That John Biccard has sunk nearly 5% of his SA value fund into much-derided retailer Pick n Pay should come as no surprise to anyone who has followed the career of one of South Africa’s ultimate contrarians over the past 25 years.
“Everything that has done really badly interests me, and when I say ‘I’m buying this’ I like it when people can dismiss my idea in one sentence. And when they’re confident to do so as well,” he tells Currency in an interview.
In fact, Biccard says not once in 30 years has he ever touched the retailer, “but everything has a price, and I’d argue that it’s the cheapest it’s ever been”.
The thing is, whether they disagree with him or not, Biccard’s stock market picks often make an outsized impression on the investment community, given how counter-trend they can be.
Biccard, who has managed Ninety One’s value fund since 2000, has had a number of memorable calls — not least his huge bet on platinum group metals (PGM) stocks seven years ago, when shares like Impala, Anglo Platinum and Northam had plunged to record lows, where they stayed for four awful years.
As Biccard bought more, the stocks sank further, costing him two-thirds of the fund’s institutional investors in the process. But the cycle turned, prices went stratospheric, and the result was an eventual 300% gain for the fund on its PGM investments.
So does a trade on Pick n Pay encapsulate his views on value investing? In a lot of ways, yes. “If Pick n Pay doesn’t go to zero, the odds are it gets bought out or turns around and you’re going to double or treble your money. The ones that don’t go to zero, you should make 100% or 200%,” he says.
Cheap, or worthless?
But there’s the rub: the risk that instead of just being really ridiculously cheap, a share is actually completely worthless. When you’re bottom feeding where few want to go, surely the odds of total failure are quite high?
Not really, says Biccard. Only about five of his picks never made it – including the now-deceased construction stocks Basil Read and Esorfranki, and Intu, the old Liberty International that owned regional shopping centres in the UK.
“If I added up all of them, maybe I lost 6% over 25 years which is like 0.2% a year and that’s an acceptable loss rate for all the ones that have tripled,” he says.
So does the prospect of total failure not scare him?
“Obviously I don’t want it to happen and I do all the numbers to make sure it doesn’t,” he says.
In Pick n Pay’s case, Biccard reckons there’s no way it is going to zero. “Certainly not in the next three years. A big deal is that you need to have time on your side, and the company needs to have a balance sheet – and Pick n Pay does.”
Intu, on the other hand, didn’t.
“There was too much debt and I shouldn’t have had 5% of the fund in it,” he admits. Then Covid hit, “and when you’re pushing the boundaries a bit on the balance sheet and you get unlucky, that’s when you’re in trouble”.
Pick n Pay, by contrast, has a balance sheet awash in cash, and it has a real asset in Boxer. So, Biccard says, “it’s not at all similar”.
‘Pursuing what the market hates’
Asked about his guiding principles for value investing, Biccard says investors should never ignore a company’s debt.
“The stocks I’m buying are the ones that have done incredibly badly – so the equity prices are down 80% or 90% and in most cases the industry or the company is in some degree of trouble. It’s hard enough to get that right – where you say this company or industry will survive – you don’t want the clock running on the debt at the same time,” he says.
A turnaround can take one year, or it could take five — you’ve got to ensure you have enough runway.
Obviously if it’s a company like Coca-Cola that’s different. But Biccard, needless to say, isn’t investing in Coca-Cola.
So, what is he buying now? Or rather, what isn’t he buying?
“I don’t start off by going: ‘This is what I think about the future.’ I think that’s completely the wrong way around. There is no way of telling the future and analysts guessing what a company is going to earn in five years’ time are completely wasting their money and time,” Biccard says.
It’s an interesting point of departure for a man who started out as a sell-side analyst in the 1990s.
Today, however, he says, analysts’ earnings forecasts over five years is a 50/50 game.
“It doesn’t matter if you’ve got the cleverest analyst in the world working 12 hours a day with the best systems; you cannot forecast what a company is going to earn in five years’ time so I’m not interested,” he says.
Instead, he starts off by asking: “What does the market really hate?”
The vacant trade
For example, two years ago Biccard was buying Chinese shares when traders in New York, where he now lives, were calling the country uninvestable. “Then you know you’re onto something good: you know there are no bulls left in there. People have completely given up on the story.”
