim, damages, loss or expense – however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (FAIS). Use or rely on this information at your own risk. Consult your financial advisor before making an investment decision. Sanlam Collective Investments (RF) (Pty) Ltd is a registered and approved Manager in Collective Investment Schemes in Securities.

Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and that the value of investments/units/unit trusts may go down as well as up. Changes in the exchange rates may have an adverse effect on the value, price or income of a product. A schedule of fees and charges and maximum commissions is available from the manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The manager has the right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. Performance is based on a NAV to NAV calculations with income reinvestments done on the ex-div date. Performance is calculated for the portfolio and the individual investor performance may differ as a result of initial fees, actual investment date, date of reinvestment and dividend withholding tax. Annualised return is the weighted average compound growth rate over the period measured. If the fund holds assets in foreign countries, it could be exposed to the following risks regarding potential constraints on liquidity and the repatriation of funds: macroeconomic, political, foreign exchange, tax, settlement and potential limitations on the availability of market information. The fund may invest in other unit trust funds which levy their own charges and may result in a higher fee structure for our portfolio. All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (CISCA). The forecasts or opinions in this podcast are not guaranteed to occur.

Sanlam Collective Investments retains full legal responsibility for the co-branded portfolios. The portfolio management of the fund is outsourced to Denker Capital (FSP no: 47075), an authorised financial services provider in terms of the FAIS Act. For more information, visit www.sanlaminvestments.com

Caylin Conradie:

Hi, everyone. I’m Caylin Conradie, and I’m responsible for marketing at Denker Capital. Today, our Head of Multi-asset, Madalet Sessions, and I are having a conversation about saving. With Youth Day coming up this week, Madalet and I thought we’d discuss the importance of starting to save early.

Some of our listeners might think that they are past what they would consider their youth, but a lot of the principles we’ll discuss are applicable to everyone. However, as we’ll point out, the earlier you do start saving, the better.

Welcome, Madalet.

Madalet Sessions:

Thank you.

Caylin Conradie:

Let’s start out with a simple question. What is saving?

Madalet Sessions:

Saving is something that we, individually, have control over. So, we either have pocket money or some sort of income, and saving is how much of that we squirrel away into something that we put towards a financial goal.

So, either we are saving to buy our first car, we’re saving to buy our first home or, if we’re really lucky, we’re starting to save towards our retirement when we turn 65. So, 45/50 years from now for the youth (hopefully). It’s putting aside a little bit to help cover the needs that we won’t be able to meet out of the income we will have in the future, or income we won’t have in the future in the case of retirement. We need to put money away today to make that consumption in the future possible.

Caylin Conradie:

Some of those terms that you’re mentioning are quite long. If you’re saving for a car or a house, it might be a shorter period, but with the retirement point that you mentioned it comes back to the importance of starting early.

Madalet Sessions:

Absolutely.

Caylin Conradie:

No matter what it is you’re saving for, it’s important to start early if you can. I know that you’ve done some research, and this is something you’re quite passionate about, so could you tell us why is it important to start saving early?

Madalet Sessions:

Yes, I thought the best way to explain this would be with a very cool example. Say we save from the time we turn 20 until the day before our 30^th birthday, so until we’re 29, and we put R500 a month (or R6,000 a year) into savings – and we save just for those 10 years, and we save it at 5% per annum. By the time we get to 65, having never touched that money, we get to a cool nearly R450,000. That’s one example.

Caylin Conradie:

So, in this example you’re only saving for 10 years?

Madalet Sessions:

Yes, only saving for 10 years. Let’s call it example A.

For example B, we’re taking somebody who, like most of us, didn’t really take life and the future all that seriously at the age of 20 and then wakes up on their 30^th birthday and realises they need to start some planning for the future. And so, starting at the age of 30, they now save R500 a month every month until the day they retire at the ripe old age of 65.

The first investor, A, only ever saved R60,000. Investor B saves substantially more. Because they save for 35 years, they save over R200,000. At 5% this investor gets to R600,000 after 35 years vs. investor A getting to R445,000 after just 10 years.

