Good Investing Talks - Why are you digging for investing diamonds in South Africa, Rudi van Niekerk?

Episode Date: February 19, 2021

Rudi van Niekerk is an outspoken expert for investing in South Africa. He is following a long-term-oriented value approach in a rather inefficient market.

Hello, Rudy. It's great to have you here for an interview. You're currently sitting in South Africa. It's summer there. How are you enjoying summer? It's great. Weather is absolutely lovely. You know, it's Mediterranean Cape Town, so it's marvelous. Yeah, Cape Town is a great city. And this leads me to my first question because your fund is named Desert Lion. Have you ever thought about naming it like another South African animal? Maybe Cape Town Pingoine Fund or something like this? You know, there are obvious names that you can choose, which are quite recognizable, like, you know, Table Bay or Table Mountain or Cape Point, something like that. But these names are quite generic. And I love nature and I love traveling around.

And Namibia is one of, you know, neighboring country of South Africa. We do a lot of self-drive tours out there. And in the northwestern part of Namibia, there are a few remaining lions wandering the desert on the brink of extinction. And it's truly amazing the resilience that they are showing in how they are surviving in a very difficult environment. So the name kind of struck, you know, having, insight into those animals and it kind of resembled something the tenacity and the persistence operating in very harsh and difficult environments and honestly have you even thought about other South African animals to name your fund after or are there

other animals that fascinate you there are many other animals that fascinate me I am an amateur birder and there are quite a few you know birds including birds of prey. But again, I think that, so two things about names. The one is, you know, many of those are kind of generic or has been chosen already. So I'm not aware of any other desert lion capital funds. There are many battle lures and peregrins and other birds of prey funds out there. But the other thing is, you know, what is in a name? We, over time, you kind of, what you do with the fund or the company and the values and

the actions that it espouses kind of attributes the quality to the name and not the other way around. So we've played around, you know, we haven't chosen a penguin or we haven't thought of that. but we've played around with many different names we have them we should have met earlier then it might have been the penguin they're so cute I saw them as I was in South Africa 2013 and there's just this colony and well it it might have been appropriate because you know we've been huddling along for some time in the South Africa in the market so it could have been quite appropriate might be a great idea for the next fund

Before I showed a disclaimer, I just want to pose another question. And you can think about it because it's going back in your history. You started your career as a grain trader. What did you learn from that that's useful for you as an investor? Before you answer, let me just drop the disclaimer. As always, you can find the disclaimer link below. It says, please do your own work. What we're doing here is a qualified talk.

We're also trying to have fun and talking about penguins and maybe some stocks, but all of this is no recommendation. Please always do your own work. And this is no recommendation, do your own work. So thank you for listening to the disclaimer. Let's go back to the question on your past as a grain trader. What did you learn from that? that's important for you as investor today.

Yeah. The question is actually way more relevant than one might think. You know, I haphazardly entered the grain trading industry, didn't really know what I wanted to do, came from a farming background, and studied agricultural economics and just stumbled upon the grain trading industry. And that was a period,

Just South Africa still had grain boards, so single marketing channels, which meant that for the different grains, wheat, maize, etc., the price would have been set in advance ahead of planting season. So farmers went into the planting season, knowing exactly what price it was that they would receive, obviously eliminating a lot of uncertainty from a pricing perspective. now that market deregulated into a free market system by the time that I entered and it was a very nascent market we were one of the early players and I interacted directly with the farmers my role was predominantly to procure grain you know drive around in the countryside meet the producers the the farmers and contract the grain then manage the book manage the price and then sell it to Miller's again. And the free market system, as you know, Tillman, is prices moving up and down every

single day. And this was a major transition for farmers to offer them a price today, you know, say, I just just use index numbers, 100. And tomorrow, the price might be 110. And farmers, you know, would have thought you have done them in in somehow because a market market, moved up or down. And if the market moved down, you know, it's a psychological call option. If the market moved down, farmers would have told you that they made the right decision. But if the market moved up, they would blame it on you. So what I've really learned there is about human psychology. That's what I learned. I learned about temperament. I learned about psychological duress, emotional dearest. I come from a farming background. So I've been on both

side of the fence and farmers can be quite rough and rough with you if they wish, especially if it's their main income that you're dealing with. So we've learned a lot. I have really learned a lot about human psychology and temperament there. The other thing that I learned is it was also my introduction into financial markets in the sense that I was a registered trader for futures, derivatives, options, et cetera. And being young and extremely, naive. I thought that there was a way of kind of beating the market. And it didn't take me too long to realize that, you know, commodity markets, especially like that with the rudimentary approach that we had, it was a zero-sum game. It was a fool's game. So that was kind of the precursor to me

to start looking for something more in the markets. So much, how much farmers dealing strategy did you copy for your way dealing with companies or what elements did you copy or take away from this you still have today as an investor? Yeah. I think especially when it comes to elements like conflict resolution and respect for the individual. I have learned that people are generally way more intelligent than what you think they are. are. So don't underestimate their intelligence by trying to manipulate or drive a conversation in a direction. And when you have genuine and true empathy and genuine and true interest in a subject matter that is important to the people that you are talking to, and when you have

respect for the individual that you are dealing with, you know, that kind of creates an environment where there is way more transparency and a willingness to be forthcoming. And the other thing that I've learned there is that, you know, the best relationships to this very day, I have a lot of very good friends in that farming community. The best relationships that I've cultivated were cultivated during tough times when we had to resolve conflicts. And I think that, you know, business isn't always smooth.

I have learned a lot from the operational. I've been inside the operations of that business. I've had managerial roles in that business, and business is not smooth. If you haven't seen the belly of the beast and the managerial side, and you just read the company filings, the annual reports, it looks like this pristine clinical model that you can invest in.

