The difference between value and cheap: Stanlib’s Lo Giyose

FUND FOCUS

Hlelo (Lo) Giyose 

Stanlib Value Fund (A)
Price:	R5.25
Inception:	09 Aug 2000
Domestic Equity Value
Fund Size:	R 1,454.1m
Price Performance
12 months:	16.07%
24 months:	11.88%
More Details...

At a presentation on value investing, Lo Giyose, fund manager of the Stanlib Value Fund took his audience through the difference between cheap and value.

The Stanlib Value Fund with assets under management of R1.2 billion as of end of September 2008 is currently (5/12/08) ranked sixth out of ten fund with respect to performance over a rolling 12 month period and second over a rolling three year period. The 12 month performance is - 33.95% while the three year performance is 31.26%.

Giyose also runs two other value segregated funds Stanlib with assets under management of R17.2 billion and R119.9 billion respectively.

The current top holdings of the fund include Standard Bank (7.8%), ABSA Group (7.3%), MTN Group (6.5%), Aspen Limited (5.0%), Telkom Limited (5.0%) Truworths International (4.9%), Tigerbrands Limited (4.6%) Massmart Limited (3.8%), Blue Label Telecoms (3.3%) and Investec Limited (3.0%).

He said that his mantra for value investing could be summed up by 'intrinsic value with a margin of safety.'

The starting point for the Stanlib value team was to assign weightings to four key pillars of analysis. 'Moat analysis', (more about that later) and 'Valuations' were both assigned 30% weightings, while 'Fair Value Certainty' and 'Management /Stewardship' were both assigned 20%.

'What a company does is nowhere near as important as how it does it, he says. 'Moats' or economic barriers were important when selecting  value companies. Moats included the efficiencies associated with low cost producer, intangible assets, whereby companies could pass on the costs of their production to the end users, maintaining their profit margins, network effects, whereby dominant companies such as MTN and Telkom created unassailable entry levels, and switching costs, which benefited those companies that had customers for life, such as banks.  

'True value investments are those where companies continually renew corporate value effecting rising or stable margins and returns for the foreseeable future. On the other had there are lots of companies that may appear to be good value investments because they are cheap, but they have no 'economic moat' and fail to take advantage of market opportunities. Investors often fall into the trap of believing cheap companies are value companies because they do not do enough work to understand why certain companies are cheap,' he said.

To illustrate his point, Giyose took the audience through the difference between Sappi and Truworths, comparing the three year cost of equity and return on equity of both companies. He said that Sappi management had made many bad decisions and bad acquisitions since 1990, which had failed to add value to the company, at shareholder's expense. The opposite could be said of the Truworths management.

In his view, 'the paper and air line industries were competing as to which sector could destroy value the quickest. And yet it seems as though many of our competitors have invested in Sappi, they have obviously failed to tell the difference between value and price,' he said.

Another 'value test' used by the Stanlib team was to compare the implied equity risk premium with government bonds (or risk free rate) against which changing levels of risk premiums of different companies could be established and understood.

Looking back over the last quarter, the Stanlib Value Fund had started the fourth quarter divesting resource stocks, preferring financials. The fund had sold out of BHP Billiton, Anglo American, Amplats, Implats, Kumba, Mittal and ARM. Financials such as Standard Bank, Absa, Coronation and JSE. Industrial interest rate-sensitive stocks such as Mass Mart and Sun International were added and the weighting in Truworths increased.

'In these moves we were guided to sell out of resources at the time that they announced their best results which we thought would be non-repeatable. We found alternatives and  compelling valuations in domestic financials and retail despite a not-so encouraging short term horizon. We anticipate continuing with this sector position, while waiting for the domestic operating environment to improve, led by falling price pressures and then interest rates', said Giyose, quoted in the fund fact sheet.

'The fund remain well pre-disposed to infrastructure, our investment in this sector has been rewarded, but on an earnings per share relative to inflation basis, it is possible that the sector is now reflecting fair value,' he said.