Interestingly, investor B, the guy who starts at 30, only overtakes investor A at the age of 50. So, he needs to save for 20 years to get to the same capital value as investor A. It’s a big difference.

Caylin Conradie:

Yes, that’s massive.

Madalet Sessions:

So, starting early means that compounding works in your favour for much longer. And then, just to round this off, if we start at 20 and we save until we’re 65 (R500 a month at 5%, exactly the same as before), that gets to R1 million.

Caylin Conradie:

Can you just say that again?

Madalet Sessions:

Yes, so we had investor A that starts at 20 until 29. He gets to R445,000. Investor B starts at 30 and continues until they’re 65. That gets to just shy of R605,000. Investor C starts at 20 and saves R500 every month from the age of 20 to the age of 65. All three investors saving at 5%. Investor C, the guy who saves his whole life, gets to R1 million.

So, it makes sense to start early. Compounding works in your favour.

It also makes sense to cultivate the habit. So, if you get to your 20s and you’ve cultivated the habit of first putting a little bit aside, and you can maintain that for your entire life, you get well ahead of the alternatives. Starting later is not as good at starting early. Maintaining the habit is better than just starting early.

Caylin Conradie:

What are some other good financial habits you can suggest to the youth?

Madalet Sessions:

So, there are some good habits. One is to never save last. Put your savings first. It’s a very good habit because it enables you to earn the compound return. So, saving first is a very good habit to cultivate. Saving frequently is another good habit.

My advice to young investors specifically, but actually to all, is to never borrow money or incur debt for anything other than buying an asset. So, if you’re going to borrow money, don’t spend it on clothes or holidays or coffees. If you’re going to borrow money, buy an education, buy a car, buy a house. That’s either investing in your human capital or in your financial capital. Those are really, in my opinion, the only times when it’s a good idea to incur debt.

Then the last thing, which I think it doesn’t get enough airtime, is to match your savings to your financial goals. I’m going to talk a little bit about that in a minute.

I just want to say why it’s important to save first. So, when Caylin and I were discussing this podcast, she said asked me how much a cup of coffee costs these days. And it wasn’t because she wasn’t sure how much coffee costs – but I did an analysis where I take R30 a week. If you spend R30 a week on coffee, and you manage to persuade yourself, instead of going out for coffee, to have coffee at home and save yourself this R30. If you save this R30 per week for 10 years, you would’ve saved R15,000, more or less, in coffee budget over those 10 years. And that monthly saving (R15,000) would’ve grown to R20,000 if invested at 5% per annum.

Now, we’re using very low return rates here. We do actually expect much higher return rates. But just a modest assessment of how much it costs you to have a cup of coffee every week: physically it’s R15,000, and in potential return at very low rates of return it’s R20,000. It’s a big number.

Caylin Conradie:

It’s a big number. So, to round off the question on why it’s important to start saving early – you’ve mentioned two things, essentially. It’s to form a habit of saving, and you also illustrated the importance of compounding (which you’ve done again now with the coffee example).

Madalet Sessions:

So, in this coffee example, we got to roughly R20,000 at the end of 10 years of not buying coffee. If you leave that money to grow for 35 years, which is not unrealistic (if you save your coffees in your 20s, at the age of 30 you’ve got this pot of R20,000). If you leave that R20,000 in the market at, again, a modest 5% return, at the age of 65, that would’ve grown to a little bit more than R110,000. And that’s from not buying coffee every week. That’s the benefit of compounding.

Caylin Conradie:

We’re using examples here. With your investor A and investor B examples, we used R500 a month. But that could be any amount. R50 a month, R100 a month, R1,000 a month… just to illustrate how far saving will get you, especially if you start early.

Madalet Sessions:

That’s right. So, now, the reason I picked R500 is a little bit self-serving. The unit trust industry takes, I think, a monthly debit order minimum, generally of R500. I think there are exceptions. So, R500 is a nice clean number, because it allows you to make investments in unit trusts, where the money can really be put away.