But it's haphazard, it's volatile stuff happens. and there's friction and there's conflict to be resolved. And I've learned that about business to be understanding about that as well and more trying to assess how management's dealing with conflict, how management is dealing with challenges. I think that is something that I was able to bring along and have a reference framework when I evaluate management as well. It sounds like you already had a very interesting

and also challenging career as crane trader and in the crane industry. What made you bet on this pingoing we described, the South African market that's wanking along through the last years? I think it's since you started investing, not as a part-time job, but since you started investing, it's up 6% per annum. It's not that kind of big of a performance. So you decided to bet on a career on investing in South Africa. What chance did you see here?

Yeah. So I think it was around 2018 when you launched the fund, but you started investing at 2013. Maybe you could add this too. Yes, sure. So a few moving parts here. Let's see if we can touch on all of them. Let's start with the last part first. So the fund was launched in the Desert Line Capital Fund launched in April 2019.

I have been managing outside capital since 2013. And over that period, you are correct that the South African market has only returned 6% per annum. Now, I have to qualify that by saying that the market, and I guess we'll get to that a bit later, you know, so inefficient and there are so many opportunities in the market that we have been able to outperform that multiple times, purely because of the structure and the nature of the market. So I would be the first to say that, you know, if you look at the South African Equities market as an entity, then I wouldn't necessarily say it is such an attractive opportunity to invest in.

I am not advocating going out, rushing out, and buying South African index trackers to anyone. My background to your first part of the question, you know, what got me interested in why am I playing in this playpen of the South African equities market is purely because that's where I cut my teeth. I started, you know, from that first introduction to financial markets of equity, sorry, grain prices, trading on the derivatives market moving up and down. I ventured out and I started looking at companies and investing in companies. And I bought my first company or shares in a company in 2004 whilst I was still at Grainco and a grain trader. And that's where it really took off. You know, it was parallel to a process of reading about fundamental investing.

And it just immediately, the concept just clicked with me, the concept of being able to buy something for less than what it's worth. and the concept of exponential growth. So it's merely a function of where I've cut my teeth. At that stage, I didn't go and take a top-down view and say, where are the most attractive markets in the world to invest in. I did what was right in front of me. And over that period, you know, I made a lot of mistakes initially,

but I cut my teeth from 2004 to 2013 for that first nine years doing my own thing in the market. What I realized is the market is so heterogeneous, you know, it's so dispersed. There are so many smaller opportunities of which the return profiles are not representative of the market return as general, that it kind of just fell on me that I realized that there is a huge opportunity here, which by definition will be overlooked or not identified if you just look at the SA market as a singular entity. Are you the only desert lion in this South African capital market?

Are there many other players that have the same approach like you have or is the financial industry more conservative, classical, not looking for the way you look at stocks? Yeah. Excellent question. So let's talk about the structure of your market and take a step back. It's a relatively small market. We have about 325 listed equities, depending on how you define it. and of that the top 40 completely overweights the market so 80% 80% of the total market capitalization of the total market is vested in those top 40 stocks and then you have the remainder of about 280 stocks which constitutes the remaining 20%. And the top 40 is fairly efficient because that is where all the institutional players play. It's highly liquid. There is a lot of information.

There's a lot of analysis. And the South African financial market is quite sophisticated. To give you an idea, we have more than 1,000 unit trusts or mutual funds that invests in this relatively small market. But when you get to the small and the mid-cap side, there are less than 10 mutual funds registered at last check that invests in this space. And even those are highly regulated and they are limited by regulatory restrictions. So there's a high degree of group think, of an institutional approach. and there are very few who are willing to really venture, you know, off the beaten path. Career risk is a very real thing here.

It's not as, I would say, audacious and entrepreneurial and individualized that you will see in developed markets, especially like the U.S., for example. And then if you look at, you know, the entry point, I honestly, there are a few individuals who manage their own family offices or who manage private companies whom I regard highly who are very good investors in the SA market. But they do that for themselves and they do it unconstrained. When it comes to formal vehicles doing what we do, I think that is what really separates us in that I am not really aware of any other US-based funds that do exactly what we do in the SA market. So, you know, we follow a completely unconstrained mandate within the South African

equities market. And if you look at our portfolio, you will see that it's highly concentrated and it doesn't resemble the index, it's all. And if you look at the dispersion of our returns, you know, it's very lowly correlated with the index. If you think about the South African market, a name comes into mind that might be known global in the investing scene, it's Nespers. How big is Nespers in the share of the South African market

and also attached to its question, how global is the South African market because if I'm thinking about what you're telling me it sounds a bit like Germany where you have some middle stand the ducks is not that easy to invest but some middle stand and small midcaps that are quite interesting to invest in

they are often global companies yeah NASPAs and let's include NASPAs and use the two terms interchangeably because NASPAs owns slightly more than 70% of process, they completely dominate the market, give a take where you are about 25% of the total market cap of SA. So again, if you just take the salient financial characteristics of the market, that's hugely distorted by Naspers. If you look at the price earnings ratio of the

market, for example, and other elements. just one or two thoughts about NASPERS and then we'll get back to NASPERS, the role in the market and then the rest of the market. NASPERS is quite interesting. I'm not going to talk about 10 cents. We know that well enough. But it is quite amazing that NASPERS

as a South African listed company is a victim of its own success in the capital allocation that it has done. And on a look-through basis, NASPERS is now trading, at about 50, 51% discount to its underlying sum of the parts. So you are buying 10 cent, arguably, at half price. And there are many other moving parts, both within 10 cent and process, which I believe are

undervalued. So the discount might actually be even higher. And NASPERS, I believe, is trading so low due to a few factors. it could be that people simply just don't like the holding structure. We have seen holding company discounts around the world. But definitely I do believe it is that it's essay and people are willing to rather buy process, which is more Netherlands-based or 10-Send directly.

