Dear Fellow Investors and Friends

Today is Thursday, the 14th of September. It is the 257th day of the year; 108 days remain until the end of the year. There are only 75 more shopping days left until Christmas.

On this day in 2007, the Northern Rock Bank experienced the first bank run in the United Kingdom in 150 years. Northern Rock was a precursor for the failure of many banks, hedge funds and structured investment vehicles during the Great Financial Crisis of 2007/08.

Quote of the day

“It takes considerable knowledge just to realize the extent of your own ignorance”
Thomas Sowell

“People are drastically overconfident about their judgement of others”
Dan Gilbert

This week, I got involved in a debate on X around the merits of concentrated vs. diversified investing. A well-meaning but naïve financial adviser said that “great managers run concentrated funds.”

This is a problematic statement. For one, it suffers from severe hindsight bias. It’s easy to say that today, such and such a manager is great because their concentrated fund has outperformed everyone else. But the right approach here is to use the “base rate,” a term coined by Michael Mauboussin.

A base rate is a distribution of past experiences given the same set of initial circumstances. So, to determine whether concentrated funds and great managers/investors go together, you need to go back 10 or 20 years, look at all the concentrated investment vehicles available at the time, and then look at what the success rate is over the ensuing 20 years.

Unfortunately, this is where we run smack-bang into the survivorship bias problem.

Today, you only know about the funds that succeeded. The ones that didn’t are written out of the statistical tables. But my instincts tell me the success rate of concentrated funds and their managers – starting say, 20 years ago – is quite low.

But, there’s more. Today, who’s to know that the managers and funds that are considered great will still be thought of as great in 5, 10 or 20 years? Running a concentrated fund is a risky endeavour. It’s not that long ago that the Transaction Capital management team were regarded as the best in the business, and if you were running a concentrated fund, it is not inconceivable that you would have had a big allocation to that business, only to see the share price decline by 90% in the space of 6 months and not leaving you any time to get out of your big position.

In markets, events have a habit of changing perceptions rapidly.

Let me illustrate the point with two personal examples. In 2003, I started two companies with my partner Theunis de Bruyn. One was an investment manager called RECM and the other was a private equity investment company called Calibre.

RECM flourished on the back of good investment outcomes, its style being that of a concentrated value investor. 10 years after inception it was one of the top 10 large fund managers in the country. In 2014, platinum stocks – in my opinion – had become undervalued, and I took a big position in them. If I recall correctly, the funds had over 30% exposure to that sector.

The view was right; but early. Almost three years too early. And, as they say in the classics, it’s hard to tell the difference between being wrong and being early.

RECM underperformed consistently for two years, from 2014 through 2015, during which time our clients’ advisors and gatekeepers lost patience and most of them disinvested. From being one of the most highly regarded investment management firms, RECM had become a laughingstock. Perceptions had changed.

Of course, platinum stocks turned up – right after most of our clients had left. Amplats went up from R126 per share in January 2016 to R1,435 per share a short five years later – a ten-bagger which our clients didn’t get to enjoy.

They couldn’t enjoy it, because they (or their advisors) couldn’t stomach the volatility of a concentrated fund. And the nature of the beast – an open-ended fund with daily liquidity – provided them with easy means to escape their discomfort.

On the other hand, Theunis’ business Calibre, in which I was fortunate enough to be a day 1 investor, has been an unqualified success. Over the past 20 years he has compounded the capital in that business by a high 20% IRR.

Calibre is highly concentrated with at present only eight assets. It has no clients or outside capital and there is no liquidity. It is a closed-end fund, with permanent capital, which can’t be taken away at the merest whiff of poor performance. There was once a period of 6 years in which Calibre made no new investments.

So, is Theunis a better investor than I am? Of course, he would say so, and I wouldn’t agree. But realistically, who’s to know? Calibre has an investment vehicle that matches his investment style. An open-ended fund like a unit trust is not suited to concentrated investing, be that of the value variety or otherwise.

I guess the lesson here is to be careful of what you wish for – concentrated funds can be volatile and perform very differently to benchmarks. Be ready for the ride. Also, the vehicle through which you choose to access concentrated funds matters. If you are in the wrong type of vehicle, actions by other investors can have unintended consequences for your investment.

“New highs are bullish”

1. Turkey

In Turkey, things seem to be going well. This is the iShares Turkish ETF over the past 5 years, in US$ terms.

Source: Koyfin

Turkey is a founding member of the OECD and the G20 and is the 19th largest economy in the world. It also has an autocratic prime minister with strange ideas about how economies work. These ideas have resulted in inflation rates of 85% most recently and a currency depreciating by 30% p.a. against the US$ over the past 10 years. A salutary lesson for those scared of the South African market?

