Nigel Barnes:

Welcome to the Denker Capital podcast with me, Nigel Barnes. Today is the 29th of November 2021 and I’m very pleased to be joined by Jan Meintjes, the portfolio manager of our small cap fund [the S-Alt SC Qualified Hedge Fund +].

Welcome, Jan. How’s it going?

Jan Meintjes:

Morning Nigel. All good! We saw some volatility in the market on Friday, but today looks slightly better. So hopefully the world will recognise that these variants and mutations of the Covid-19 virus are probably going to be part of what we have to deal with going forward and I thought we saw a bit of an overreaction on Friday.

Nigel Barnes:

I’m very keen – as we head towards the end of the year – to have a look back, and then look forward, at the small cap arena in South Africa. Could you kick off by taking us back over the course of this year – how have small caps performed and how has the fund performed?

Jan Meintjes:

I think small cap stocks have had a good time during the last year, and certainly over the last two years – they’ve outperformed benchmarks considerably. As far as our fund goes* – in the last 12 months we returned 45.0% until the end of October, after fees. That’s quite a bit ahead of the FTSE/JSE All Share (Alsi) and the FTSE/JSE Capped Swix. I think it’s probably more important to look at the fund’s performance from the time before Covid-19 struck because we saw quite a bit of volatility, and we see lots of people quoting very high numbers over the period but some of that is coming off a very low base. So I think the right way to look at it is over the last (almost) two years, since our fund has been running. Since inception the fund has returned 36.0%. The Alsi has done 26.3% and the Capped Swix 20.8%, over that time. So I think that the opportunity we saw two years ago, when we launched the fund, has played out. We’ve had some phenomenal performers in the fund. To highlight two of them: ADvTECH and Lewis – they’ve been up 180% and 160% since we bought them. In addition, there are five counters that have returned over 50%. So I think it’s fair to say that some of the easy money has been made, but we continue to see lots of value in this space. We do think that global equities in general are stretched. Valuations do look full, and we think that that valuation gap is probably going to provide a bit of a margin of safety going forward to at least decent returns in this space.

Nigel Barnes:

Okay, fantastic. Let’s turn to the future. Looking forward, you say that easy money has been made. How do you feel the prospects going forward?

Jan Meintjes:

First of all, it’s important to realise that in the space, most companies are very South Africa faced. Very few within the small cap universe have substantial offshore operations. So I think the important thing is to look at the macro environment for the SA economy, and we continue to see that improving. Standard Bank, I think just last week, upgraded their GDP growth outlook for this year from 4.2% to 5%. And they also upgraded their outlook for next year. I think it’s important that from an economic point of view, we continue to see a bit of a tailwind for some of the SA Inc. stocks. Generally, management teams have come through the pandemic period very well. Companies with well managed cash flows have been well managed. So I think the macro picture is a tailwind.

If we look at some pricing or valuation metrics, we continue to see good value. I looked at our portfolio late last week and almost 60% of the portfolio is still trading at a PE multiple of below nine and the average dividend yield of all the dividend paying stocks in our portfolio is 5.4%. We look at intrinsic value – and the average discount to intrinsic value is still north of 25% for the portfolio. So, we continue to see good opportunities.

Nigel Barnes:

And how many stocks in the portfolio at moment?

Jan Meintjes:

We’ve got 19, we’ve always planned for it to be around 20. We’ve just come out of a period where the breadth of opportunities was quite wide. Going forward, it will be more important to get the stock picks right. We will probably look to increase the weights to some of the higher conviction ideas but we don’t see ourselves adding a lot more counters to the portfolio. So, around 20 is where we want to be.

Nigel Barnes:

Thanks Jan. In synopsis, the sector and the fund have had a very good run over the last year or so, and you think that there’s economic tailwind, strong management teams, GDP upgrades, etc. All positive for the next year or so. Please remind the listeners of the characteristics of the fund?

Jan Meintjes:

I think it’s important to start at the beginning. We launched this fund really because we saw a big opportunity in small caps. We thought that there was lots of value to be had, and our competitors were exiting this space. Keeping the fund relatively small, we think there are very good opportunities to earn decent returns in the space. In line with our philosophy at Denker, when picking stocks, we prefer to invest in higher quality companies, the quality of management is very important to us and the return profile of companies looking forward is very important to us. So we try to avoid high-risk situations. There’s very little gearing in our portfolio (companies being geared). I can think of three counters that have got significant gearing on their balance sheets. I would certainly look at this as a portfolio of companies with slightly higher quality strong balance sheets, and we buy into their management teams – which is a consistent philosophy throughout our whole business.

Nigel Barnes:

Thank you. One final question, which is dear to my heart: Are Arsenal going to finish in the top four?

Jan Meintjes:

That is a million-dollar question. I must say I’m probably more confident in picking a few stocks in the small cap space than trying to answer that. I’d say that they’ve raised their game a bit, they’re still not competing with the top three or four sides, so I think they’ll do well to finish in the top six.

Nigel Barnes:

For the listeners’ benefit, Jan and I share the same allegiance to ‘The Gunners’. Thanks Jan, I appreciate your time and look forward to seeing you in the new year.

*Fund returns quoted are annualised and net of the A2 class of the S-Alt SC Qualified Hedge Fund +, which has an annual management fee of 1.35% (excl. VAT). The annualised returns are the weighted average compound growth rates over the periods measured. The benchmark (STeFI) returned 3.8% over the last 12 months and 8.7% since inception. The highest one year return since inception was 45.39% and the lowest was 6.06%. The fund launched on 1 December 2019. Source of returns: Morningstar, 31 October 2021.

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.

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

The Manager of the range of Denker Capital South African funds and feeder funds is Sanlam Collective Investments (RF) (Pty) Ltd (SCI).The Manager retains full legal responsibility for third party named portfolio. The Sanlam Group is a full member of the Association for Savings and Investment SA. A schedule of fees and charges and maximum commissions is available from the Manager. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments schemes.

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 a 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. 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. Management of this portfolio is outsourced to Denker Capital (Pty) Ltd, who act as a juristic representative on the Sanlam Investment Management (Pty) Limited regulatory license.

While CIS in hedge funds differ from CIS in securities (long-only portfolios) the two may appear similar, as both are structured in the same way and are subject to the same regulatory requirements. The ability of a portfolio to repurchase is dependent upon the liquidity of the securities and cash of the portfolio. A manager may, in exceptional circumstances, suspend repurchases for a period, subject to regulatory approval, to await liquidity and the manager must keep the investors informed about these circumstances. Further risks associated with hedge funds include: investment strategies may be inherently risky; leverage usually means higher volatility; short-selling can lead to significant losses; unlisted instruments might be valued incorrectly; fixed income instruments may be low-grade; exchange rates could turn against the fund; other complex investments might be misunderstood; the client may be caught in a liquidity squeeze; the prime broker or custodian may default; regulations could change; past performance might be theoretical; or the manager may be conflicted. The S-ALT SC Qualified Hedge Fund was formerly registered as the S-ALT YN Qualified Hedge Fund. The name change was approved with a change of investment policy, and as such the historic fund performance ceases to exist.