I think with R200 or R300, you need to start looking at potentially a money market type of account, until you get to a lump sum minimum. And again, the numbers or minimum values vary from unit trust to unit trust, but typically I think R5,000 to R10,000 would be the minimums allowed in the unit trust markets.

Caylin Conradie:

I think something that could go through the minds of a lot of the youth is, ‘I don’t need to start saving now. I can use my money, enjoy my youth, and start saving later’ or ‘I can wait till I’m earning more so that I’ve got more to save’. It’s not easy for everyone to put money away, no matter how small it is. But if it is possible, it makes a massive difference.

Madalet Sessions:

It makes a huge difference. So, I’ve worked another example. I’m a sort of spreadsheet junkie. You can illustrate so many things with examples. So, I did this example to show the value of two things. So, when you asked me about good financial habits, the one was saving regularly, and then the last one I mentioned was to save in a way that’s time-horizon appropriate.

So, what I did in this example, and I think it’s a big number, but if you have a child today and you could put R10,000 away for that child and never top that up.

It’s just on the day of their birth, you put that R10,000 away for them, and then every year on their birthday you give them a statement. I’m sure that’d be a fantastic birthday present! Anyway, so you do that for a child. At the age of 65, so now we’ve really stretched this example to give you the maximum horizon, essentially, that R10,000 at 5% would grow to R240,000. It’s a big number. It’s gone up 25-fold at very modest rates of return.

Because we’re actually looking at a really long-term horizon, let’s say you could invest at a much more attractive 10% per annum, do you want to guess what your growth in your asset value is then? It goes from R10,000 to just shy of R5 million. That’s the difference between 5% return and the 10% return.

Now, the additional 5% is not free. You have to take risk for it. But if you’re not going to need the capital for 20 or 30 years, you really should take that risk, because it’s the only way you open your door to really attractive outcomes. If, however, you’re saving for a house or a car, and you need your money next year or maybe the year thereafter, the equity market can fall 50%. You cannot afford to put money away that might be worth 50% less when you need it. That’s a bad idea.

Caylin Conradie:

So, this is getting quite technical for some listeners, maybe, but when you start talking about taking more risk you’re referring to different asset classes.

Madalet Sessions:

That’s right. So, there are different asset classes, and most fund managers of unit trust companies would give you a sense of time horizon on their investment information. There’s a document, called the minimum disclosure document, which will tell you what is the appropriate time horizon for which this money should be considered as, call it in inverted commas, ‘locked up’.

So, a lower risk product would be a type of money market, or an income product, or a low-equity product. And typically, those would be suitable for three-ish, four-ish, five-ish years. Equity, high-equity or flexible products are really much longer-term products. You really need to be looking upwards of seven and 10 years.

Caylin Conradie:

Because it’s more risky.

Madalet Sessions:

It’s more risky. Which means you’re not sure what the capital values will be in the short run.

Caylin Conradie:

Because it’s slightly more volatile.

Madalet Sessions:

It’s more volatile, exactly. But that volatility is what gives you the upside. So, if you don’t need the capital, you don’t care about what it’s worth in two or three years’ time. You want the maximum likelihood of earning really attractive returns over an appropriate investment horizon, which is 10 years plus. You really don’t want to be sitting on conservative products if you’re saving for retirement or saving for some future objective.

Caylin Conradie:

If you’re starting early.

Madalet Sessions:

If you’re starting early. And that’s the beauty. If you start early, you can afford these risks. If you start later, you’ve got to be a little bit more concerned. Otherwise, if you’re starting at 60 to save towards 65, and you need to start drawing an income of living off of a portfolio because you stopped working at 65, you’ve got to be a little bit more concerned about what your capital will be worth, because you might need your capital.

So, again, we’re talking really to the youth today. And so, one of the benefits we want to highlight, or habits, is if you really don’t need your money, don’t put it in a money market. If you need your money, put it in a money market. Money market means lending overnight or in the next month or two to somebody who gives you your money back in the relatively short period, and just earning very modest rates of returns, but consistently. Very little capital volatility or uncertainty about your return.