2. Novo Nordisk

Denmark is famous for Vikings and Lego. Also, two Danish brothers did the initial work behind Google Maps. But now Ozempic, made by Novo Nordisk (a Danish pharmaceutical business), has taken over the number 1 spot for famous Danish things. Ozempic helps lower blood sugar and is being widely prescribed for weight loss. You can guess what’s happening here; taking a pill instead of going for a 5km run and eating less is a sure-fire winner.

Here’s the Novo Nordisk share price:

Source: Koyfin

Demand for weight-loss drug Ozempic is so significant that the government of Denmark (where drug maker Novo Nordisk is from) now has to publish GDP data excluding it.

Since the first half of 2022 (left), headline GDP growth has been 1.7% (blue), but ex-Pharma it sits at -0.3% (green).

I don’t understand Danish either, but you should be able to figure out what’s going on here.

Also, I grabbed this off someone’s X-feed, and I don’t know who anymore. So, it might be fake or untrue. But interesting nonetheless.

“New lows are bearish”

1. Transaction Capital

Transaction Capital has gone from being regarded as one of the best-run businesses in the South African market to a missed payment away from bankruptcy. After Brait, Ascendis, Coast-2-Coast, Tongaat, Steinhoff and EOH, the lesson we are once again learning here is that debt is like a drug. It is pleasantly addictive in moderation, but fatal in overdose. And very easy to overdose on.

Source: Koyfin

2. Moderna

Moderna’s role in the pandemic helped propel its market capitalisation from under $10 billion in 2019 to nearly $200 billion at its peak. But as we move into a more normalised environment, it’s struggled to maintain that valuation.

Since 2021, its valuation has tumbled 80% to roughly $40 billion.

Moderna said its new vaccine generated a robust immune response against a highly mutated omicron variant, BA.2.86. Yet the stock barely budged on the news, instead continuing its recent decline. The good news associated with this new low is that despite the best efforts of the marketing crew at Moderna (and other pharma companies), the markets’ view is that pandemics of the Covid variety are yesterday’s news.

In related news, Novak Djokovic – who was refused entry to Australia to play in the Aussie Open a few years ago due to his unvaccinated status – won the US Open, sponsored by…. Moderna.

Source: TradingView

Did you know?

  • The initial public offering (IPO) market continues to heat up, with Arm pricing at $52 per share, valuing the chip designer at $55.5 billion. In its fiscal year ending March 31, 2023, Arm reported $2.679 billion in revenue, down from $2.703 billion a year earlier. Ahem! Meanwhile, footwear company Birkenstock is planning an $8 billion IPO two years after a private equity firm took a majority stake at a $4.85 billion value. My take – avoid IPOs like the plague. And never buy anything from a private equity seller.
  • Growthpoint reported results and cited a poor outlook for future earnings. Importantly – and no one is talking about this – its NAV declined. This was mainly due to declining property prices in Australia(!). It’s not that rosy on the other side of the ocean either, mate. Growthpoint trades at a 10.8% yield that seems to be going backwards. My take – why own this when you can buy a perfectly good government bond yielding 12.6%?

What I’m reading:

An article by one of my heroes in the investment world, Cliff Asness.

In this piece, he neatly identifies the problems inherent in the increasingly popular “alternative/private investment” space. In a concise article, he highlights many, many pertinent issues. True food for thought here, and worth a few re-reads.

My take is that the general rule with any investment proposition is that the more popular it becomes, the lower the prospective returns are. And always will be. Perversely, it also becomes easier for those who are incentivised appropriately to sell them.

In a related thought piece, Ted Seides neatly summarised David Swensons’s investment philosophy. In it, he destroys many of the myths attributed to Swenson by asset-gathering private and other “alternative investment” firms.

Caveat Emptor. It’s always Caveat Emptor.

What I’m watching:

I belong to a cycling club called “Road to Vasco”. We have monthly time trials on different parts of Table Mountain. The club contributes to trail building on the mountain and some upliftment projects.

An all-around good guy, Clive Dix-Peek, founded the club. Like many of us, Clive is in his golden years and, as a result, a bit chubby.

This week, I watched an interview with Dr. Inigo San Millan. Dr Millan is the coach of Tour de France winner Tadej Pogacar and Team UAE Emirates and an all-around fitness expert.

In the interview, he expounds on the positive effect on fat loss, overall fitness and longevity of zone 2 training. It’s very long, but the meat in the sandwich is from around 62 minutes.

That’s all for this week. I can’t say it too often; be careful out there.

Piet Viljoen



This weekly commentary is for information purposes only and does not constitute advice or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investment.  Opinions expressed in this commentary may be changed without notice at any time after publication. RECM therefore disclaims any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information.

The value of an investment may go up as well as down, past performance is not necessarily a guide to future performance and no guarantees are provided. Before investing, the reader should seek appropriate advice as to the suitability of an investment.

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