So you're getting a global company at an essay discount. It's an example of that. And another reason for NASPERS, this big discount is all the institutional funds, they have limits as to what they are willing to invest in. And they would all tell you it's imprudent to have 20 or 25% of all portfolio allocated to a single company, which in itself is kind of strange that you have the largest company

on the JSE actually offering one of the most compelling value propositions currently. And that's a dichotomy with what you're working with on. on the S.A. market. For the rest of the market, let's look at valuations. If you strip out Naspers, the rest of the market, until recently, we have had quite a strong run over the past few weeks. But until recently, the rest of the market, excluding Naspers, has been at valuation levels last seen more than 10 years ago, between 10 and 15 years ago. We are at multi-decade lows, quite interesting. But again, we need to understand that the market is not homogeneous. So it is made up of companies that genuinely are old business models or

business models that will struggle given the prevailing socioeconomic and political environment and in South Africa. And then again, on the other hand, there are companies that are actually growing quite fast and doing much better. So within that, what people tend to call, you know, excluding Naspers, you have a few of the international companies like A.B. Inbev, Rishamor,

and those companies, which are blue-chip, hard currency hedges. Apart from that, the so-called SA-Incccccc companies, is really a wide dispersion of an opportunity set. And the tails are quite fat. The tails are quite thick. And you will find that there are many landmines. It's not an easy environment to navigate. But then again, there are many extremely compelling opportunities.

And these are also trading at very depressed prices relative to where they would have traded if they were in a different spotlight or in a different environment. So that is what you need to navigate. Although this market is so small, it's extremely important to understand that the dispersion of the data points are extremely wide. And that exactly is where the opportunity lies in the market. Let's try to experiment with the distribution curve you wanted to draw.

Let's say someone asked you which industry, what you like to, you don't do shorting, but let's try this as experiment. Which industries in South Africa should you short and which should you go long? Look for longs or shorts. It doesn't mean that they automatically are shorts or longs, but yeah. Okay. I'm willing to take a jab again with a provision that even within those industries, you might find opportunities, the ones that I say short. might find that's in the ones that I say long. But I would say that the industries where there are opportunities that I would go long

are industries that widen access, number one. So industries, I would say in the financial services industry in South Africa, you know, they have structural tailwinds, education industry. the very, very niche areas within the construction industry, education, niche opportunities within mining, especially giving the macro environment that we are going into now. And basically anything that is tech enabled, where tech is an enabler to grow and scale further.

On the short side, just for what is in front of us right now, I am still concerned about just basic industrial manufacturing, locally oriented basic industrial manufacturing. I am concerned about certain pockets of retail. the economy is struggling. How big is the unemployment rate at the moment? It's high, depending on how you measure it, but let's say it's 30%. So it's a very high unemployment rate and we also have very high income inequality.

And then I also think, you know, we've had quite a glut, not a glut, but a very, very healthy, a very strong supply of physical retail space. And I do think that physical retail space is also something that will be under pressure for some time to come. If someone would ask you for books to read about business in South Africa, what would you recommend? For the viewers, we will add some links to the books. So, Tillman, let's just say to the viewers that your questions weren't circulated beforehand,

but I have listened to some of your podcast and I kind of preempted this question and one of the books that I would recommend is someone who has inspired me quite a lot is Yanni Motton. He is the founder of PSG and you know it's just phenomenal. The book is not very eloquent

but it is instructive in its raw honesty and its raw account of how he has a true entrepreneur but a capital allocator at heart is what he actually is, an activist capital allocator, have built up a business, started late in his life, you know, near 50s, and built up a business that compounded at about 40% per annum over a 25-year period, just amazing. And he gives accounts,

to the various businesses that he invested in, et cetera. I think if you go a bit further back, that's more contemporary. If you go but further back, it's worthwhile reading up on people like Anton Rupert, the founder of the Rembrandt group. It's also worthwhile, you know, unfortunately he has lost most of his wealth now at the end of, you know, his professional career. well, actually he was retired already, but towards the end of his life, Chris DeVisa, a real trailblazer.

So, you know, you might say, and again, this is where there's this massive difference between what the average tell us. The average is not inspiring, but I can highlight a few individuals and success stories that are truly phenomenal of what people have achieved. But that book is a worthwhile read. to get an authentic South African flavor of the opportunities and how one can go about the opportunities. You already mentioned Chinese moton.

I hope I get the name right. It's one of the best capital allocators in South Africa. What are other great capital allocators? You know, I think Brian Jaffe, who, headed up Bitwest for many years. It's a great capital allocator. Currently in the contemporary environment,

we've had someone, Andris van Yerden, who is heading up Afrimat, an aggregate and construction materials company, exceptional capital allocator. We have seen some a mining executive that's coming to the fore he has made mistakes in the past but i have to say recently it seems like he's learned from his mistakes and uh um the track record has been quite phenomenal over the past almost 10 years eight years or so is neil froneman of a sabania

stillwater um yeah um i prefer not to go into the fund management space. I think it's it's treacherous to talk about that. But those are the operational and and I apologize, I probably left out quite a few, but those are the ones that come to mind now. And that has been instructive to me in the past, you know, that has influenced me. If you have some to add, you can send me names and I will add the box to the transcript. So people can see the addition. If we talk about capital allocation, we also have to talk about capital. In Europe and the US, we currently have enough of it, how Skyris is capital in South Africa. Like, is it different if you aren't here in Europe and US, but you can say it from your South African

perspective, how Skyrus is capital? Very. And I think that's the reason for the opportunity. you know for capital to truly function it needs a hurdle and the expected return on capital is quite high in South Africa due to the limited amount of capital what we have seen until recently and I have written about this expected return of capital to South Africa but until recently until middle towards end of last year 2020 we've seen over about

a period of three years, three and a half years, a constant outflow of liquidity from the markets. And you have witnessed that some companies posting excellent results, and regardless, their prices just go down, go from a 10 PE to an 8 PE to a 6 PE. And that was on the back of indiscriminate redemptions and withdrawals, and people are by funds and people just exiting the market. You know, sentiment is a fickle thing. In the end, it is true what Ben Graham said about the market, that in the short run, it's a voting machine, in the long run, it's a weighing machine.

