David Shapiro's Sasfin Twenty Ten Fund: A barometer for government delivery

FUND FOCUS

David Shapiro 

Sasfin Value Fund
Price:	R1.95
Inception:	31 Oct 2005
Domestic Equity Value
Fund Size:	R 29.1m
Price Performance
12 months:	16.74%
24 months:	47.99%
More Details...

David Shapiro is a well known investment expert and radio personality. He recently launched the Sasfin Twenty-Ten fund, which will invest in companies most likely to benefit from the government's R165 billion infrastructural spending over the next five years. Liz Still, Editor of Equinox.co.za spoke to him about the reasons for launching the fund.

Equinox: Please could you kick off by telling us a little about your investment experience.

David Shapiro: I have been in the investment business for 33 years. I am a Chartered Accountant and member of the SA Institute of Stock Brokers. I started off with Max Pollack, which merged with Frankel, which was bought and then sold by French bank Societie General, so I have been around the block.

Equinox: So what was the prompt to launch a unit trust fund?

David Shapiro: It was Mbeki's speech to parliament in February this year. He announced a plan to spend R165 billion on infrastructure, social welfare spending and the reduction of disease.

In some ways, this fund will be like a barometer of the government's ability to deliver. For ten years the government have focused on renaming roads, hospitals and airports. The time has come for the government to take the lead, deliver on its promises and build new clinics, roads and so on.

Equinox: Your fund has a very interesting mandate. Most unit trust investment literature tells us that unit trusts are long term investments and so on, while yours has a built in expiry date.

David Shapiro: No, I don't see it as an expiry date at all. We chose 2010 as the name of the fund because the government has given itself a target of bring growth up to 6% by that date, and of course it is the date of the World Cup soccer. But if the infrastructural spend happens as it should, it will be the catalyst for growth for ten to fifteen years. China made a commitment to infrastructural spend in 1978, and 27 years later the country is still reaping the benefit from that decision.

Equinox: The Soccer World Cup event due to be held in South Africa in 2010 is a fantastic opportunity for all South Africans to work together towards a common goal. How many people are actually expected to visit South Africa?

David Shapiro: Yes, in June 2010 the first whistle of the first soccer match will blow and the world's eyes will be on South Africa. It is a one-off opportunity for us to showcase our country and it is extremely important that we get it right. It is bigger than the Olympics which is a two week event in one city. This is four weeks in our country, in all the major cities. Soccer attracts huge passionate audiences. French statistics showed that a total of 38 billion people watched the last world cup on TV, with 1.5 billion watching the final.

Physical visitors are more difficult to measure as previous world cups have been held in countries where the base level of tourism is already quite high, but previous World Cup events have been very well supported.

Equinox: Could you give us a quick run down of the government's major capital expenditure programmes?

David Shapiro: Well there does not seem to be a blue print or a grand plan which is a concern, but Transnet, Eskom, the 'still being debated' Gautrain project and public works expenditure plans total R168 billion.

Equinox: And estimates of private spending on ongoing capex spend?

David Shapiro: That figure could be in excess of R100 billion. Expansion plans announced by Sasol, the platinum mines, the second network operator should account for about R37 billion. All the private spend around Coega will be considerable, the Airports Company of South Africa has announced expansion plans and the Taxi Association of South Africa has announced plans to improve the fleet.

Equinox: Which sectors do you think are most likely benefit from new levels of government spending?

David Shapiro: These sectors can be divided into two; first of all the infrastructural-spend will benefit construction companies, cement companies, steel companies, cabling and electronic companies and equipment manufacturers. Secondly, the increased social spending will benefit retailers, generic medicine companies and hospital groups.

Equinox: The major risk to your fund must surely be lack of capacity to spend the money. Large-scale infrastructural spending, as envisaged by the government requires experienced, committed management teams. Our workforce has inherited a legacy that is riddled with race issues which could be a significant stumbling block to delivery with the most able (black) top class politicians and administrators lured away from the public sector by BEE options in the private sector and on the other hand experienced (white) candidates are overlooked for public sector management positions in the name of transformation. This has led to a uniquely South African version of 'race-based' structural unemployment and gross underspending in the public sector due to sheer lack of capacity. At the end of the day, somebody's got to order the cement.

David Shapiro: I couldn't agree with you more and this is one of the reasons I launched the fund. These issues are very, very serious and people don't want to talk about them, they have been swept under the carpet. People hope that time will simply overcome these problems, but of course it won't. We have to confront them and deal with them, the deadline offered by the 2010 vision gives us a focus to do this. This is what the fund is all about, we just have to work together to make it happen.

