Portfolio and Investment Insights for the six month period end 31 December 2011.
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Executive Chairman Piet Viljoen gives an overview of RE:CM funds, highlighting returns and notable position changes, and introduces the subject matter and authors for this edition of RE:VIEW.
Wilhelm Hertzog shares his thoughts on one of the significant holdings in RE:CM’s client portfolios, Discovery. It consists of a medical scheme administration and life insurance business. Wilhelm explores Discovery’s ability to give people incentives to live and behave more responsibly by rewarding their behaviour with tangible benefits. This is the core concept that differentiates Discovery from its competitors and has contributed to their superior financial position. Lastly, Wilhelm compares Discovery’s operating history and valuation to that of its competitors and explains why we are optimistic about the Company’s future prospects.
Linda Eedes argues that, despite evidence that unpopular under-priced value stocks outperform glamour stocks over the long term, investors tend to favour glamour stocks. She argues that investors are attracted to glamour stocks because of perceived high expectations, good stories and positive performance metrics of these stocks. These factors however don’t take intrinsic value into account when looking at share prices. Linda supports her argument with historical data from the 1980s onwards. She concludes that investors should be cautious of behavioural biases and reminds us that investors should rather focus on the relationship between value and price.
Johannes Visser offers us insights about the Japanese economy and explains why we believe Japan offers good investment opportunities. He discusses the macroeconomic arguments against Japan and offers counter arguments to many myths about the Japanese economy. He also touches on some unique characteristics of the Japanese stockmarket. Johannes argues that these factors, together with the reforms that are already taking place, indicate that there is unlikely to be a crisis in Japan. He says that low valuations mean the Japanese stockmarket offers downside protection and upside potential. He concludes by discussing three factors that count in favour of bottom-up stock pickers – market efficiency, high quality businesses and starting valuations.
Daniel Malan and Razeen Dinath explain how panic and fear can lead to irrational decision-making, which can then lead to the mispricing of assets. They say this is more apparent in European markets such as Portugal, Ireland, Italy, Greece and Spain (the PIIGS). Daniel and Razeen give a first-hand account of the European investment market as experienced on a recent trip to the continent. Contrary to popular pessimism, they found investment opportunities worth exploring. Daniel and Razeen conclude with an explanation of how RE:CM’s investment philosophy minimises a permanent loss of capital should there be a worst-case scenario. They use three European businesses that are current holdings of the RE:CM Global Fund to do so.
