In an impromptu keynote speech at BNC#6 in Hermanus, Cy Jacobs highlighted challenges in beating passive indices and his optimism for investing in South Africa’s political climate. He emphasised the need for active management to outperform indices consistently. Jacobs also expressed positivity regarding the US election outcome and bullishness on Chinese tech companies due to valuation disparities and regulatory shifts. He identified potential opportunities in quality South African assets like Grindrod and Zeta.
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Summary of Cy Jacobs’s keynote address at BNC#6 in Hermanus
00:07 Good afternoon. I’ve got some good news and some bad news. The bad news is I had a presentation prepared, but I was told last night that presentations weren’t allowed, leaving me unprepared for this speech. I’ll adlib and wing it. A good place to start is to follow up on what Pete said about indexation.
00:36 In February, we had an experience regarding indexation, active versus passive, with a large client managing assets exceeding the South African local industry. We’ve consistently outperformed the emerging markets index, but when we asked about developed markets, we realised beating passive indices is challenging. Over 10 years, 98% of long-only managers failed to beat global indices.
01:36 Investing in the current political climate is confusing, but based on our research and connections, we don’t foresee a total disaster coalition. We believe in a coalition, but not below 40% for the ANC. This could mean positive changes for South Africa, reflected in recent Rand gains.
04:33 The investment perspective suggests potential for change in South Africa, with recent positive developments like improvements in Eskom and Transnet. Liquidity drained from the domestic market could reverse with global investors’ interest, given the current cheap valuation.
08:24 Managing active to beat passive is the new game. We’ve consistently outperformed the index in SA equity space at 361. Beating passive consistently month by month, year by year is our aim.
10:17 We’re positive about the US election outcome, as Trump’s policies are supported by the Fed and inflation is under control. Regarding China, we’re bullish on tech companies like Tencent due to valuation disparities and regulatory shifts.
13:38 China’s tech sector, particularly companies like Tencent, presents opportunities due to valuation gaps and regulatory responses. We’ve observed positive shifts in sentiment and actions from China towards market influences.
16:00 We’re bullish on quality South African assets, including companies like Grindrod, which has shown promise with port assets in Mozambique. Other potential opportunities include companies like Zeta, spun off from Barlow’s, showing strong potential in the tourism sector.
*The above transcript has been condensed and paraphrased for brevity and clarity, and may not capture the full context or nuances of the original speech delivered by Cy Jacobs at the Biznews conference, BNC#6.
Read the full transcript of Cy Jacobs’s keynote address at BNC#6 in Hermanus ___STEADY_PAYWALL___
00:07
Good afternoon everybody. Well, I’ve got some good news and some bad news. So bad news is I had a presentation prepared and last night I was told there’s no presentations that leads to further bad news, actually not good news that I’m actually totally unprepared for the 20 minutes speech, but I’m going to just ad lib and wing it. And I actually thought a good place to start was to follow on from something that Pete said, and that was about indexation and I’ll get on.
00:36
later to obviously investing in this political climate and the changes that we maybe foresee. But I think what’s a very interesting way for me to start was to tell you about an actual story that happened to us this year in February around indexation active versus passive. When we took a trip to the US to a large client of ours, a client who manages more than probably the entire size of the South African local…
01:06
asset management industry. And they have us as one of their 15 emerging market managers meeting in February of a year, as they have a few billion Rand with us. And our job is simply to beat the emerging markets of Africa index in US dollars. And luckily we’ve had this mandate for 10 years and we’ve done it. And we go there and report back and show them we’ve added four or 5% above the index, luckily for 10 years.
01:36
And luckily so of the guys in Turkey and Mexico and Indonesia and everywhere else. And then we asked them then we’d love to meet some of your developed market managers. We’ve met them Indian managers and Chinese managers for years and they’ll offer us. And they say, who is going to beat the passive index in developed markets? We realized that years ago, 10 years ago. And this is a very massive business with
02:06
A professional investment team as large as what we’ve got sitting here. And I realized right then and there that even our temps, and we, we are three, six, one have a global long only for. So, I mean, I’m talking against us and many of the, our competitors, I mean, pits managing a flexible fund, it’s a little bit different globally, but I realized right then and there, the truth is over the longer period of time, I don’t believe any South African manager, particularly, or any global manager. And.
