The investors’ nirvana – capital growth plus dividends!

Gareth Stokes, FAnews Online Editor

The Financial Planning Institute (FPI) 2011 Annual Convention was held at the Sandton Convention Centre on the 1st and 2nd June 2011. Apart from invaluable presentations on employee benefits, practice management and trusts among others, financial services

The fundamental tenet of investing is to acquire an asset that offers growth prospects, pays dividends, and trades at a discount to its intrinsic value. “You want to commit funds to companies with the prospect of solid long-term capital returns – and if this company also pays dividends then so much the better,” says Kooyman. Fund managers will typically set aside the dividend requirement for companies in their start-up stages, when earnings should be utilised to fund expansion. One of the important messages from his Global Investments presentation was that the decision to invest offshore shouldn’t revolve around the value of the rand. South African investors should be looking for value opportunities in economies that are growing faster than ours, or as exhibited in Japan post-quake, where equities are really cheap! “The most important thing you have to understand is that there are tremendous opportunities out there,” observes Kooyman.

Is there such a thing as perfect information?

These days there is so much information about listed companies that it’s almost impossible to spot a bargain before the investment community gets wind of it. The reason is that asset prices (share prices) are efficient, to the extent that they already factor in or discount all available information! According to website http://www.investopedia.com/ the theory of price efficiency follows on from the efficient market hypothesis, which holds that since markets are efficient, it is nearly impossible for investors to “beat the market” on a consistent basis.

Kooyman explains the phenomenon by comparing two companies, one listed in the US and the other in Hong Kong. US-listed Microsoft is covered by approximately 20,000 investment analysts around the world, each trying to motivate a ‘buy’, ‘hold’ or ‘sell’ signal based on similar information. In stark contrast there are only two analysts in the world who follow Hong Kong-listed DBA. The company has huge potential but very little is known about it. “You make your best returns by finding these little-known companies,” says Kooyman. Another way to buy miss-priced companies is to “play psychologist” and scoop up shares when markets bottom out on investors’ emotions.

Plenty of opportunities if you’re cash flush!

A couple of weeks ago we attended a presentation by another of South Africa’s top fund managers. Sam Houlie of Investec Asset Management told us he likes to sit on a fair amount of cash so that he can ‘jump’ on opportunities as they present. Kooyman agrees with this sentiment. At the height of the 2008/9 stock market slump he took advantage of strong cash positions to buy up sizeable chunks of stock in illiquid companies. A perfect example of this strategy in action was with Adira Dinamika Multi Finance Tbk in Indonesia. The company finances motorcycles – an extremely popular means of transport in that country. Before the crisis shares in this company traded as high as 3,000 Indonesian Rupiah (IDR), but by February 2009 they’d plummeted more than 50% to just IDR1,400! Sanlam Asset Managers: Global was able to buy up shares from panicked investors at a 20% discount to this price (due to the share’s illiquidity) and ended up bagging a dividend yield of 44% at February 2009! Within 30-months the company was changing hands at around IDR14,000 and the fund manager was sitting on an 800%-plus return.

As you scratch around China, Hong Kong and other emerging markets you will stumble upon many more fantastic opportunities. Another company which has served the fund manager well is Xingda International Holdings, a Chinese manufacturer of radial cords used in tyres. There are only two companies servicing the Asian market at the moment, and Xingda boasts around 60% market share. Imagine the growth potential as Asia, with 40 motor vehicles per 1,000 citizens plays catch up with the US, 800 vehicles per 1,000 citizens. The company will grow on the inevitable surge in demand. Xingda is not cheap, but offers fair value at its current price-to-earnings ratio of 10.7 times and a 2.7% dividend yield.

Technology wreaks havoc with traditional valuation techniques

“Technology has made enormous changes in the world of investing,” says Kooyman. On a recent trip to Hong Kong / China he met a chief executive who could view security camera footage from any of his 600 jewellery outlets on his mobile phone. Another example of technology in action is from a leading Turkey bank, which gives its clients a watch with an embedded microchip. This chip has many applications – for example you can purchase a coffee at a Starbucks in Istanbul and simply swipe your watch over a scanner to pay!

The bottom line is to act when a company gets ‘knocked’ unfairly. Japan post-quake provided numerous opportunities. Another company which has been sold off recently is Folli Follie, a Greek-based company which generates around 30% of its revenue at home. Shares were trading at a fraction of fair value due to sovereign debt concerns. And Holland-based retailer, Royal Ahold, which has been plagued by accounting scandals, is now one of the cheapest major retailers in the world. Kooyman has been buying the company at a price-to-earnings ratio of just 9.6 times.

Editor’s thoughts: We enjoy attending presentations by South Africa’s top fund managers… And it’s comforting to learn how much hands-on research the likes of Kokkie Kooyman undertake before investing in international companies. Do you buy into the investing philosophy shared in today’s newsletter: To buy assets with growth potential, that pay dividends, and offer deep discount to intrinsic value? Please add your comment below, or send it to gareth@fanews.co.za