Podcast: Jacobus Oosthuizen on riding the global rollercoaster
In this episode, Portfolio manager Jacobus Oosthuizen talks to Nigel Barnes about how we use our process and philosophy to navigate the global environment. Jacobus uses sector and company specific examples and tells listeners what differentiates the Denker Global Equity Fund from its peers.
Hello Jacobus, thanks for joining me. For the benefit of listeners, maybe just remind people who you are and how you came to pick up the management of the Denker Global Equity Fund?
Good morning, Nigel. Great to be here with you this morning. Well, I’ve been with Denker from its inception. Before that I was part of the SIM (Sanlam Investment Management) Global team which was started by Kokkie Kooyman in 2004. That’s where the global capability started for our firm.
I’ve worked with Kokkie from 2006 until 2011, when I became more of a generalist. I’ve had a mandate and scope to cover any company or industry in the world. It’s been a fantastic experience and, yes, I got the opportunity to take over the fund about two years ago when Pierre Marais retired.
So, almost a decade of experience working in global equities and, as you say, almost two years ago you took over the running of the Denker Global Equity Fund – that’s great. In terms of how things are going, I know it’s been an interesting period over the last two years with lots of things happening in the global environment. How are you invested right now and why?
Yes, it’s been a rollercoaster over the last two years in the market. About two years ago we were coming out of the pandemic and vaccines were kicking in and since then we’ve seen interest rates starting to pick up, supply chain problems around the world and now the Ukraine/Russia issue, inflation and monetary tightening taking place.
It’s really a very difficult environment to navigate. But I believe our process and philosophy sets us up very well to navigate through this period. Our process forces us to remain very disciplined on valuation. We’ve been able to avoid the big landmines, especially the long duration equities, the tech stocks that were trading at ludicrous valuations with no profitability and have come down 70% to 80% over the last year. We’ve been able to avoid those and that’s mainly due to the valuation discipline.
And the other part of our process is around quality and making sure that we invest in companies that grow shareholder value over time, so companies that have sustainable competitive advantages over a long period of time, that are profitable, that have good management teams and that are good at capital allocation.
Having that focus enabled us to invest in companies that are actually well positioned to navigate through this inflationary environment. So, companies with pricing power where demand for the products is very much inelastic, and companies that are well run.
We are seeing opportunities in this environment. We have a big chunk of the fund still in technology companies. Our technology companies have held up very well over this period. Two examples would be Oracle and CDK Global, a company that many investors won’t know – a small little mid cap that got bought out by private equity.
These type of technology companies are profitable, they’ve got high margins, very sticky products and they were not expensive going into this environment. They were trading at 13x to 15x price earnings multiples (relative to other technology stocks that were trading at 30x to 50x) and they’ve outperformed the technology market.
And then we’ve got a big chunk in financials, where it’s great that we can draw on the experience of Kokkie and his financials team and we’ve got Barry De Kock feeding those ideas into our fund. Two of our biggest positions there are Arch Capital and Berkshire Hathaway.
These companies are benefiting from a hardening rate cycle. That means the pricing for insurance is going up, their profitability is going up and they are also benefiting from rising interest rates. So, their investment book is doing better in this environment and these companies also have done exceptionally well over the last year.
Then about 15% of the fund is invested in what I like to call quality cyclical companies, and these are companies where we believe the market has become too pessimistic around pricing in the recession risk and where the market isn’t differentiating between companies that are well positioned for a recession and those that are not.
We can drill down into some examples there later but, yes, that’s how we are positioned at the moment.
Thanks, Jacobus. It’s interesting because when you talk about your process and philosophy it’s clearly a very bottom up focus which, our listeners will know, is consistent across the Denker business. Macro awareness is clearly part of that, but I’m going to park that for a second. We can come back to that in a moment but you talk about three areas – technology, financials and your global cyclicals. CDK Global, tell us a bit more about that business. What do they do? Where are they listed? How did you find that one? Give us a bit of a background there.
