Value investor RECM makes a comeback
RECM EQUITY FUND
Raging Bull Award for the Best South African Equity General Fund on straight performance over three years to December 31, 2018
THE RECM Equity Fund has experienced a remarkable turnaround over the past three years. At the end of 2015, the fund had underperformed by 31.39%, according to ProfileData.
At the end of last year, it had achieved an average annual return of 13.75% over three years, outperforming all other actively managed funds in the South African equity general sub-category.
The average annual return of the 124 funds with a performance history of at least three years was 2.38%, while the FTSE/JSE All Share Index returned 4.33% over the same period.
RECM is known as a deep-value asset manager, investing in shares that are significantly undervalued by the market based on what RECM believes are their intrinsic value. Linda Eedes, the managing director of RECM, says one of the important differences between RECM’s value approach and that of other value managers is that RECM tends to be conservative in its assumptions about the future earnings potential of a business.
Piet Viljoen, the founder and chairperson of RECM who manages the Equity Fund, has been criticised for sticking to his value convictions, which often result in RECM taking positions in companies in sectors such as resources and energy that are surrounded by bad news and eschewed by the market.
As a result, the Equity Fund is suitable for investors with a long investment horizon and who are prepared to wait out periods of when the fund may underperform severely.
Eedes says the Equity Fund’s turnaround in performance is partly due to Viljoen returning as the fund’s manager. The unintended consequence of Viljoen stepping down as the fund’s manager in 2013 was that RECM’s investment process began to drift away from that which had been developed at inception, and the fund morphed into a high-conviction, high-concentration portfolio, she says.
“When this positioning coincided with a particularly sharp downturn for value as a style, the fund underperformed significantly, and in late 2015, Piet stepped back in to take over the management of the fund.
Since then, the fund has been managed in line with its original style and philosophy: minimising losses, managing clients’ assets conservatively, while being focused on generating absolute returns over time.”
Eedes attributes the fund’s performance over the past three years to two main factors. Last year, when the market was down, the fund posted positive returns after fees, mainly because it did not own some of the popular stocks that collapsed, while it did hold some small-cap stocks that bucked the trend. Second, in 2016, when the market rebounded from the panic around resource stocks in 2015, the fund had quite a large exposure to these stocks.
Five shares that have made a particularly strong contribution to the fund’s performance are Stefanutti Stocks, Implats, Lewis, Anglo American and Bowler Metcalf.
The decision to buy Stefanutti Stocks illustrates RECM’s investment approach.
“Stefanutti Stocks is on a price/earnings ratio of three. It’s one of the few construction companies that are actually profitable in these very tough times for the sector. If the market is correct in its judgment that the sector is dying, we probably won’t lose very much money. But if there is an upturn in the cycle at some point in the next five years – and given that most construction businesses have significantly reduced or eliminated capacity – companies such as Stefanutti could make a lot of money,” says Eedes.
Eedes says the biggest challenge facing the Equity Fund in the coming year will be to communicate with clients about what RECM is doing, and why. “Our investment process is very different to anyone else out there … Our fund’s performance tends to zig when others zag, and vice versa. Our clients need to understand why this is so, and how this is of great benefit to them.”