What we’ve learnt from previous crises

Ricco Friedrich
Director and portfolio manager

• Our research shows that there have been eight market manias over the past 50 years. While each started for a different reason, they all presented incredible buying opportunities.
• The average sell-off from peak to trough was roughly 14 months, with an average decline of 41%. The shortest lasted four months after the 1998 Russian crisis and the longest was 28 months following the collapse of the Bretton Woods System in 1975.
• Investing in the three months after the initial sell-off yielded exceptional results over the subsequent 12, 24 and 36 months.
• It is not possible to time the bottom in a period of extreme uncertainty and it’s not easy to buy when the news is bad and everyone else is selling…but buying at these low prices is a great opportunity.
• The South African market initially fell 35% from its January peak and has subsequently bounced 26%, leaving it down 18%. Research by Gavekal tells us that rallies rarely happen in a straight line. In 15 bear markets over the past 50 years, only one did not see the initial major low being tested within three months. So, we do see further buying opportunities in the coming months. The bounce we’ve seen reflects perhaps a little too much optimism.

Critical factors in analysing which businesses to avoid

Claude van Cuyck
Director and portfolio manager

• Given that the future is impossible to predict, it’s important to stick to an investment philosophy.
• For us, there are certain key factors that we consider when making an investment decision. These are good business economics (strength of business models or moat and strength of balance sheet); the quality of the management team; and investing with a margin of safety – we make sure that we aren’t overpaying for the value we are receiving by understanding the intrinsic value and the range of possible outcomes.
• The ideal scenario is for all of these factors to be aligned when allocating capital but this is not always possible. Therefore, it’s important that we understand the risks companies face so that we diversify against them and invest with a margin of safety.
• If valuation is the only reason to buy then it is probably not the right buy – you need to consider other factors in conjunction with value.

Will domestic small caps survive?

Jan Meintjes

Portfolio manager

• When fear and greed dominate, market participants seek the liquidity that large caps offer. So small caps have lagged, which is normal in times of crisis. However, it’s important to focus on the long term.
• In the last three years the small caps in our portfolio have outperformed the FTSE/JSE Shareholder Weighted Index by around 15%.
• In the medium- to long term the companies that have strong balance sheets, strong business models and strong management teams will survive.
• We see significant opportunities in the small cap sector, now and before the crisis hit.

How the Denker SCI Equity Fund is positioned 

Ricco Friedrich
Director and portfolio manager

• In March we sold some of the defensive companies in our portfolio that held up well (Pick n Pay, Dis-Chem, Shoprite and Mediclinic). We bought MTN, Northam, Mr Price, Capitec, Sasol, Curro, FirstRand and Naspers).
• In April we have not made many changes to the portfolio. Stocks have recovered quickly and to some extent we think this optimism is premature.
• There are good opportunities to buy great quality businesses at bargain prices. We are sticking with our investment philosophy and are attracted to companies that are not just resilient, but anti-fragile. We see an anti-fragile company as having a growing profit pool, being a great capital allocator, having a strong track record of financial health and culture as a sustainable competitive advantage.

If you have any questions, please contact me at nigel@denkercapital.com

Disclaimer

The information in this material 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.
Sanlam Collective Investments (RF) (Pty) Ltd (SCI) is a registered and approved Manager in terms of the Collective Investment Schemes Control Act.

The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. The manager retains full legal responsibility for the third party named portfolio. The Sanlam Group is a full member of the Association for Savings and Investment SA. If the fund holds assets in foreign countries and could be exposed to the following risks regarding potential constraints on liquidity and the repatriation of funds, macroeconomic, political, foreign exchange, tax risks, settlement risks and potential limitations on the availability of market information. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments, a registered and approved Manager in Collective Investment Schemes in Securities. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme.

Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. Changes in exchange rates may have an adverse effect on the value, price or income of the product. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (CISCA). The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002.