If you’re saving for your house or a holiday at the end of the year, it’s a very good idea to do that. If you’re not going to touch the money, you want to put it away until you’re 65, do not take such little risk. It’s a bad idea.

Caylin Conradie:

And again here, we’re assuming it’s a unit trust-type product. So, it can be a general unit trust fund, or a tax-free savings option on a unit trust fund, or even a retirement annuity. But this assumes, as you mentioned earlier, generally a minimum investment of R500 a month, or various lump sum options, whether it’s R10,000 once off or R20,000 (various funds are different).

But someone who’s saving less than that a month, they do have the option of, say, saving it in their bank account. If it’s R200 a month, not enough to invest it in a unit trust, those people could wait until that amount has built up to be able to put a lump sum into a unit trust fund.

Madalet Sessions:

That’s right. So, they’re very innovative. Every single bank now will offer a savings or a money market or a higher interest rate facility.

Caylin Conradie:

And we’re really talking unit trusts, because that’s our area of expertise. That’s what we do.

Madalet Sessions:

Exactly. As you say, if you have R200 a month, you could save it in a high interest rate type of account until you have a lump sum to put away. So, even in our example of the coffee, nobody’s going to allow you to put R30 a week into an investment product. It’s just too expensive to administer. So, you would need to have the discipline to put that R30 aside yourself, and then build up until you have sufficient capital to put it into a unit trust or another type of investment vehicle…

Caylin Conradie:

…so that you can earn a return on it because it’s not going to earn much return if you’ve got it in cash.

Madalet Sessions:

Exactly. Bank accounts, where we have most of our income paid into, are not return products. They are transactional products. So, if you want to save, there are two reasons to move it out of that account. One, it’s much harder to spend if it’s not in your bank account.

And two, it means you’ve put it aside and you can earn a return on it. It’s always time dependent. It depends on what the Reserve Bank is doing. But there are always interest rates available for making your money unavailable to yourself for some period of time. So, banks will offer you a seven-day deposit or a 14-day deposit, or a 60-day deposit rate that is much higher than what is available in your transactional bank account. And it means you lock your money up for that period of time. You can’t touch it. That’s another good discipline, tying up your money so you can’t touch it.

And so, again, there are ways of building up lump sums towards a unit trust investment. But also, my understanding is that there are people in this market, financial advisors, who can help investors make these types of decisions. That is not our area of expertise. We really just want to encourage the matching of time frame and the understanding of the importance of actually starting young and forming the habit.

We’ve had conversations before where people see their income as available to them today. And what is so important is to recognise that there are two people that need to live out of your income. It is you today, and you when you can’t earn an income. So, when you are older than 65 or 70 years old, you no longer have your sturdy job and your paycheque, you need to live off of the income that you earned when you were 20, 21, 22 years old. And the only way to enable that is for you at 20, 21, 22 to put some of that away.

Caylin Conradie:

Or 25, 26. Or 30, 31, 32.

Madalet Sessions:

Exactly.

Caylin Conradie:

One thing, that really has stuck with me, that you’ve said in the past, and I’m going to mention it again here because I love this quote of yours. It’s an original Madalet Sessions quote. You’ve often said, ‘the money you spend now, you are borrowing from your future self’. And that is quite a scary thought.

Madalet Sessions:

Yes, your future self can’t replace it.

Caylin Conradie:

Yes, and that’s maybe the money spent on those extra things you want or you think you need, but you could actually be putting it away so that one day, when you aren’t earning income anymore, you have that money available to spend on living… and luxuries.

Madalet Sessions:

That’s right. I mean, a fantastic outcome for us all would be, have luxuries today and luxuries in the future. And the way in which we can maximise the probability of both of those is starting the savings habit early, investing in the right type of product.

