Investment opportunities in turbulent times

By on February 24, 2014
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South African investors need to be aware of the difference between risky businesses and risky investments.

Often the confusion between these can result in missing out on opportunities within the current market environment, according to Piet Viljoen, Chairman of value asset manager, RECM. 

He explains that there are two types of risk within the current investment market. “Business risk is the risk that management deals with on a daily basis in the course of running their company, be it mining platinum or providing IT services. What we as investors do is manage investment risk – an entirely different concept.”

He says that while some of the businesses that RECM invests in may be perceived as risky, they should not be confused with risky investments. “Mining platinum out of the ground, as Anglo American Platinum do, is by default a risky business. However, if a low price is paid for the company’s shares, this asset is a low risk investment, despite the riskiness of the business. These two concepts of risk must not be confused.”

Viljoen says that as a value investor, RECM manages the investment risk associated with buying equity in a business, which gives investors access to the cash flows of that business. “Our funds do contain risky businesses, but in our opinion we have paid such a low price for these businesses that the risk is very small. “Value investing isn’t just picking a bunch of cheap assets, it’s a risk management process.”

Viljoen points to some very real investment risks that investors may be struggling with in the current market environment. “Reaching for yield is a risky strategy which we see happening frequently, as is reaching for growth, as we believe that investors are often overpaying for these assets.”

He says that another investment risk is related to the market concentration. “We analysed statistics recently and saw that four investment houses are taking 80 percent of the flow at the moment. Investing in these houses may seem like a low risk proposition, but if everyone is doing the same thing, it becomes a risky activity. This illusion of safety is a very dangerous investment proposition at the moment.”

Viljoen says that an opportunity that RECM currently views as a low investment risk is cyclical stocks. “These are stocks that are economically constrained at the moment, are suffering due to the economic cycle and do not usually have the cash flow to pay dividends. We also see an opportunity in low growth assets, which are assets that do not have a growth story and are not perceived to be going anywhere. Such assets are priced very attractively for low investment risk and good returns.

“Finally, we believe that some assets which don’t pay income offer a fantastic investment opportunity. The opportunities are usually the opposite of where the risks lie and if an investor is doing the opposite of what the pack is doing, the outcome will generally be fine. Investing in growth stories and following the herd brings about a certain comfort, however investors are paying too high a price to access the equity of these businesses.

“A value investor’s main job is to manage the risk. The correct management of investment risk leads to strong compounding over time because capital is not lost, and this leads to peace of mind,” concludes Viljoen.

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