Bravata Worldwide Flexible comment - Sep 12 - Fund Manager Comment25 Oct 2012
"The Same, Only Different"
When we started the firm seven years back, we asked ourselves what we could do differently that would ultimately set us apart from other asset managers. We realised that if we wanted to maximise the wealth of investors, we would have to develop the capacity to suffer. This does not literally mean that one has to suffer, but that in order to succeed one has to be able to endure the thick and the thin of the market. It is never going to be a straight line. Sometimes you must be willing to step back in the short term to do the right thing for the long term.
This meant that we had to be benchmark agnostic, not become "asset gatherers" and have the tenacity to endure periods of underperformance. It also meant that if our investors did well, in the long run we would do well.
Our analysts have the freedom to look at any solid investment idea that will make money for our investors. We do not cover every sector of the market simply for fear of missing out. We will therefore miss some opportunities just as we will also miss some losers, a much more important criterion for winning in this highly competitive game. When one loses 50% on an investment, it needs to go up 100 % just for you to break even. For investors in Greece who have lost 90% of their capital, their market will have to go up nine times before they are back in the black!
A natural consequence of our strategy is for cash to build up as we sell investments that have met our target prices. Furthermore, our inflows may build up, as we will only invest if the probability of success is in our favour. Many investment houses mechanically invest because the model dictates that they do so. Since human beings are generally by nature impatient and anxious about inactivity, it is a difficult and tedious task to be an objectively patient investor.
A common misconception is that investors see us as value investors or contrarians. We are neither. We seek quality investments at a decent price that over the long haul will not only deliver the goods, but when the lollapalooza- happens, we have the ability to react in a positive manner. Experience has shown that value investments such as Telkom, Hulamin and even gold shares do not work over the long run. For us it is quality that matters and most certainly price.
In 2008 we went through a period of significant underperformance. We simply could not bring ourselves to invest. One's character certainly gets tested, but you simply have to remind yourself that permanent loss of capital is irreversible, just ask the Greeks. In 2012, we are seeing similar themes where some of the risk premiums are simply not high enough and investors are purchasing companies whose revenues are either vendor financed or obtained by unsecured financing. In our view, the "hazard pay" for these investments is simply not sufficient to warrant the risks.
As an investment house we have historically proven our "capacity for suffering" and been vindicated with subsequent outperformance. Given the vagaries of the market in general and local economic challenges in particular, times of "thick and thin" will be a given. Currently, we are prepared to withstand relative underperformance on the back of sound long-term investment focus to generate wealth for our investors without the risk of losing capital. We know what we want to buy and at what price.
- A term often used by Charlie Munger - "an unusual or extraordinary thing or event"
Bravata Worldwide Flexible comment - Jun 12 - Fund Manager Comment26 Jul 2012
As we enter the second half of the year, monetary authorities around the globe are resorting to the third round of liquidity injections into the markets. The effect is to push interest rates to their lowest levels and to create renewed appetite for risky assets. Money appears to hold little value and investors would rather consume, or alternatively seek to invest in higher yielding assets such as emerging markets. Often, the excess cash seems to end up on the balance sheets of companies and does not achieve the required effect. We are not experts on these matters, but it does not feel like the central bankers are any different to the commercial bankers that are being lynched by their respective governments and media. Our conclusion remains the same - we don't know how it will play out and we will continue to stick to what we know, ie buying companies that will continue to operate successfully, despite the prevailing economic environment. Furthermore, our expectations are low and when opportunities present themselves, we will invest on our own terms. Experience has shown us that in these very volatile times, the market serves those who are prepared to take action when the rest of the market is "battening down the hatches".
Delta, a share we know quite well, was recently sold down to R5.25 from a price of about R7.40. The seller was a bank who decided to liquidate its holding, owing to a change in its policy on proprietary trading. Once the bank sold out of its holding, the share recovered to R6.50. As a house, we purchased about ten percent of what was sold at an average of R5.43 and only time will tell if it was a smart purchase. Similarly, we were afforded a chance to purchase Hellenic Bottling at reasonably low prices as the world pondered Greece's exit from the markets. At the time of compiling this commentary, the share was up 22% from where we purchased it. In these times of uncertainty, our goal is to continue to purchase businesses that will be able to fare well in any situation in which they may find themselves.