We have to ease back on empowerment, which has taken a huge toll. We have to recognize that we need people with experience, and I believe that we should look at home for these skills first, there is no need to go to India. The destruction of management and administrative capacity in the municipalities in particular has been absolutely crazy. Empowerment has been applied over-zealously with disastrous results.

Hopefully, common sense will prevail. There are small signs of this; the appointment of Denel chief executive Shaun Liebenberg and Marie Ramos's choice of board members is telling.

Equinox: A second risk might be described as the capping of growth opportunities due to ideological positions. For example, the latest Healthcare Charter talks about the health sector making 'reasonable profits' and the Medical Schemes Council has queried the increasing cost of hospital care, suggesting that hospital costs could become regulated. This, coupled with the Competitions Board requirement that no player should dominate a sector with a more-than 35% market share could fairly successfully ensure that a company like Netcare, one of your chosen investments may possibly not experience growth over the next few years.

David Shapiro: Normally I avoid investing in regulated industries as regulation is a sure way to kill the growth of an industry. But the reality is that there are just not enough hospital beds to provide for the new-comers onto medical aid schemes, so there has to be growth.

Equinox: Another ideologically-based delivery obstacle may be the government's luke-warm response to public private partnerships, which some would say are our only hope of delivery. Have you monitored this debate?

David Shapiro: Not really. But nobody can dispute the fact the government just not have the financial and risk management skills to roll out projects like the Pebble Bed Modular Reactor, the telecoms infrastructure and so on. Private sector and government have to work together.

Equinox: In the case of the Gautrain Rapid Rail Link there was no choice but to opt for a Private Public Partnership, using a B.O.T (Build, Own, Transfer) model, simply because it is such an expensive project that it needs funding from government and the private sector. Do you think there is any chance that this model will have a copy-cat effect, opening the way for more speedy delivery?

David Shapiro: Well, at this point let me say that I think the whole Gautrain project is crazy. We would be much better off building a few flyovers between Pretoria and Johannesburg, improving the roads, and spending the left over money on improving the taxi infrastructure and fleet.

But to answer your question, yes, I suppose the BOT model has been successfully used before with toll roads and so on, and serves as a model for future projects.

Equinox: A contrarian investor might think that construction company Murray and Roberts won a poisoned chalice when they won the Gautrain project tender as their contract price has been pre-set. They have little control over a wide range of variables and they will have to up-scale its machinery and equipment and preclude itself from other, possibly more profitable building opportunities. Therefore it might make better sense to invest in the company that lost the bid, Grinaker Construction.

David Shapiro: Well that is exactly what did happen. Not with Grinaker, but Aveng. Immediately after winning the Gautrain bid, the M&R share price went up and then news came that Aveng's order book was full, but with a range of smaller projects. And Aveng's price shot up and has continued to outperform Murray and Roberts.

On the other hand, Murray and Roberts are not new at this game, and they would have protected themselves with project variance sub-clauses. If they lose efficiency, they must pay of course, but yes, it is very risky taking on a big project like this.

Equinox: What is the rationale for including Tongaat in your fund?

David Shapiro: I just like it. The aluminum division should get more 2010 energy-related orders, which is the rationale for including it in the fund. In addition the company directors are sure to want to unlock the value of the company and split it into three divisions, sugar, property and aluminum, which will be a windfall for investors.

Equinox: On the positive side, your fund should be fairly resilient to market volatility because the source of funding for the projects you are investing in is fairly secure.

David Shapiro: It is not easy to read the markets. Personally I believe that China will continue pumping and that domestically we will be able to contain inflation and interest rates, which will lead to continued outperformance of the JSE. But yes, if there is market volatility the government-spend component will give the fund some ballast.

Equinox: Also, it must be said that while you have a theme-based mandate, you are not precluded from investing in any particular companies.

David Shapiro: Absolutely. I don't want to use too much investment licence but I have anchored the fund with some good well run companies like Bidvest, Imperial and Tongaat. Bidvest may well get some spin off with its food and hospitality related businesses and Imperial with car hire, but in the short term the benefits for these companies is tenuous.

Equinox: Market commentators have said that this fund and its mandate is more about a nice warm feeling and is not grounded in good investment opportunities.

David Shapiro: I can live with nice warm feelings. Fundamental analysis is based on assumptions and nice warm feelings. I always say that my glass is always half full and I want this fund to work.

From an pure investment point of view I think it is likely that companies in the fund will in fact outperform the retail sector which has had such a good run recently. Of course I should add that investors should not put all their money in this fund, this fund is an ideal add-on or satellite fund, it should not be a core investment.