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22 May 2024

Unlocking Opportunities in SA Inc. Counters

Investing in ‘SA Inc.’ companies can seem daunting, given the country’s many economic headwinds. Economic growth has been paltry for the last decade and government debt has ratcheted to its highest levels in history. Without significant economic reform, this trend should persist. Portfolio Manager Wim Murray looks at how Foord navigates this tricky minefield to find investments that should generate meaningful returns without undue risk.

We see four types of opportunities within the SA Inc. opportunity set — companies that are mostly exposed to the fortunes of the South African economy — that serve as useful hunting grounds for investment ideas during tough economic times. These opportunities include high-quality companies, companies led by high-grade management teams, companies that are growing even in a no-growth environment and, lastly, companies where value can be unlocked for reasons that are not dependent on the South African economy prospering.

Some investment examples highlighted in this piece are long-term holdings in Foord equity and multi-asset portfolios. Usually, these are companies that have high-quality characteristics and excellent management teams — we like companies with these qualities whatever the economic environment. Having high-quality characteristics and high-grade management teams are not exclusive — they often go hand in hand. Other examples are those that have been more recently added to the portfolio given their defensive attributes.

The first bucket is high-quality companies with intrinsic characteristics that set them apart from their peers. These characteristics give them a sustainable advantage that endures over time. One of the ways we measure this is by considering how effectively a company uses its capital to generate profits. Other quality characteristics include the ability of a business to pass rising costs onto customers, or to cut costs to protect margins. Examples include OUTsurance and Santam, which are both included in the Foord Equity Fund — albeit at weights that don’t make the top-ten list.

High-grade management teams in South Africa have demonstrated the ability to dodge curveballs, including social unrest, failing ports and railways, and the national energy crisis. Quality management teams display both grit and pragmatism. We look for clear signs that management has a longer term focus, supported by incentives that align management’s interests with those of shareholders. FirstRand is a long-term top-ten investment in most Foord portfolios. It has consistently generated better returns on capital than its peers, translating into stellar total returns for investors.

The third type of opportunity we like in this climate are companies that operate in sectors where there is good growth for structural reasons — bucking the trend of lacklustre growth for the overall economy. An example of this is pharmacy group Dis-Chem. Dis-Chem is defensively positioned to benefit from the growing healthcare needs of an ever-larger population. However, it is also gaining market share from small, independent pharmacies struggling to compete with the larger players. Dis-Chem is a relatively new addition to the Foord Equity Fund.

The last type of opportunity we favour in sluggish economic environments are those that depend on value being unlocked for one or more reasons. This could include complicated structures being unwound, or where our fundamental research reveals a technical opportunity to be exploited. A recent example that benefited Foord’s investors was real estate company Fortress, where negative sentiment caused the share price to trade far below the sum of its underlying assets.

Populating portfolios with different investment ideas, ensuring portfolios are tilted towards quality businesses, backing good management teams with demonstrable skill, and finding opportunities that exist independently of SA’s economic trajectory are just some of the ways we continue to focus on the job at hand: protecting and growing our investors’ capital, regardless of South Africa’s economic circumstances.

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