It’s a company that came through our screens – it screened very well on quality, on margins, on profitability over time. It’s a software company that helps auto dealers manage their business, so like an ERP (enterprise resource planning) system for dealers. It runs the whole business. It runs repairs and maintenance, new car sales, the back office, accounting. It’s got different modules.
It’s a company where the product is very sticky. It’s very difficult, if you run your whole business on their software, just to go to a competitor. Unfortunately for us, the company’s been bought out, so we don’t own it anymore, but that’s a good example of the type of companies that we look for and that was available at a very reasonable valuation.
And that was a mid cap?
That was a mid cap.
Was it listed?
It was listed in the US. It had a US$5 billion market cap.
And in terms of the portfolio at the moment, how much is in the mid and smaller cap space?
It’s around 5% at the moment. We’ve had a few of these situations where our mid-caps have actually been bought out. It hasn’t been easy to replace them. We are working hard to try and replace them. There are opportunities. One that we like at the moment is Ashtead. We actually sold it out of the portfolio last year when it became very expensive and it pulled back during the year. We bought it back now recently and that’s an interesting small company.
It’s listed on the London Stock Exchange but the main business is actually in the US. It’s an equipment rental business, Sunbelt, the second-largest equipment rental business in the US. We think they are very well positioned for the coming capital investment that’s required in the US. If you just think about the electricity grid in the US, it has to be renewed. It has to be adjusted to accommodate renewables, so trillions of dollars of capital spend that has to come in the US.
Other capital investment that’s required in the US is semiconductor production facilities that have to be built. The US wants to become less dependent on Taiwan for their semi-conductor chips. It’s billions of dollars of capital spend and you need Ashtead’s equipment to work on these projects.
Again, I think it will interest the listener that you have a 5% or so holding in mid and small caps, which helps as a differentiator. On the financials side, Arch Capital and the good old favourite, Berkshire Hathaway. Your view on Berkshire Hathaway at the moment, how do you think things are going there?
I think things are going very well. They’re very clear on the succession planning for Warren Buffett and Charlie Munger – a very good manager that they’ve identified as the new CEO (Greg Abel). And I think that company has been set up over many years for a period like this.
Warren has lived through the 70s’ inflationary environment, so that’s always been top of mind in the way they set up a company and how they make their investments. It’s well diversified. As I mentioned earlier, the insurance part of the business is now benefiting from the hardening reinsurance market cycle. Capital in the industry is, for the first time in many years, becoming constrained – and Berkshire is well positioned to benefit from the opportunities this creates, given its scale.
It’s a fantastic company, generating ROEs of between 8% to 10%. It’s undervalued, so they’re buying back shares. So, effectively your shareholder growth per share could be between 8% and 12% per annum over the next couple of years. I think in this type of environment that’s a very good return in dollars, if you can achieve that. So, yes, I think it’s a really solid investment opportunity.
Great. Let’s move on and talk about the macro. Macro-aware is, I think, the best way to describe your thinking, which, as I say, is consistent across the Denker business. Just in terms of the macro picture, how do you see things at the moment? We’re getting towards the end of the year. We’re looking into next year. The future’s behind a closed door, we know that, but how are you thinking? What’s keeping you awake at night?
Well, Nigel, I think it’s been no surprise: it’s all about inflation. You have to take it very seriously because we’re probably at a 30-, 40-year inflection point in the economic environment. I think we’ve been quite aware of this for a number of years. Again, it comes to your valuation discipline. Because we were living in this environment where interest rates and inflation were abnormally low, you had to be very disciplined in the discount rates that you use on your valuation.
As I mentioned earlier also, the companies that you choose, you have to be very certain that they can navigate this environment. They have to have pricing power. They have to have a good competitive position. If you are a commodity company, if you have a commodity product or service and you’re not differentiated, you are really going to struggle in this environment. I think that is the main thing.
It is not our competence to try and forecast inflation and when it will turn but we can see that it’s going to be very difficult for the US Government and the Fed to bring it under control.
