Norman started his career in investments in 1988 and has worked as an investment analyst and portfolio manager in asset management divisions. He has been actively involved in setting up investment processes and held the position of Chief Investment Officer in a previous company. Norman joined RMB Asset Management in 2000.
Momentum Small Mid-Cap comment - Jun 14
Despite continued domestic economic growth disappointments, which led to rating agency S&P downgrading South Africa's sovereign credit rating to one notch above junk status, the Johannesburg Stock Exchange continued to power ahead, reaching an all-time high towards the end of June. Performance related to value investing, which we (over) subscribe to as a style, slowed slightly in the second quarter, but, year-to-date (and over the longer term), value investing remains one of the best-performing investment styles.
Although the fund is up year-to-date (+2.13%) verses the SWIX total return of 11.8%, we are not happy with the short-term performance. We do, however, continue to believe that our process will reap generous returns in the long term.
The main detractor from performance this quarter was African Bank (Abil), which continued to test us and fell further during the quarter, despite no new facts emerging. We continue to challenge our investment thesis in the business according to four key criteria, namely structural, cyclical, management and, most importantly, financial. Unless the facts change in any of these four criteria, we back our research with patience. From a financial perspective, we believe that, compared to its peak (we did not own the stock then), liabilities are now more fairly stated, assets understated and normalised long-term profits are understated, despite the business operating in a challenging environment. Readers of our previous commentaries will know that we don't fear new lows, but cherish them as buying opportunities, as we did previously with Telkom, Sibanye, Pallinghurst, Torre Industries and Afgri, amongst others, which, despite causing us the odd sleepless night, eventually made up for this (and then some). We believe that, unless the facts change, Abil will be the same. Unfortunately, good news and cheap stocks seldom go hand in hand and bargains are usually found where share prices have been under sustained pressure and investors are most negative.
Positive contributors included Pallinghurst, Zeder Investments and Sun International Ltd.
Around 5% of the fund is invested offshore, predominately in two US-listed companies, namely Seneca Food Corporation and Titan Machinery Inc. Seneca Foods Corporation (SENECA) is a fully integrated food processing and food distribution company, operating 24 plants and 30 warehouses in eight American states.
Titan operates a diversified mix of agricultural, construction and consumer product dealerships across much of the upper Midwest Corn Belt in the US and has recently expanded into Europe.The management team is very experienced and run by a chief executive who is both the founder and a significant shareholder in the business. At the current prices, both the Seneca and Titan businesses meet our investment tenet.
During the quarter, we added to the fund's holdings of gold shares, African Bank Ltd and US Seneca Foods Corporation. We added a small weighting in Wilson Bayly Homes to the portfolio for the first time.
To fund these purchases and take advantage of increased liquidity in some of the smaller counters we hold, we lightened the fund's weighting in Allied Electronic Corporation, Advtech, Nu-World Holdings and Iliad Africa Limited, amongst others. These sales released substantial profit on the fund's original purchase price.
The fund's composition is considerably different to our competitors and broader small-cap index. Our underlying portfolio is populated by under-valued laggards, defensive stocks and a meaningful position in relatively depressed resource stocks (platinum and gold).
As per our process, we remain focused on looking for good, cheap businesses, regardless of the economic environment. We invest the fund as a 'true owner' of a business and back these investments with a long-term view. This requires patience as, without it, we will not see the long-term unlock of value from management when aligned with shareholders. We trust that the fund's investors view the fund with a similar long-term outlook and, as we are co-investors in the fund, our interests are aligned with yours.
The Momentum Small/Mid-Cap Fund's objective is to maximise returns over time through investment in small and mid-cap shares primarily listed on the FTSE/JSE. The fund offers investors the potential for long
term capital growth.