02:36
Pitt mentioned a number of 90%. They quoted at this conference, a number of 98%. 98% over 10 years in the long-only space had not beaten global indices. And for your ability to find that 2% and for the same manager, in fact, to be the next 2%, the following 10 years is impossible. So I just thought I’d follow on from there. But anyway, what I’m here to speak about is more about investing in the current
03:05
political climate. And whatever I thought I was going to say before yesterday morning, I’m now totally confused after listening to everybody over the last two days. But if I go back to our inherent research and what we’ve been talking about at 361, and we have our own connections and we speak to all the political parties, and we have some friends, for example, at the ANC, we believe they are friends and we believe they are good contacts.
03:35
We have a simple base case that we don’t think you’re going to get this total disaster coalition. We don’t believe at 361 that the ANC will do a deal with the EFF and the PA, which is actually an add-on that I’ve learned about in this conference. So we think there will be a coalition. We actually don’t believe that the ANC goes below 40 percent, because if you look at the last number of elections, just before that time,
04:03
the ANC seems to increase by quite a few percent. First of all, they’ve got more budget to spend into the last few weeks. And secondly, people are frightened about change, specifically about the grants they’re receiving. So we believe there’ll have to be a coalition. We don’t believe the ANC will make 50%, but we believe the coalition will be a lot more friendly. Now, if you look at that from an investment perspective, what will that mean?
04:33
two and three and four PEs. I think the world looks at that and says, there’s a starting change in South Africa. There’s a positive change. We’ve seen the ANC, which the world knows is particularly rotten at the core, and they’re seeing them lose control. To me, that’s a positive. Maybe we’ve already started seeing the positive of that. The RAN was at 19, 20 some two weeks ago. We’ve seen the polling come out.
04:59
We’ve seen the RAND trade as low as 18.55, 56. It’s a four or 5% gain in a matter of a week to 10 days. So our particular stance, and we’re a little bit different to a PIT. We’re not a value manager necessarily. We’re also not a growth manager. We’re a flexible manager. Who determines where we want to be for a time period for a cycle. And in our mind, in this cycle, and I’m talking against Magnus for a very short period of time, but…
05:28
With this cycle, we actually think your risk is to be under-invested in SA at your peril. So what we foresee, we might be wrong because maybe the ultimate election will come out and determine something that we never expected. But we really do believe that there’s a little bit of optimism around, not only politically, but we’ve seen obviously a slight improvement with ESKIM. We’re starting to see talk of TransNet get fixed. We’ve seen a lot of privatization around that as well.
05:58
So we think relative to where we are, and relative to where we could turn out after this election, all you need is a few, what we call macro tourists. And we’ve seen what’s happened in some South American countries, when you get some slight optimism, and really what’s happened in South Africa over the last five to 10 years, is we’ve seen absolutely liquidity being drained out of the SA domestic market. If we even, and we manage close to 50 billion,
06:29
Blair, if we come to the market and try to buy a bank or a domestic retailer, small cap, the ability of us even to enter those markets is almost impossible. It takes us weeks to build up stakes. So all we need here is two or three global emerging market players to decide, well, you know, South Africa is becoming a bit more investable. We’re going to see some policy change. It’s so cheap.
06:57
I mean, it’s dirt cheap. We haven’t seen it this cheap. And I know it goes against the trend that we’ve seen over a number of years, but I believe is the good quality businesses here could really get ramped up. You take us at the time of that term, which we probably all hate now, Ramaphoria, where we all thought Cyril was our savior. You take the market at that point of time. We had, for example, a Mr. Price trading on a 14 or 15 multiple.
07:26
Ramaphoria hits, it went to a 25. Well, Mr. Price currently trades at around about an 11. They imagine 11 just going up to a 15 or a 16, it’s 40% upside. And the same could be said for many of the local domestic stocks. And many of them continue to be well run, as Pete said. And many of them have had to, over time, just totally depreciate. But as a result, I’m not sure of money going out because of passive, I’m not sure.