Bravata Worldwide Flexible comment - Mar 12 - Fund Manager Comment14 May 2012
It bothers us when we hear "experts" on local media who speak about the future of stock markets, foreign exchange, interest and inflation rates. How do they know this? Our experience shows us that this is a very challenging thing to correctly predict and we have tried to unearth individuals that can genuinely accomplish this feat. Surely, if the "experts" did find themselves in possession of such valuable and potentially rewarding information, which they would have worked hard to garner, would they keep this information to themselves? Our conclusion is that they would share this information with the public because they don't really know. Many also talk to their book. These modern priests of financial theory should stick to explaining the past and not attempt to persuade investors regarding what to do with their savings. On the other hand, it suits us at Aylett & Co, as they often persuade Mr Market to enter one of his psychotic moods; this in turn provides us with excellent investment opportunities.
Our focus at Aylett & Co is to try and avoid overpaying for assets. Our thinking is that if we don't permanently lose capital, the rest of our investment process will take care of the upside. Selecting good companies, coupled with an ability to ignore the soothsayers of market forces will, over time, prove to be a winning strategy. So what concerns us?
Our concern is that investors in emerging markets and certain developed markets have not been punished enough. Buying during the dips hasn't been a bad strategy; in fact, just when you think that is it, some central banker/government comes to the rescue. Bad behaviour continues to be encouraged and common sense is ignored. The Volcker Rule meeting such resistance in the USA, even from governors of the Fed, particularly Mr Lacker, is evidence of this mind-set.
Locally, I find the increases in unsecured lending to the unbanked quite remarkable: CEOs try to reassure us that we do not have a bubble and they inform us that this time, it is different. Why aren't they marketing products that encourage one to save? Fundisa is a great example of this kind of initiative.
We have built up our cash reserves. Not much has changed in the world and this lull in the markets might be warning of a prevailing storm - we hope this is the case, but until then, our cash reserves will continue to grow.
Bravata Worldwide Flexible comment - Dec 11 - Fund Manager Comment15 Feb 2012
Performance
The Nedgroup Investments Bravata Worldwide Flexible Fund has had a satisfactory year with regard to its performance. For the year to 31 December 2011, the portfolio delivered a return of 14.9% during a period when both local and foreign returns were quite poor. We were fortunate to be overweight the US markets, which provided the only positive returns (in local currency terms). In the past, we have constantly cautioned investors of the perils of investing in the emerging markets and fortuitously, this outcome prevailed.
Winners
Our decision to invest in many of the well-known NASDAQ names such as Cisco, Dell, Intel, and News Corp served to preserve capital and in some cases, these stocks made us quite a bit of money in a relatively short period of time. Our UK portfolio did reasonably well - holding Vodafone, BP and Games Workshop - a pity we did not own more of this micro stock! On the European side, Sanofi and Nestle held up very well against the negative publicity of the European sovereign debt crisis. Finally, Ale Property Group in Australia and local stocks such as AECI and Lewis Stores made small contributions to our returns.
Losers
The results of our decision to invest in Japan, despite the lower valuations, disappointed us. Clearly the earthquake did not help the market and coupled with the strong yen, and the negative backdrop of the global economy, led to poor sentiment towards Japanese equities. European shares such as Carrefour, Jumbo, Nokia and TNT were negative contributors. Collectively, these shares only made up about 5% of the portfolio.
Outlook
We do not know what the future holds, however, there is quite a lot of pessimism priced into the markets and it would not surprise us if market returns improved. As an avid reader and follower of several financial publications, I have found it rather difficult to uncover any good news. Currently, interest rates are low, inflation subdued, capital is not scarce and the hoarding of cash is the strategy of the day. In my view, this is good news for equity investors. The USA is, in particular, very interesting, whereas South Africa is not very exciting and we have longer-term concerns. Valuations do not reflect the risk of investing in Africa.