So, you could be saving today at 5%, or you could be saving today at 10%. If you can save today at 10%, you need to save less to achieve a higher level of income in the future. If you’re saving today at 5%, you need to save more to achieve a level of income in the future. So, if you match appropriately and you have the habit, that is how you live a good life now and a good life then.

But by cutting your cloth according to size – I always forget how that saying goes – you also learn that you have an appropriate sense of luxury. You know, decent home-brewed coffee is a luxury. Sure, an outside coffee is also a luxury. But maybe go walk in the forest with your friends or go walk on the promenade. One doesn’t always need to spend the money to have a good time.

And so, in my opinion (I’m not a big spender myself), it’s not a reduced life. It’s just a slightly different set of choices that enables a richer life today and a richer life, in all its senses, tomorrow.

Caylin Conradie:

Yes, and I think it’s sometimes hard for people to see the flashiness of others, and the things that they’re enjoying, so stretch themselves to be able to enjoy those things, too. But ultimately, you’re not doing yourself any favours, because you’re just putting more stress on yourself and not being able to enjoy that one day in the future. It’s not sustainable.

Madalet Sessions:

It’s not sustainable. And also, and this is so important during life, you don’t know where those people’s spending is coming from. It could well be financed on credit cards that come with a 20%+ interest rate. That’s a very, very expensive lifestyle when you’re paying 20% interest on your life.

Caylin Conradie:

Maybe that’s a conversation for another day.

Madalet Sessions:

It is a conversation for another day. I think it’s very important. I do want to make this point, that debt is really only beneficial in the long run if you use it to acquire assets. To borrow to go on holidays, or for a cup of coffee on a credit card, or your groceries on your credit card and you don’t pay it for a few months, it’s very expensive, and it’s better not to do that.

Caylin Conradie:

To finish off – we have stressed the importance of saving early, but if there are people listening to this podcast and thinking, ‘Oh dear, I’m not quite in my youth anymore and I haven’t started saving yet’: Start today. It’s not too late. It will take you a little bit longer to get there, but rather now than never.

Madalet Sessions:

Exactly.

Caylin Conradie:

As an asset manager, we don’t offer advice ourselves, but if you are looking for advice, we are more than happy to put you in touch with the right people. You can contact us at investorrelations@denkercapital.com. Or, if you’d simply like to find out more about us and the funds we manage, then you can have a look at our website at www.denkercapital.com.

We hope to have more conversations on saving and investing in future.

Thanks, Madalet. We’ll chat again soon.

Madalet Sessions:

Thanks, Caylin.

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).

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.

We have entered into a co-branding agreement with Sanlam Collective Investments (SCI), which has been approved by the Financial Services Board. As such, the names of the funds below have changed to be Denker Capital funds and the minimum disclosure documents for September will reflect this change. Two of the name changes include changes to better describe the investment strategies of the funds*.

The investment philosophy and team have not changed. These feeder funds have always been managed by our investment team, since we were part of Sanlam Investments as SIM Global and SIM Unconstrained Capital Partners. The process for transacting stays the same as in the past because SCI will continue to administer the funds.

If you have any queries, please contact us.

Disclaimer

The information in this communication or document belongs to Denker Capital (Pty) Ltd (Denker Capital). This information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. While we have undertaken to provide information that is true and not misleading in any way, all information provided by Denker Capital is not guaranteed and is for illustrative purposes only. The information does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment or transaction. Because there are risks involved in buying or selling financial products, please do not rely on any information without appropriate advice from an independent financial adviser. We will not be held responsible for any loss or damages suffered by any person or entity as a result of them relying on, or not acting on, any of the information provided.

Disclaimer

The information above belongs to Denker Capital (Pty) Ltd (Denker Capital).  This information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent.   While we have undertaken to provide information that is true and not misleading in any way, all information provided by Denker Capital is not guaranteed and is for illustrative purposes only.  The information does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment or transaction. Because there are risks involved in buying or selling financial products, please do not rely on any information without appropriate advice from an independent financial adviser.  We will not be held responsible for any loss or damages suffered by any person or entity as a result of them relying on, or not acting on, any of the information provided.