Different strokes for different folks

ALMOST A YEAR ago Remgro CEO Johann Rupert – while debating whether the rally in stock markets was for real – noted debates about South Africa’s economy were characterised by strongly divergent views. At the time Rupert said: “I’ve never before seen so many highly intelligent people disagreeing with strong and cogent arguments. It’s got to mean a period of uncertainty.”

Indeed, judging by the recent comments and portfolio stances adopted by some of the JSE’s top investment companies and institutions, there are contrasting views about value in the market. For some there are plentiful opportunities in a weak market in specific asset categories (financial services and commodities seemingly the segments of choice). Others feel it’s an opportune time to hang back and wait.

Of course, skittish trading on the JSE over recent weeks (where bad news seems to go a long way) does provide some justification for the repeated use of “uncertainty” as a watchword in motivating cautious portfolio positioning. Significantly, both RECM & Calibre (RACP) and Foord Compass – two specialist investment vehicles headed respectively by top South African fund managers Piet Viljoen and Dave Foord – have adopted ultra-cautious stances.

The latest portfolio statement (to end-June 2010) by RAC, which listed its preference shares recently, showed a full R500m holding in cash. RAC financial director Theunis de Bruyn says an updated portfolio couldn’t be disclosed at this point, but indicated things looked “very similar” to the company’s position a few weeks ago.

There’s probably more to glean from RAC executive chairman Piet Viljoen’s comments that accompanied its recently released financial statements to end-March this year. Viljoen argued asset prices were discounting a favourable outcome to the recent global financial crisis – adding that, as such, sensible investment opportunities were few and far between. While Viljoen said RAC was looking forward to allocating its capital into sensible opportunities, prevailing asset prices could mean that process taking some time.

Of course, we might forgive RAC for erring on the side of caution. It’s a new investment fund that would want to preclude reputational damage by not taking any early dents to its portfolio.

Perhaps more startling then are the developments at Foord Compass, which reflected a marked swing out of SA equities at the end of the six months to end-June 2010. After building up its holding in SA equities to 53% of its portfolio at year-end 2009, Foord Compass – which aims to provide debenture holders with capital growth and a decent income yield – finished its interim period with a holding of just 35% in local equities.

But it’s not like Foord Compass to have abandoned equities. During its interim period its position in foreign equities was built up from 24% to 27%, which meant Foord Compass’s total equity position was 62% at end-June (compared with 77% at year-end 2009).

While a 62% equity composition might still seem reasonable, there can be no denying its ultra-defensive stance going forward. Foord Compass’s portfolio has quite a bit of cash, corporate debt and a chunky short position in bonds. The balance of its portfolio consists of listed property and commodities.

Foord Compass executive director Dave Foord says the possibility of a double dip recession remains. He says the company is cautious on investment prospects for the next six months, as previous economic stimulatory measures are reduced and some governments are forced to adopt strict austerity plans for their economies.

While both RAC and Foord Compass have signalled an unwillingness to do anything other than nibble at selected opportunities in the SA market, you might closely monitor developments at strategic investment companies, such as PSG’s Paladin Capital, as well as deal-hungry empowerment groups like Brimstone.

Paladin will soon be the recipient of R340m from the sale of its strategic stake in logistics specialist CIC Holdings. It’s a chunky bit of change, representing – at last count – around 25% of Paladin’s market capitalisation (around 60c/share). Paladin CEO Francois Swart says it sees plenty of opportunities at attractive prices. He suggests a special dividend is unlikely, reiterating a payout would only be considered if Paladin couldn’t put the proceeds from the CIC deal to good use.

Brimstone, with its balance sheet reinforced from the Life Healthcare transaction, could also soon be on the lookout for new deal flows – quite possibly in the fishing and financial services sectors.

As strategic investment companies, Paladin and Brimstone won’t get much credit for a “watch and wait” strategy. While specialised investment vehicles such as Foord Compass and RAC are in a holding pattern, what transpires at Paladin and Brimstone over the next six months should be very interesting.