But, you know, that fulcrum, those pivots need to be oiled, and you need liquidity to oil it. Otherwise, it can be stuck in the voting status for a prolonged period of time. And we have seen that in the South African market, market, a constant withdrawal of liquidity for three, three and a half years. With that, obviously, it brings opportunities because you see this constant de-rating, de-rating, de-rating, to the point where capital is scarce.

And now, you know, with capital flowing around in the world, with, I don't know, at last check, it's probably 18, how much is the negative yielding debt around the world now? Last time I checked was something like $17 or $18 trillion. I don't know what. No idea. I don't care. Yeah, but you see, that's crazy. You have that and you have a South African total market that's about $1 trillion. And you have global exchanges that are at very high multiples and you have very low interest rates.

And I get that. I mean, it's a reality with what we are dealing with. And then you're sitting with South Africa, which still has positive real rates ranging from 3 to 6%, depending on how far you go out the curve. We have inflation that's under control. And we have high expected returns on our equities. So it is quite an anomaly that capital is so scarce. And I think there are understandable reasons for it. Because people tend, when people look at a South African fund,

it's difficult for them to evaluate the South African fund without taking a top-down approach and looking at South Africa. And if you look at South Africa, you look at the headlines and you look at the statistics. The optics are not good. You know, Tillman, we've had a, before COVID last year, we hosted an investor trip for people globally. We've had fantastic people from places like Russia, Dubai, UK, US, France, or, all over the world. And many of them have never been to South Africa

or haven't been to Essay for a long time. And I specifically asked them to kind of formulate a view of South Africa before they arrived. And at the end of the trip, I asked them to relay what their new impression is of South Africa. And without a single exception, they were all blown away. They were surprised by the infrastructure,

the quality of the businesses, etc. So it is a difficult sell. Capital is very scarce in essay. That is why the market is so inefficient. So I have this dichotomy, this contradiction. On the one end, the reason we can go off the beaten path and find opportunities that outperforms the market with significant margins is because capital is scarce. On the other hand, you have all these opportunities and you cannot really capitalize on them because you do not have enough capital. So it's a tightrope that we are walking. There's less capital available.

Does this make the quality of the capital allocation in South African companies better? I did get a question from Twitter from someone. He asked, why do South African companies seek poor international expansion instead of high cash generation and buyback or mergers, how would you answer to this question? Yeah.

No. The thing is South Africans in general and this is not just a personal opinion that I'm expousing now there's been quite a wide-ranging market survey that has been done on this. South Africans in general tend to be more pessimistic about the country than what the reality dictates.

They could be Germans. And so you have the same problem there. Yeah, somehow, or in some parts of the country is. Yeah. So you would find that when posed with an opportunity to externalize a point, of your capital by investing offshore, whether on a retail basis for an individual when it has an option to invest in a locally focused vehicle or investing in an internationally focused vehicle, or when companies at a company level as surplus capital to allocate, they tend to pay quite a high level of consideration to externalizing some of that capital and to diversify

from what their perceived risk of SAA is and based on their perceived negativity towards essay. And the reality is that in the bulk of the cases, those who went offshore, the investments didn't work out as well. And those who focused internally and focused on the opportunities that were here, regardless the terrible news headlines in what the media says

and the very real political, and socio-economic challenges, they were able to still post very, very decent, more than satisfactory returns. So I do think to a large extent, it is a function of human psychology and being overly pessimistic at own home level. Another question about going abroad

is why are some of African companies delisting from the local index and going to Europe or the US? you could think of nespers and prosos. That's a very, very good question. And it's actually related to your prior question about the scarcity of capital. We have many, especially in the smaller and the mid-cap space companies, we've seen roughly between 40, 60, de-listings over the past two years or so. And it is a function of you have these smaller and mid-cap companies which are completely overlooked. They do have compliance issues or just they do have to comply with all the regulations.

So that's an additional compliance burden. And their stocks aren't rated. So they cannot use the market for what they want to use the market for. They cannot go to the market. I mean, what is the market function? What was the initial idea? the initial idea was to go to the market, to open it to the public, to get the public to invest in your company, to enable you to grow in a direction when you don't have access to that necessary capital.

And then also for the market to create a liquid platform where that can then exchange and value can be realized. Now, for many of those companies, that function has very much, you know, been suboptimal over the past few years. So why stay listed if you have these regulatory burdens and your stock is trading at 20 or 30% what you deem to be intrinsic value? A good question is why more of them haven't done share buybacks. I think two years ago it would have been a more reasonable or more valid question. Now they kind of caught up. I see many more companies doing share buybacks at depressed prices or lower prices. We've also seen corporate action ramping up.

You've seen a few take privates, but it's a function of the market, not attributing fair value to the companies. That's the main reason. Maybe let's talk about progress also in a longer term view and go back maybe to the 1990s and see where South Africa is today. What has changed since then? Also in relation to maybe crime, I have this funny anecdote as I was South Africa in 2000. 13. We were so much warned before that there might be crime that I went to the ATM, took like 30 euros in South African run and lost it on the way back to the hotel because I was so scared about crime. It was just like stupid, but. Yeah. Is this image that is it still true that you have to be take take care of yourself much more compared to other countries or is it getting better in South Africa? Two parts to that question.

I think yes, it is still true that you have to be more vigilant in South Africa than you have to be in most other countries. Crime certainly is front of mind, and to a large extent you know, it's not that people are deliberately malicious. It's more a function of people being poor, people being hungry, people being opportunistic, which one can understand. And it's a failing. Crime is, without excuse, it's a failing of governance and of the economic system.

