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Over the years, Kokkie Kooyman has won just about every worthwhile local and international award. That’s a credit to his analytical ability, deep knowledge of his focus area – financial services – and an incredibly high work ethic. Kooyman spends much of the year in the air, travelling around the world to spot the best opportunities.
He sent me his latest update on a flight between Boston and Amsterdam with the quip that in 20 years of visiting banks and insurers in Europe, Asia and the US “I’ve never seen such a dislocation between valuations and what managements are doing to adapt to the tough environment and growing shareholder value.
How do I wake investors up to the fact that they’re missing an unbelievable investment opportunity – European insurers at 5% plus dividend yields….” You start, I guess, by sharing your views. As Kooyman does here. – Alec Hogg
By Kokkie Kooyman*
A few factors combined to ensure that the period since March 2014 has been the worst period to be invested in global financial shares except possibly 2008.
The main cause was fear. True, the fears all have some grounds, but as usual, once the herd stampedes irrationality rules. I’ve listed some of the fears below, but our meetings with managements of the firms we are invested confirms that the fears are overblown and despite lower growth, compression of NIMS (interest margins), potential increase in bad debts resulting from lower commodity prices, they are continuing to grow shareholder value.
(There are exceptions such as Barclays, Deutsche bank, Standard Chartered, HSBC, etc. but we are not invested in any of these, or similarly challenged institutions).
Market action however does indicate that the worst might be over and that the herd has done most of its selling. I base this statement on the following:
• Despite continued negative news flow on China’s growth rate and the precarious situation of its financial institutions as well as increased oil stockpiles, the oil price, commodity prices and emerging market currencies seem to have bottomed and ended the month positively (oil +10%).
• Whereas up to now the market has largely ignored good results, a large number of our investments rallied strongly on reporting good results (Bank of Georgia, Sparebanken Nord Norway, Sberbank, Moscow Exchange, Tinkoff Credit Systems, Credicorp (in Peru), Aareal Bank, TSKB (in Turkey) all gained ±10% during the month).
The fund still ended the month negative (but outperforming the MSCI World Financial Index) due to the market further selling down Bank of America, Citigroup, UBS, Axa, Ageas (European insurers) and Indian financials (all ±10%).
Particularly painful was the 18% sell-off in PRA (a US distressed debt collector) after it announced its results.
But there is good news here as well about the above negative performers:
• They trade at significant discounts to their value, and in most cases to tangible net asset value,
• They are buying back shares or are on dividend yields of 5%+
• And as mentioned above, reporting satisfactory results.
• The share prices have started rallying strongly after month end.
• PRA’s result was misunderstood and started rallying when the CEO announce he is buying the shares personally.
We cannot stress this enough: The companies we are invested in are healthy, very undervalued, have sufficient capital and reserves and continue to grow shareholder value (apologies for continuously repeating this).
Eventually the market will realise its error. History shows that when companies get this mis-priced investments generate significant returns over the next few years.
We have increased the fund’s investment in emerging markets (now 51%) because our research shows that this is where the underlying trends continue to be strong, especially in Indonesia, Peru, Georgia and also India.
At the same time we used the market sell-off to increase the fund’s investment in insurers like Axa, Ageas and others where the forward dividend yields now exceed 5%.
I can’t recall when last the fund had such attractive franchises at such beaten down valuations. Despite all the “macro negativity” we are very optimistic about potential for excellent returns over the next few years. A repeat of 2003 – 2007 and 2009, 2010 when the fund generated excessive returns is very possible.
• Kokkie Kooyman, a charted accountant, is a partner and portfolio manager at Denker Capital. He manages the Sanlam Global Financial Fund.
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