Q&A with John Biccard, portfolio manager of the Investec Value Fund

You took over the reins of the Investec Value Fund in late 2000 and over the next ten years the fund enjoyed annualised returns of 30%*, materially outperforming the average general equity, value and growth fund. How did you and your team achieve this exceptional performance?

As value investors we are prepared to swim against the tide, stick to our strategy and not be swayed by the general market opinion. In 2001, the investment community was very bearish on the rand and the South African equity market.  At that time, South Africa was running a current account surplus and the local currency was substantially undervalued. What’s more, SA equities were trading at a 60% discount to the rest of the world. While most people took their money offshore, we had full exposure to domestic-oriented shares and little exposure to rand hedges. Subsequently, the tide turned. Local equities rallied strongly and the rand appreciated sharply. Our positioning paid off handsomely, with the biggest outperformance taking place between 2001 and 2004.

We were also vindicated when the commodities bubble burst in June 2008. At the height of the commodities boom, the fund had no exposure to resources stocks and was heavily invested in domestic retail shares. At the time, retailers were massively undervalued. High inflation and a soaring oil price resulted in a sell-off in these stocks and a huge swing towards commodities. Hence, between 2007 and the first half of 2008, the fund underperformed the general market.  When the commodities bubble burst, the Investec Value Fund regained more than its lost ground and appreciated strongly. The fund’s excellent returns over the last decade can definitely be attributed to our value style of investing.

What do investors in your fund need to understand about value investing?

Market data around the world confirms that the value style of investing outperforms other styles over longer periods, i.e. five years or more. Although value investing generally works well over the longer term, investors need to know that the fund may underperform the broader market in the short term. Whenever there is a massive boom in a sector or market and a bubble develops, value lags significantly. This was evident during the IT and commodities boom. Investors therefore need to have an investment horizon of at least five years.

You are often described as a bottom-up stock picker. Could you please explain what this means.

While the general market is often driven by themes and macroeconomic forecasts, our point of departure is valuation. Firstly, we assess stocks on an individual basis using a variety of valuation metrics such as the price earnings ratio (PE), dividend yield and book value. We favour shares which trade below their intrinsic value. Shares that trade at a big discount give us a margin of safety, should markets move against us.

This does not mean that we are not aware of macroeconomic conditions or any themes at play. While we don’t do macroeconomic forecasts, we consider the big picture, once we have identified cheap shares. For instance, when we invested in retailers a few years ago they were trading at a dividend yield of 7% and their share prices had halved. We expected the tide to turn and when the commodities bubble burst and the oil price declined, these shares benefited handsomely. Therefore, we like cheap shares where there is a good likelihood that a change in the bigger picture will unlock some value. 

We will, however, also buy shares that are significantly undervalued without knowing what the catalyst will be which will unlock value. It can take time for out-of-favour shares to enjoy a turnaround. Investors have to be patient, but the rewards can be very attractive.

What is your current outlook?

For the first time in ten years we believe there is better value in international equity markets than in South Africa.  Over the last two years foreigners have bought R100 billion worth of SA equities; this has pushed our market very high. South Africa currently trades on a similar PE to the US and Europe and only at a modest discount to Japan.  We believe there is too much speculative money in South Africa and we need to be cautious now. Investors should expect much lower returns from the SA equity market over the next ten years. Our view is that international equity markets will deliver better returns than the domestic market.

How have you positioned your portfolio?

We are fully invested offshore (20% of total assets). On the domestic front, we have no exposure to retailers as this sector is too expensive. We do not hold banks as we believe that rand hedges offer better value. We favour rand hedges that have lagged the market and are trading at relatively low PEs. The fund has a weighting in Steinhoff, Anglo American, Sasol and Sappi. The criteria we use for holding domestic-oriented shares are that they must have a very high dividend yield and be defensive. We have exposure to Vodacom, AVI and Oceana Fishing. These companies offer dividend yields of 4% to 6%.

What exposure do you have to gold?

The fund has a weighting in gold of around 14%. We started building our position in gold a year ago. The US Federal Reserve’s massive stimulus programmes have resulted in trillions of dollars being pumped into the US economy. The effect this is having on the value of currencies is of great concern.  We support the view that gold is in a long-term bull market because investors regard gold as an important store of value.  While we are bullish on the dollar gold price we are even more positive about the rand gold price. Our view is that the rand is overpriced against the dollar.  The fund’s gold exposure is mainly in SA gold producers. These counters are very out of favour with the investment community. We believe the problems in the mining industry are more than fully discounted in the share prices of mining companies. Valuations are low and these shares should benefit materially from a rising rand gold price.

What are your favourite stock picks in the international market?

We are finding attractive stocks in the US, Europe, Japan and Israel. In the US we have exposure to Hewlett Packard, which is a global IT company with a strong brand and fantastic products. Hewlett Packard’s share price has halved over the last eight years and its PE is only 10, whereas the South African market’s PE is 16.   In Japan, we have bought Toyota at book value.  The fund also has a weighting in US food retailer, SuperValu. The company’s earnings have halved over the last three years because of food deflation and the US recession.  For those low earnings, you pay seven times earnings.  This food retailer is much more attractive than SA food retailers.  When you buy a share that is as cheap as SuperValu, you need just a little bit of good news to earn attractive returns.

^{*As at 31 December 2010, Morningstar, NAV to NAV basis, gross income reinvested.}