That said, if you take the Hans Rosling view of factfulness and you look at, take a snapshot at where South Africa was socio-economically in 1990, for example, and where it's is today, then on many levels we are so much better of stuff like housing, access to water, people living below the poverty line, access to education, all of that is way, way better, and we've seen a genuine improvement on the population in aggregate. it. So, you know, there's a saying which I have internalized, which is that South Africa is never as good as it should be, but it's definitely never as bad as it could be. And South Africa has an amazing resilience and ability to continue to grow through crisis, from crisis to

crisis. And again, it's quite, you know, heterogeneous. There are areas where there are extreme problems, and then there are areas which are first world and very, very progressive. So it's an interesting melting pot of risk profiles, private initiative, you know, and and cultures. that you find here. It was quite interesting as I was in South Africa. You could drive through the highest income gated community. And after two kilometers, you will see some informal settlements. Formal settlements, yes.

It's or you have in Pretoria, you have this malls where you think you're in UBS somewhere in California, also from the climate. And then a few kilometers in the inner city of Joburg, you have this high rise. That's disquoted by people from North Africa, from Northern Africa. Yeah. And, you know, notwithstanding the problems, corruption and political problems that they are, is this bothering in the background? Are you hearing it or not?

I hear it a bit, but it's okay, I think. Okay. You know, notwithstanding the corruption and the political challenges that we face. we are constantly South Africa on average is constantly busy widening access and addressing these problems so we see a lot of construction in housing

we see a renewed drive into energy and into a better service delivery when it comes to that we see infrastructure roads are being built yes I can take you to roads full of potholes but I can equally take you

to two new roads that are being built and it's world class roads you know it's not just the short-term solution. So growth is happening. It's just South Africa is extremely, you know, the data points are so diverse. So you can, whatever theory you have, if you sit, if you are a journalist,

you will find confirming evidence for whatever theory you have about South Africa. And that is why I say that I can understand, understand why people are skeptical about investing in a fund that invest in South Africa if you do not understand the local nuances that, sure, there are areas pockets of challenges, but there are areas of massive, massive, massive opportunities which are completely overlooked. And this is just how granular it is. You also have a mission of widening access for international intelligence or maybe not so stupid capital to South Africa. And you have two seats investors, Scott Miller of Greenhaven Road and Charles Royce, who is an expert in the small microcap space. Have you gotten an impression from them what made them finally invest in you and in your fund?

What was the quality they saw there? I should ask them this themselves, but maybe you can be an idea about this. You should ask them that maybe I can relay the story, you know, the way I recall it, how this all happened. And there was an exchange of letters between Scott and I, which led to some FaceTime, you know, a call like this. And Chuck is a mentor and a co-investor, seed investor of Scott as well. so he was in the meeting and just it was an amazing conversation truly which was followed up by another conversation now apparently the story goes that after that second conversation Scott and Chuck turned to each other and they said we look the environment we like the environment the fact that you know it's inefficient so you can make off the beaten path investments we like where we're it is in the cycle. You know, it's completely depressed. It's icky. No one wants to invest. And

they are, you know, very good contrarian investors if the facts merit it. And we see an opportunity here, but we do not know how to invest in it. There's no formal structure that actually makes it ideal to invest in it. So apparently they turn to each other and they said, why don't we make it happen. And why don't we propose that we set this up and we will be, you know, use our local contacts and we will be the seed investors. And Tillman, you know, they, I believe, are happy with what has happened, given the context with which we have operated in so far. And from my side, I cannot be grateful enough and I cannot be praise them enough, you know, I've never had partners that has been so supportive and has played such a level of mentorship and just support to the fund.

Oftentimes, you know, it can turn out wrong and it can bring a negative energy or it can distract you from what it is that you need to do but I really want to take my head off to them you know they created an environment and facilitated in such a way that I can focus singularly on what it is where I want to focus so it's just been an absolute great great great journey you started your fund in 2019 and since then I think or you're showing your material also your private accounts and then you compounded capital at 17% per annum or something around that compared to the index that's compounded about 6% per annum but 2017 you had a year where you lost against the index i think you lost 10% by the index made 27% what happened there

maybe you can shine some light on that yeah um just pure volatility it's just if you if you don't index hug, it's going to happen from time to time. What happened in that particular year, you know, since we've been going, and I'm not sure if I'm allowed to say this, if I'm not, let's just edit it out. But since we started, you know, we're now in our ninth year. We have outperformed eight out of the nine years. And that particular year was the one out of the nine years when we underperformed. And we underperformed handsomely in that year. And it was, to position sizing, I had quite a high conviction, high, big position in a certain company. And it, the company was not overly expensive. We entered the company at about seven PE,

trailing earnings. A company was fundamentally a good company. But it was at the time where you saw this indiscriminate withdrawal from small and midcaps. And this was a company that was highly illiquid and we've seen the withdrawals and you know when you have such a high weighting and you see the company half and it goes down from a seven PE to a two PE that's going to hurt your performance I think that you know if we we typically this is in the nature of what I do is to have very high conviction portfolios try and know our companies very well, so have high conviction, high concentrated portfolios, and the ride is going to be lumpy. That said, over multi-year periods, the returns have played out satisfactorily.

So it's going to happen. We're going to have massive dispersions from the benchmark, and certainly we're going to have more down years. It's going to happen again, absolutely. in the seven or eight years you're investing in a professional semi-professional setup what were the mistakes that you learned most from so so this is ironic the the mistake that was most instructive is a company called steinoff which you might know but we didn't lose money on it we actually made more than a hundred percent we made double our money on it. Yet, that was being lucky. We invested in Steinoff because we thought the price was attractive at that stage. And again, bear in mind now I'm talking about 2013, 2014. So I've also evolved as an investor. I wouldn't necessarily do what I did then today. And I really

liked the diversity of the company, the structural tailwinds, the apparent structural tailwinds. The one thing is it was a big company. There was a lot of moving parts. It was extremely difficult to do your due diligence on that company. So there was a lot to like, but it was tough to do due diligence. And then Chris Tuvisa, who is one of the gents I mentioned earlier and I had the highest admiration for and had this almost, you know, impeccable track record of making extremely, extremely intelligent investing decisions in retail, became a massive shareholder in Steinoff. And I, whether consciously or subconsciously, attributed some of the due diligence which I couldn't perform to the fact that he was an investor. So he was a proxy

to do that due diligence and there was a bit of a halo effect there and the price did run up and I did exit because I picked up a few things which I wasn't really comfortable with and we've made our money but if I'm in fair honesty you know I didn't see what was coming at that stage and if I knew if I really did the deep deep deep due diligence I probably would never have invested in the company in the first place. But I did because I saw this halo effect. I thought that the mere fact that a very reputable investor is investing in this company means that it should be okay. And for me, that was the biggest mistake, even though we didn't lose money on it. It was the biggest mistake and was the most instructive lesson that I learned.

