Intervest/Equinox interviews Geoff Cook, Director of GCI Investments

Please could you tell us a little about your career history and investing experience?

I have successfully invested in shares for 40 years. I have seen ups and downs in markets including the long drought following ’69. I have also seen and analyzed the crashes of ‘87, ‘97, ‘98, the collapse of world markets after the turn of the millennium and what is normally described as the 9/11 crash but was actually well established before that tragedy.

I served 11 years with Old Mutual which served as an excellent training ground and sharpened me to the requirements of investors. Subsequent to leaving OM, in ’82, I recognized the need for a system for analyzing what we then called Unit Trusts. It needed to identify the point at which to sell and also investments showing strong growth potential always taking account of risk. I looked around but could not find suitable software. I decided to write it myself. This was the beginning of what has become our hallmark and very successful GCI Stop Loss Strategy. My market penetration was limited by manpower constraints and in 2000, my mathematically competent honors graduate son, Alex, joined me and we launched the present company, GCI. We are not a bunch of individuals but a team focused on our core GCI stop loss strategy and pulling in the same direction. Our software has undergone much development but will always be seen as work in progress to maximize returns in the safest coupled with the lowest possible downside risk. I have since ‘82 headed asset management.

Please could you tell us a little more about GCI the company … how many staff member, total assets under management etc

GCI is a company devoted exclusively to the maximizing of client’s portfolio returns within an environment consistent with their risk profile.

Including the Johannesburg directors, we are a team of 8. I head asset management. Alex’s time is divided between assisting me and developing the business, including client and broker relations. In my team, I also have Francois, a statistician and Rodney a Master’s graduate in finance and investment.

Eva is our office manager. Alex is assisted by Lizelle, Laroto, and Sinah in broker and client relationship management.

Our Garden Route office falls under a capable and caring veteran of the industry, Adrian Wright. His assistant is Maryna.

We currently manage R450 million.

Do you work with an investment team that informs your view, or do you buy research from some of the analysts?

The important thing to emphasize is that we work as a team, guided by our systems and strictly adhering to the GCI Stop Loss Strategy. We do not regard ourselves only as a fund but rather as a Complete Managed Investment Solution.

We buy no research. Our in house systems tell what sectors we should be entering and what sectors we should be exiting. Having identified a sector, we choose the best fund or selection of funds based on history, management and fund composition. We try to steer away from small funds or those with a poor liquidation record as, in these fast moving times, if conditions turn against a sector, you need to be out as soon as possible. We dig down into the holdings of the short listed funds and provided they meet our other criteria, we will take holdings in those most closely following our market analysis. On occasion we will hold more than one fund in a sector either to assist in approaching our prognosis model or for the purpose of making liquidation easier. We pride ourselves on fast turn-around times and the funds we include in our portfolio must meet our criteria.

Please could you briefly describe your investment philosophy.

Our investment is to maximize returns within the risk parameters of our clients and to avoid downside erosion though the use of our GCI Stop Loss Strategy, driven through the use of our in-house systems.

Your domestic asset allocation has had an unusually high allocation to cash since March 2008. What was it about the markets that made you take this call?

Cash has recently been the most reliable preserver of wealth. World markets are in turmoil, hence our high exposure to the sector. This preservation of wealth will always be our most important theme. We never want our clients to reduce their standard of living nor do we want to embarrass the brokers who entrust their client’s funds to us. We are not married to any market sector. We have no favorites. We are sufficiently small to be nimble but sufficiently large to be taken seriously. From 2004 to April of this year, it was easy to be a hero as the market grew by an annualized rate of more than 30% but current times emphasize the value of good management and fund picking.

To answer the second part of your question, the financial world is facing meltdown. Many have been forced to retire on considerably less capital than they hoped for. The impact of this reduced buying power coupled with the fact that retirees are expected to live longer than at any time in history will impact on our markets for years to come. We listen carefully, read widely analyze the opinions of commentators from economists, central bankers, statisticians and successful investors like the Sage of Omaha and then distill all this information into our prognosis. We are not at this stage ready to pour money back into equity funds but are watching the game carefully.

The equity exposure that you have has had a commodity flavour since December 07. This has proved correct, what is your view on commodities going forward?

We identified commodities as having growth potential for the first half of this year. As the credit crisis deepens and the global economy slows, there is clearly a reduced demand for resources from iron, copper, chrome and aluminum to the platinum used in catalytic convertors. The gold price, while out of the doldrums, is volatile and increased producer prices have made it marginal. The oil price which is demand driven is also under pressure. We again state that we have no favorites and are committed to playing it as we see the moving tapestry unfold.

You have also had relatively high exposure to foreign holdings via foreign currency funds and SA registered off shore funds. Was this due to nervousness around the current deficit, and if so, what is your position looking ahead?

For several reasons, the rand has come under pressure. The first is that in times of crisis money will flow to major markets. South Africa has been running with high inflation, a massive current account deficit and a projected fiscal deficit. The market capitalization of the JSE is approximately 43% commodities and yet tourism is greater contributor to our GDP. If the world slowdown continues, the investing community will continue to be burdened by lower growth and money will continue to flee to the greater safety of American and European government investments. This will continue to negatively impact on our currency and our clients will continue to benefit from the foreign exposure. We are not taking positions on foreign equities but are merely working on the currency difference. It has worked so far but if the rand shows signs of recovery, we will reduce our exposure.

Right now, (14/10/08) you have more cash than most of your peers, are you tempted to get a little more equity exposure?

We will only aggressively re-enter the equity markets when we are convinced that we can do so without endangering our client’s hard earned assets. We feel that the potential for more downside pressure is still real. We do not want to invest in a dead cat bounce. Following 1929, there were a few brief rallies before the Dow Jones Industrial Index reached its lowest point in 1932 having lost 96% of its peak value.