The Fed is very hawkish in their talk but whether they will actually be able to raise interest rates enough to really bring it under control, I think we have our doubts around that, especially while the government is spending so much. So, there’s a disconnect between what the Fed is saying and what the US Government is doing. We think we have to be prepared for an inflationary environment for the medium term.
And you’re comfortable that the portfolio’s positioned with that key macro concern in mind?
Yes, exactly. So, we won’t position the portfolio for that environment but we make sure that, from a risk point of view, that we are well diversified, again, from a fundamental point of view and in companies that are able to navigate through this environment.
And the number of stocks in the portfolio at the moment?
It’s just more than 50 stocks. So, I think it’s well diversified. We are totally unconstrained. We’ve got a very high active share (80%) so by investing in our fund you get something totally different from the benchmark. We think we’ve got good risk management and valuation discipline, so you’re getting something which is probably cheaper than the market, and companies that we believe are actually better than the average company in the market.
Yes, I think that’s your challenge now. Over the last few years here in South Africa we’ve seen many of the large global asset management firms getting funds registered and approved here and giving the financial intermediary or the discretionary manager much more access to those bigger names.
But I think the way you’ve summed it up there for me would be that if you’re looking for something that’s slightly different alongside some of those big names, that your fund would be an interesting holding there because of the slightly different portfolio construction or stocks within that portfolio, including some of the mid and small caps. So, thank you for that.
Let’s finish up. Over the last two years I was looking at the feeder fund – it’s great that you’ve got a feeder fund option for investors as well as the hard currency option. It’s the Denker Sanlam Collective Investments (SCI) Global Equity Feeder Fund and I was looking at the A1 class and you’re comfortably ahead of the category average there since you took over Jacobus. That’s great to see.
And I think what we’ll do is within the transcript of this podcast we’ll put in a couple of charts on performance. So, thank you. It’s great to catch up and wishing you every success for the end of the year and really appreciate your feedback. Jacobus, thanks a lot.
Please contact us for more information on the Denker Global Equity Fund or the Denker SCI Global Equity Feeder Fund, or if you would like to invest.
Denker SCI Global Equity Feeder Fund: Annualised performance as at 30 September 2022
SCI stands for Sanlam Collective Investments
Source: Morningstar. Returns for periods longer than one year are annualised. Annualised performance is the weighted compound growth rate over the performance period measured. Net of A1 class fees of 1.0% (excl. VAT). The highest annual calendar return in the last 10 years was 30.3% and the lowest was -10.4%.
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 Equity Fund is a sub-fund 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 fund 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).
The Sanlam Universal Funds Plc full prospectus, the fund supplement, the minimum disclosure document (MDD) and the KIID are available free of charge from the Manager or at www.sanlam.ie. This is neither an offer to sell, nor a solicitation to buy any securities in any fund managed by us. Any offering is made only pursuant to the relevant offering document, together with the current financial statements of the relevant fund, and the relevant subscription/application forms, all of which must be read in their entirety together with the Sanlam Universal Funds Plc prospectus, the fund supplement the MDD and the KIID. No offer to purchase securities will be made or accepted prior to receipt by the offeree of these documents, and the completion of all appropriate documentation. A schedule of fees and charges and maximum commissions is available on request from the Manager.
The Manager of the Denker SCI Global Equity Feeder Fund is Sanlam Collective Investments, a registered and approved Manager in Collective Investment Schemes in Securities. This is an equity fund, which means prices will go up and down. Funds that hold 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 A1 class is the most expensive class of the fund with an annual management fee of 1.0%, a maximum initial fee of 2.9% and a maximum annual advisor fee of 1.0% (these fees excl. VAT). A feeder fund is a portfolio that invests in a single portfolio of a collective investment scheme, which levies its own charges and which could result in a higher fee structure for the feeder fund.
Changes in exchange rates may have an adverse effect on the value, price or income of a product. 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. 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. Lump sum investment performances are quoted. For more information visit https://www.sanlaminvestments.com/.