Doesn't matter how reputable the investor is. Do your own work. Do the deep delve. Everyone can make mistakes. Yeah, with the concentrated portfolio, you already mentioned you're investing concentrated. You have to do your own work for every position. Exactly. Absolutely. And I mean, yeah, that was instructive. And also position sizing.

If you do have a concentrated position of 10% or whatever, I mean, Steinoff went close to zero. So not not not worthwhile having that kinds of. down so taking that type of risk so it was very instructive lesson how do you go about position sizing and also the selection that you say i want to keep it to eight till 12 positions is your sizing that means 10% an average per position how do you construct your portfolio based on the facts you have and what's your framework for this sure so we typically would be invested in seven to 15 positions. We are currently invested in eight positions.

And what I do is, you know, it's not a very elegant Excel sheet of, you know, very formalized approach that I follow. But I would try and explain it as follows. There is a huge opportunity set out there. So what we do is our universe. is not that big that we cannot keep tabs on most of what most of the moving parts or most of the companies that are in the opportunity set and to each of those you know some of them i just deem uninvestable and i just don't consider them in my investable universe so i eliminate them and that would include these that are so-called go onto the two hard piles and then for the rest that you deem are worthy of evaluating for the investable universe, you constantly try to

keep tabs and that interaction between where the fundamentals are going versus what the price is doing. You know, those are the two main determinants on what you can expect for future returns. And I then construct what I call an opportunity cost curve. So if there is a business which I have a high degree conviction in that is likely to compound for 30% that would be quite high up on the opportunity cost curve and if there is a business that I think is a high degree to compound at 5% that would be lower end of the opportunity cost curve and I see that as the major dictating factor in how we construct our portfolio because I want the best of the best up at that portfolio curve.

And then I will also wait according to that. So regarding waiting, the maximum position size that we can take is 20%. Currently, but if it gets there and it runs, we wouldn't necessarily trim unless it's warranted to trim it. So we can let the position run. You don't have to trim if it's getting to 30. No. So what we say is we will not buy more.

beyond 20%, is what we say. So currently in our portfolio, we have a position as small as 5%, and we have a position as large as 25%, a company that has grown into that. And the allocation is according to we have an expected, I calculate an expected outcome, and then I weigh a level of probability to that, how much conviction do we have in that expected outcome?

And if those two come together, the more those two align, the higher it goes and the higher the weighting goes. And the less they align or the more uncertain, you know, the smaller the position sizing or not a position sizing at all. And that then also informs how we might reposition or restructure the portfolio. If suddenly a strong player emerges that warrants a place under the top three or top four, then we will. will rebalance a portfolio to give that. We constantly want to select from my definition of a opportunity cost curve. We constantly want to select the best of the best from that. And we want to position size it accordingly within a 7 to 15 position position portfolio. That's interesting. And it's very hard to get the right formula to make position sizing look clever. You know, you can you can, I

read Kelly formula and I've read so many, you know, papers about position sizing. And then in the end, you put in the parameters and you realize that it's all subject to judgment in any case. So now if the Kelly criteria kicks out, but you should put 55% of your portfolio into it, you're not going to do it. And it's because, you know, the inputs, the variables that you put into the Kelly criteria to begin with might have been wrong or overly optimistic, etc. So it is a bit of a balancing act. There is judgment involved and in that judgment you have to be very cognizant of your own potential blind spots and biases and the risks that might be involved and not being overconfident. In your talking about, you're talking about.

about sectors you already mentioned mining and education as partly interesting sectors in South Africa. Maybe we can try to get a general spotlight on this two sectors. What mining companies exist in South Africa and what mining opportunities are there? Firstly, let me give the disclaimer that I'm not a mining expert and we have some impressive mining experts in SA. That said, I think we are in for a very interesting cyclical trend and era for mining in SAVAP that might just have many positive knock-on effects. Currently, what you are seeing is iron ore is doing well, you know, are rich in iron ore, especially in the PGM Platinum Group minerals, metals, sorry, environment.

You know, South Africa remains one of the largest. contributors of platinum group metals in the world. The top three Impala, Anglo-American and Sabania Stillwater completely dominate the market. Very, very good operators. You have this and you have the structural macro tailwinds going green. You know, a lot of this is used in auto-catalysts. And there is some structural deficiency supplied. non-deficiencies in the short to medium term.

So I think that that can run up quite a lot. And then unfortunately, the environment has not been as conducive to accelerate what is happening in the junior mining industry and the mine exploration sectors. But there has been very impressive finds by some of these junior companies. Orion minerals being one of them finding fantastic deposits of base metals and battery metals which now is at the point where

they have to start commissioning to extract these reserves. The benefits are these are still a big sector of employment in South Africa so they create jobs, they provide jobs. The other thing is where commodity prices are now, they contribute largely to a trade surplus for South Africa,

actually, you know, boosting the South African financial situation. And who knows the future? I mean, I cannot predict the future, but it seems like the central banks around the world are hell-bent on continuing printing money, and it's very likely if they continue with this unprecedented. experiment that you will see asset price inflation, you will see metal inflation, and this is a sector that is eminently well positioned for that perfect storm of excessive money printing from so many different perspectives. We are invested in one Sabania that we invested in towards

second half of last year. It is doing exceptionally well for us. And, you know, it's a sector, not without its challenges, but it's just the quality of how they're operating, the quality of the resources are quite impressive. Education, we are invested in a company called Stardio and also in a private school called Kuro through PSG. and what we have is this is a prime example where the failings of government you know ideally we would have loved seeing government giving access to everyone to good quality schooling and good quality colleges and universities but unfortunately the delivery of government has been less than ideal I'm putting that euphemistically and And this is where private sector can step into the fore and actually give a better offering. And below and behold, at a cheaper price than government can do it and still make a very, very good margin. So we have huge pent up demand, a very big mismatch, supply demand mismatch, and that is growing every year. And in something like Stardio, we are seeing.