07:56
I think it’s more a rotation into other managers because generally what’s happened over the last while, we’ve been set at 45% for a while of offshore investment. A lot of managers have underperformed and we’ve seen, for example, at 361, a lot of mandates coming to us and we’re not really playing in the small cap space. You may have one or two or three opportunities, but generally what we’re trying to do is outperform the index. And I think…
08:24
that the other half of that argument goes to the fact that if you’re not managing passive, and if you don’t believe in passive, you have to manage active to beat passive. And that’s what’s become the new game. So value managers may do that over a long cycle. So over a 10-year cycle, suddenly value comes into play again over a one or two year period, and they get a 100% uplift, and it looks okay over a long period of time. What we’ve found works better.
08:51
is that we need to beat this active, this passive index consistently month by month, year by year. And at 361 in our SA equity space, we’ve actually done that better than any manager in the country. I think over five years, the index has done 7% per annum. We’ve done almost 14. And we’ve beaten the index something like 56 out of 68 of the last month. So it’s not only because passive is big, it’s because the managers…
09:20
rarely have to compete, have to compete against that passive size. I think what’s also important is just to frame what we think about. And Pitt doesn’t look at markets and macro, and he really is a bottom-up fundamental guy who says, this is too cheap, and at some stage, this will get hopefully better priced. For us, we also do that. But at the same time, we consider exactly what type of environment we’re in.
09:49
This is not only in South Africa, but this is a major election year. We heard Muzi say something like 65 national elections. And I think particularly the main important election besides South Africa is obviously that of the US and it looks to us and we do forecast that Trump will become the next president, publican president. He’s already tweeted the reason markets are so strong, not tweeted X.
10:17
The reason markets are so strong is the fact that there are markets already discounting the good news that he’s becoming president. That’s a typical, typical Trump comment. But I think what gives us comfort around this election year is that you’ve got, he’s got the backing, well, the Americans have got the backing of the Fed. We’re also at the top of the inflation cycle. We’ve really have seen good data about inflation starting to come down.
10:47
America’s remained at full employment, which is actually a surprise of ours because had we thought a euro, what we did think a euro ago about interest rates gaining the momentum at such a rapid rate in such magnitude, we really thought something would give or fall over. Nothing did. US remained very strong. Earnings moved forward. Everyone had, it was a huge wealth effect in the US and now we’re at a point in time where we’re in an election year. Rates have topped and maybe going to start coming down. So the safety element.
11:16
of the protection of the election as well as rates will hopefully keep the market more or less in check. So we’re reasonably positive on this election outcome, both in South Africa and globally. I mean globally, Pitt mentioned the seven, I think it is important to be very wary of very expensive stocks. But a 361, for example, we’re short one of those magnificent seven stock, in fact, two of them, the short Apple.
11:47
For those of you who don’t know what short is, it means we borrowed someone else’s shares and we’ve sold them in the market with the hope of the share price going down. So the PE that Pitt quotes, yes, it’s a PE of the combined seven, but for example, to us, Tesla is almost close to a fraud. I mean, you’ve got earnings halving, it’s getting absolutely killed by BYD in China outsells them seven or eight to one.
12:13
Cash flows look terrible, stories are being told about now, new cars, et cetera. Nothing really makes sense in that business. Just, I mean, we, we value it somewhere around 20 to 30 dollars are still trading at 175. So that’s kind of distorting that Magnificent 7 and Apple, which has had a great business. But unfortunately now, as you’ve seen in China, iPhone sales, you’re on year declining by, you know, double digit percentages. So there are parts of that that aren’t good. So you need to look at them individually.
12:42
And the video, you know, no one can really understand the price in the video, but there are good businesses in there. You know, what he’s failing to say is that Google and Meta, for example, are only around 20 multiples. So we’d look to own those kind of business. So I think it’s hard to bucket everything and say, you know, it’s all one big expensive trade. I think if you look business by business, there still are those good opportunities, market by market.