In the markets, this is known as “a vacant trade” – where anyone who ever had a hope has sold out. This, says Biccard, narrows the universe of stocks he looks at to about 2% of shares worldwide. That’s handy, because it frees him up from worrying about the other 98%.
Right now, the value fund’s basket is weighted 70% to South African shares and 30% offshore. Of that 70%, says Biccard, most are in domestic South African shares with one big punt on African Rainbow Minerals. The rest include Netcare, Life Healthcare, Pick n Pay, Raubex, Truworths, AECI, Rainbow Chicken, Caxton, Italtile and Tsogo Sun.
All of them, says Biccard, are down about 60% from their record highs, and all are paying decent dividends.
“Truworths is on an 8% dividend yield when the bond yield is 8%, which shows you how much people have given up on growth and how they think South Africa is uninvestable,” he says. “You almost won’t find a group of shares that are as cheap.”
It is this gap that really interests him. Not least because much of it has to do with the incredible run enjoyed by precious metals shares over the past year. While gold and PGM shares have, in some cases, more than doubled, domestic shares were completely left behind.
“Last year the top 10 domestic shares in my portfolio were down 9% on average, in rands, when the market was up 40%. So the narrative then becomes ‘there’s no GDP growth and it’s uninvestable, and politics, etcetera, etcetera’.”
Instead, Biccard says, the main reason these companies lagged was far more prosaic: fund managers were scrambling to catch the precious metals wave, so they had to sell something to buy gold shares – and what they sold was SA Inc.
“Fund managers, to protect their jobs, will say: ‘I don’t have enough of this, it’s killing me’ so they will have sold the dual-listed [companies] and the domestics to buy the commodities.”
Eyeing the disconnect
This disjuncture, says Biccard, is the “technical” opportunity that the past year has now created.
Then there’s the very real prospect that South Africa is in a better place than it’s been for years (even if for a lot of people it still doesn’t feel that way). And the most telling indicator here is what has happened to South Africa’s bond yields in the past 12 months.
“This is the interesting thing,” says Biccard. “When people buy shares, they’re very interested in what earnings growth is going to be and future cash flows, but as important is the discount rate you’re using, and that moved down from 10.5% to 8%.”
This discount rate is based on a country’s bond yields – basically the risk-free interest rate investors will receive for holding sovereign bonds – and in South Africa’s case this has strengthened by almost a quarter.
Yet at the same time, the domestic shares in Biccard’s value portfolio dropped almost 10%. “So there’s a total disconnect between the bond market and domestic South African equities which doesn’t make any sense to me,” he says.
In the meantime, South Africa’s terms of trade have improved hugely, thanks to the rally in gold and PGMs, as well as a 20% drop in the price of oil. Eskom isn’t pulling the plug on everyone and Transnet is in the process of being fixed; interest rates have dropped, as has inflation.
South African politics remains Biccard’s biggest worry — but even on this front, he is optimistic that the mood has shifted. “The most telling thing [was] the ANC meeting in December; usually it’s a tricky affair but this one was over in a flash and you can see [Cyril] Ramaphosa’s opposition has gradually ground away.”
Management pressures
For a value investor, the steepling rise in gold will surely have rankled. Yet what Biccard sees as the “forced buying of precious metals” last year goes to the heart of his contrarian philosophies.
“Once you’re a manager or analyst in a big institution you’ve got a good job. It’s pretty cushy, you can drink cappuccinos at your desk. So when you went into the year underweight gold and platinum and by the middle of the year you were 5% or 10% behind the index and your chief investment officer says ‘what’s going on?’, you buy gold or platinum to cover your position.”
But you can hardly blame customers for wanting to be invested in the stocks making money. Isn’t this where determined value managers can prejudice their clients by not embracing contemporary themes showing big gains — such as Big Tech, AI or gold?
Well, argues Biccard, the record shows otherwise.
Ninety One’s value fund has actually been the best performer over three years, tied best over five years and is in the running to win best performer over 10 years.
In round numbers, this means R10,000 invested in his fund 25 years ago would be worth about R610,000 today. That’s an annual gain of 17.77%, compared to the 14.52% yearly gain of the JSE all share, or the MSCI all world index’s 10.29% annual increase.
“It doesn’t look like shareholders are getting prejudiced and I haven’t been invested in any theme at any time. All I’ve been in is the worst shares. So that says something,” Biccard retorts.