where they are coming with a new approach to the market, multi-faculty, multi-mode, and they have multiple programs, and they are inclined towards the world of work. So they actually go towards the workplace and ask them when they deliver the programs, what is it that you want to see in the graduates when they come out if you want to invite?

employ them. So big opportunities in that and additional one would be homes, housing, where there are opportunities for widening access as well and structural tailwinds in the country. How are the demographics of Africa compared to Europe or the US? The population is still growing strongly or? The population is, we have 58 million people in South Africa. Population growth is not that strong, to be honest. And you have huge income inequality. So the bulk, you know, if you use the wider definition of unemployment,

you have about 40% of people who are unemployed. you have a lot of youth which is good for the future and then you have the middle income and the upper middle income class which is growing actually and is creating a lot of opportunities within the economy and for private sector one topic that comes for some investors to mind when thinking about the affid companies are the card tracking companies you have an investment in Car Track. There's also mixed telematics. What is interesting about these companies and why are they so strong in South Africa?

Well, you know the founder of Car Track, Zach Callisto, apparently had two cars stolen. And his background is he was working in the engineering department in Standard Bank. and he was working on by that time was when cell phones were just introduced and GSM technology global system for mobile communications and you realize that you can

use cell phone towers you know to track objects so for him being having a statistical and engineering inclination you went out and he started purely with stolen vehicle recovery is what they did. And this is again one of those unique situations

where South Africa probably developed a world-class product by necessity because vehicle theft is such an high occurrence, which has then grown organically and evolved into this amazing smart mobility SaaS company that is growing globally and organically currently and has 1.3 million subscribers they're processing 40 billion data points

on a monthly basis, 98% recurring revenue, just an amazing, amazing business model with such a compelling value proposition for customers, the return on investment, you know, the payback is quick, you know, one, two years payback on return on investment.

So there again, when we entered that company, you know, we bought it, was listed 2014. We looked at that company and never really got comfortable with the price and it had a run up. And then towards, when was it? Yeah, 2018, 2019, you know, we had some depression in the price and we bought into it at a price we deemed to be attractive at that stage.

But it's a truly phenomenal company that has done very, very well for us. You know, since it's listed, it's compounded at more than 35%. So that's since 2014. I actually believe it's going to accelerate. Extremely good managers, Zach Listo and his partner being 80%. insider owners and operators, best in industry returns on capital, you know, constantly posting returns on equity in excess of 40%. It's debt-free. And what I like about them is, you know, they operate in an industry where a few winners will take most. And they already

have a leading market share in this industry. But the industry is so that the, The market is so large that their market share is still relatively small to the total market. And this is exactly the type of companies that we like to invest in, where it's technology enabled, where they can scale, where they have a very large market, and they can use that technology to grow into that market. This is also a company, you know, where it epitomizes that concept of scale economy shared. where the more data you have, the better your solution, the better your solution. The more customers you get, the more customers you get, the more profitable you get, et cetera, et cetera. So, and you can get some of that benefit to the customers, and the flywheel just takes over and it grows fast. And, you know, this is a company that emanated from South Africa about six years ago.

Only six percent of their revenue came from non-South African. jurisdictions. Now it's about 30% and within the next few years it's going to be 50%. So it's truly a global company operating across five continents and 23 countries that's been trading at a South African discount. What is interesting now I can talk about it because it is in the public domain is that they are busy with corporate action and they will be moving their primary listing to the NASDAQ. Again, to your very, very earlier question, why do they do this? Because the shares were underappreciated.

And now, I guess, you know, NASDAQ is a proper home for a best in industry, smart mobility sales company. I think their share price will be appreciated there. Help me understand what have they done technology-wise to come from a car tracking company to this software as a service mobility company. Yeah, yeah. So it's, it's a gradual process. It's a very, very gradual process.

There's this beautiful concept that I heard from Josh Wolf once, where he said, if you ask anyone how they got to where they are now, then in retrospect, they will give you a beautiful linear account of exactly all the events that happened that brought them to where they are. But, you know, a priori when you are there in the moment, you just don't know. All you do is you are faced with randomness and optionality and you take whatever you choose and what is dictated. And to some extent, you know, that is the benefit of having such an agile and intelligent and fanatical management team. So if you have stolen vehicle recovery, then you know you can track a vehicle.

And what's the next natural thing to do is instead of just tracking vehicles when they are stolen, maybe we can use it as a fleet solution. So if you have several different vehicles in your fleet and you just want to know where there are at any given point in time, let's track them and let's give you a real-time interface that shows you how they are tracked. And now suddenly that opens the doors to so many other things that you can do because now we can add some hardware to that vehicles and we can say well let's look at the fuel efficiency let's look at the maintenance and if you have cold storage in the back let's put in a few

monitors and do real-time tracking of the temperatures in the cold storage in the trailers that you have there let's look at the driving behavior and then suddenly you can do maintenance schedules you can add on cost accounting software you can do optimal routing accident detection you know it just it becomes endless and it becomes more and more sophisticated as they go constantly they're constantly just layering and what they did which truly differentiates them in the sense that they did this faster and better than anyone else is having one cloud-based one solution fits all for everyone doesn't matter how small or how big you are and And you can simply, through your subscription, you can elect how much of the solution you want or how little of the solution you want.