13:09
And the last market I’d like to talk about, which also came out very negative, is China. For the first time in a long time, and we’ve been negative China, we are bullish China. Not bullish the entire Chinese market, because as you can see that property, I don’t think is going to come right for many, many years. They totally overdid it. And obviously that’s got knock on effects to resources because resource demand will maybe never be as strong, or not for a while.
13:38
you know, until that bubble kind of disappears. But what we saw in December, and we sent an analyst to China, and they met with all the tech companies, and particularly Tencent, is that the tech companies are not that far behind US tech companies, or obviously on valuations, because you can buy Tencent on about a 12 multiple, excluding its investments in associates and cash, but its counterparts in the US will be on
14:07
30 or 40s. And what we saw particularly in December is regulation was announced again against gaming, mobile gaming, particularly in China. Market corrected in Tencent, for example, and other gaming companies came off almost 10%. Within a 24-hour period, that regulation was removed by the Chinese, the minister was removed, all the rhetoric around it was changed.
14:35
And for the first time I can remember in ever in years, China paid attention to what the stock market did. And since that day, we’ve had different rhetoric coming out of China. To us, it feels like they need to grow again, they can’t achieve it in where they achieved it before, it needs to be done domestically, it needs to be done by consumption, and they need to promote the tech sector better. And I think there’s been a fundamental shift.
15:02
Earnings are out in a couple of weeks. You would see those of you who follow Tencent that just in the last three days the stock’s up 8.5%. Its knock-on to Nuspeh and Process is massive because Tencent is doing a buyback, doing one four or five times bigger than it used to do in prior years due to them also knowing how much growth there is underlying and how the mechanics work.
15:30
Nuspass who holds the process stock is also doing a bar back. She’s got an automatic tailwind and pit spoke about bar backs, but here you’ve got a leverage bar back as the holding company of another, another dozen, and we believe results will be really good. So they’re coming on the 21st. I think it is of this month. Hope that’s right. But our biggest overweight position in South Africa right now is the Nuspass process trade and we bullish Chinese tech. So there’s China kind of middle of the road on the US.
16:00
And SA, we’re in the camp of kind of bullish into the election, into quality. And there are a couple of small caps I’ll just mention quick, the other day if I’m like… All good, you go ahead.
16:14
Pete spoke about, and I know people like to talk about different opportunities. Pete spoke about Grinrod. Well, a 361 just below the 15% threshold. We obviously have to announce that we cross over 15%. So I think we are whatever the second largest shareholder in Grinrod. We started buying it at three bucks or four bucks. It’s now trading at 13 or so.
16:40
It’s a fundamentally great business that has benefited from delivery on Transnet as a phenomenal port in Mozambique. You’ve seen the volumes in Maputo climbing at a serious rapid rate. And if you look at other deals done around the globe on port assets, you’ll notice if they had to sell their port asset at anything done by even other African port values, you’ve got enormous upside. So I think there we would agree.
17:09
Just think of anything else that could be citing on that. I mean, he spoke about Argent, Calgary, M3. Yeah. So Argent, I don’t, I don’t, yeah. Argent and Calgary, I don’t really have it. An interesting other one is Zeta. I know there are two Zetas. I’m not talking about the agricultural Zeta. Talking about Zeta that was unbundled out of Barlow’s, which owns Avis. Interesting business because it’s very focused on tourism. You could imagine more rental cars that are delivered into the
17:38
into Cape and what we’re getting is a phenomenal story about how good that business has done over the last few months and what multiple do you think we are on our models that multiple forward trades on about a 2.6 odd multiple. It’s a 2 billion Rand business. It seems to us to be absolutely ludicrous. So I’m sure that business which was unbundled is probably subject to I’m sure private equity, having a look at it all that has got a very big.
18:07
CapEx budget in reflating, so maybe not quite private equity. But to us, that’s worth at least double the ship.
Read also:
- BNC#6: Phil Craig – Cape Independence is an essential survival strategy
- BNC#6: Anthea Jeffery – Revealing the history behind SA’s socialist trajectory
- BNC#6 Mavuso Msimang – A call for unity, progress in post-Apartheid SA
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