Biccard is adamant that to make “proper money” investors have to be courageous enough to move away from the index.
“It’s the most ridiculous thing I’ve ever heard – that people would want to be where other people are,” he says. “If you’re going into the most contemporary idea of the time, by definition there has to be the most buyers for those shares. So what are your chances of getting a good price?”
Value investing, he says, is like shopping for a fridge: do you go to the shop where the most buyers are and the owner can charge whatever they like, or do you go to the store where you’re the only customer, and you can pay $20 for a $100 appliance?
Okay – but what if you end up with a rubbish fridge?
“That’s a fair point – if you don’t do the work you may buy something rubbish,” admits Biccard. But he quickly adds: “To the people who say: ‘This can’t work because you’re buying rubbish,’ I’d say that the numbers tell you something else.”
Natural born contrarian
Asked whether he is characteristically counter-culture, Biccard admits to being a cynic by nature.
“I always was, but that said, when I joined the industry as a trainee analyst 35 years ago I didn’t know anything, so I wasn’t like that,” he says. “I did analyse growth stocks and did recommend people buy them, but to be honest I didn’t have a clue what I was doing.”
Those were the years from 1990 to 2000, in the lead up to the dot-com boom which, locally, saw go-go shares like Didata and Primedia soar to giddying heights. Biccard was the analyst for Primedia and watched the stock rocket from R1 to about R60 and then fall back to R2. By that point, he “understood” what a market cycle was all about.
“I was intimately involved in that company for years and then I learnt how it works – how growth stocks roll up earnings and how people forget about the valuations and concentrate on the story. And then it blows up and you go back to normal,” he says.
It was this decade that brought out his true inclinations, but he reckons a lot of his success came down to luck, as he took over Investec’s value fund in 2000, when “no-one else wanted it”. At that point the fund had all of R50m under management.
“What I didn’t realise was that we happened to be right at the bottom of a value cycle, so for the next seven years everything was in value’s favour,” he says. This meant that at the end of the period, the fund had outperformed so prolifically that when things dipped in later downturns, “we had enough goodwill to hang onto some of the money to keep the track record”.
Unless you get this kind of a break, he believes, most fund managers coming into the industry in their 20s will probably end up hugging a general market index for most of their careers.
“The fact is that you have to report to clients every quarter and if you’re wrong for more than three quarters in a row, they start asking very difficult questions, which prohibits you from using your learnings,” he says.
This, he believes, is why passive funds like exchange traded funds are beating actively managed investments right now. “The truth is that the set-up of active fund management works against you achieving your clients’ objectives,” Biccard says.
After all, being right but cash poor is a horrible experience. Look no further than the example of Michael Burry, star of Michael Lewis’s book The Big Short, who went against the sub-prime frenzy in 2005 and whose positions only paid off more than two years later. And not before Burry was sued by investors furious at losing money.
Biccard says this is often just luck – occasionally a position will work out within one year, but often it won’t.
“When it takes four years to play out, you need to be able to say: ‘I will sacrifice my whole career, two-thirds of the money I run and my reputation in order to make the returns’ and I don’t think many people can do that,” he says. “The real problem is that your clients will give up on you.”
Drink and be merry
So where is the next big value trade?
Besides betting on SA Inc, Biccard is a big fan of offshore drinks companies, and says he may have another crack at gold. “I love the gold story long term; I think the gold price is in a multi-decade bull market but the last two years have just been too much,” he says.
But his biggest bet internationally is on alcohol shares, which have fallen about 80% in the past four years.
While some argue that beer and spirits firms will never again enjoy the same sort of sales they did before Covid – thanks to abstinent Gen Zers and the proliferation of alcohol unfriendly anti-obesity drugs – Biccard believes we are simply in a cyclical downturn, which has to turn.
“If I’m wrong and alcohol is in permanent decline, the shares have discounted that already; and they might just do nothing. But if there’s any recovery in alcohol volumes, that is not priced in.”
And here is some sanguine value logic to leave you with, courtesy of John Biccard: “The market is 100% certain and my view on the world is always that it’s 50-50 – and even if it is 50-50, those are great odds.”
* The writer owns units in the value fund
ALSO READ:
- Half the South Africa fund in four stocks? Yep, that’s John Biccard
- What 25 years of value investing has taught me
- Why SA Inc is tipped to outshine Wall Street
Top image: supplied.
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