But they essentially have one offering with, you know, elements where you can opt in and opt out and have the pricing. That sounds quite interesting. And it's a constant, sorry, Tillman, it's a constant evolution. You know, now they are thinking about not thinking, it's actually happening. they have an insurance department so they are now an insurance aggregator because they have all of these data points and they can act as that another opportunity for them going forward is you know used vehicles market platform the the traditional old method of buying a used vehicle if you or i want to go out and buy a used vehicle five years ago is we look in the media are we

go in Gumtree or whatever the online site is and we look for it or we go to a secondhand trader and we look at the car and we decide whether we like it or not we can do an inspection but the reality is we have no idea how that car has been driven and whether we've been lied about whether that car has really been in an accident or not if you buy a vehicle that's come through the car track ecosystem it's been tracked the way it has been driven the maintenance that has been done on it whether it's been in action where it's been driven every single granular detail of that is in a log so it brings so much transparency in dealing with cars and it's just another example of their expansion opportunities that sounds quite interesting and there are many opportunities

and access to many other market another topic that also came through twitter is the access to financial services that's an interesting topic if you're thinking about a growing middle class in a country if not that already grown out institutions some people ask about bitcoin as an access tool for financial services in south africa you have capitech in your portfolio why is this bank interesting for access definitely so So spot on the concept of widening to access, I think that is one of the main thrusts of Capitech. You know, Capitech, the banking industry in South Africa used to be dominated by the so-called Big Four. And Capitech realized that there is an opportunity to come in as a late entrant

and disrupt the way things have been doing and deliver a better service. more customized service, widening access to more people who are unbanked or underbanked or maybe are banked but not truly served by the competitors and doing that at a very, very affordable price. And, you know, it's phenomenal

if you see the stellar growth of Capitech. It is the fastest growing bank in South Africa. they have the highest customer satisfaction score in South Africa they have the best digital banking app in South Africa they have this extreme energetic focus on technology on data analytics employing the best machine learning and AI in utilizing their data when it comes to customizing products so that the customer gets a very, very quick or instantaneous

customized solution to deal with. And it's still coming from a very low base. If we quickly look at the banking environment in SA, there are about 30 million banked people in SA and the total bankable population is about 38 million people so there are still 8 million people who are unbanked or underbanked

now Capitec has about 15 million client accounts so by client accounts it's already the biggest bank in essay but many of those accounts are once or accounts or secondary accounts or third accounts, people just checking it out. If you measure it by primary banking accounts, Capitech has about 4 million out of a total banking population currently

of 30 million. So it's relatively low, but that is growing at an exceptional pace. And it's growing because of their service delivery and because of their price point and because of their simplicity. To give you an idea, I have my wallet here. Tillman, here I have the Capitech. I'm now Capitech private or primary bank client. And I have been in the branches recently dealing with them. It's absolutely amazing. You know, everything is biometric.

I didn't have to use a pen and paper to sign it all. It's completely technology-dryphrine using, biometric eye scanning biometric fingerprinting and efficient quick simple service and to give you an idea i don't know what do you pay all in you know for your bank account do you have any ideas what your monthly bank fees are zero because i'm very price sensitive yeah but truly zero depends on the credit card if i pay if i want to get cash from several ATMs in the U.S. But on your saving

or your checks are checking accounts so you don't pay any management fees or anything like that? Five euros with one account I will cancel but that's it. It's the German banking landscape is very competitive in this area. Which is great and completely

you know different from the US environment so my banking fees are five RAND a month which is like what is that 40 cents yeah 50 cents yeah 35 40 cents a month

so it's very very cheap and again to the question of widening access Capitech what they are doing now is acting the role playing the role as fintech player and as facilitator so onto their platform with their reach that they have

they have partnered and onboard it people like easy equities, which gives people the ability to become involved in the market with way lower levels of introductory capital, way lower trading fees. So that gives them access to that. They have partnered with people in the home loan space. They're expanding into that. So it's just the amount of additional services that they can add in people that they can partner with to do this, makes for Capitech to have an extremely, extremely long runway.

Currently, they only serve about 6% or they occupy 6% of the total retail market in SA. So there's a lot to go. And maybe just this one anecdote, you know, about Capitech relative to the other banks. Because I do think there's this fallacy where people tend to lump tech. Capitech within the other banks, and then they purely do a pure comparison. And they say, but Capitech is ridiculously expensive. Why should we buy it? And the reason is Capitech is a completely different animal.

You're not comparing apples with apples. And Capitech's growth comes from a much lower base. If you take someone like First Rand, First National Bank, the CEO sometime at the AGM, he said, you know for us to grow a 20% Capitech is growing at 20 plus percent per year the earnings he said for us to grow a 20% FNB we would have to add the whole of Capitex earnings

every single year and that gives you an idea of how low versus how high the base is that they are growing from that's a quite interesting scenario I think we're coming to the end of our interview you and I want to give you the chance to add something here. A point we haven't touched, maybe some fun facts on penguins in Cape Towns

or whatever you want to add, if you have something to add. So I think as a final thought, you know, we, Tillman, have been forged by some tough periods now in the SA market over the past three years and to no extent imaginable as a market caught up to what is happening in many of the developed and some of the other emerging markets currently. Now I am not a macro investor and I am not particularly good at predicting the future. I am extremely interested in creating the future by acting appropriately in the moment. I do think that there is quite a compelling case to be made that some of the surplus liquidity will find its way into the SA market.

And I do think that now might be a very interesting time that we are entering for people who are looking for off the beaten path opportunities here. I think we are in for interesting times. That's quite a good word to close our conversation. Thank you very much for taking the time for the interview and giving great insights into South Africa. We might also plan a trip to visit South Africa at some point if it's safe and allowed again. So I'm happy to see you at some point and just want to say thank you very much for your time and thank you much to the audience to listening to this interview. Yeah. Thank you, Tillman. Really enjoyed it.

Bye bye to everyone.