One of the driving philosophies behind Gerrit Smit’s investment approach is that it is better to pick a strong business at a fair valuation than to look for something that is cheap and hope it will recover. Patience is the name of the game.
Mr Smit, who is head of equity management at Stonehage Fleming, said: “Where assets appear to be cheap, there is a good reason for it. Very often the hope or the expectation of being able to turn it around are too optimistic. The task to turn a proverbial ship is usually larger than people perceive it to be.
“[Our] philosophy is to buy to hold outstanding quality businesses with a particular competitive edge at the maximum of a fair valuation.”
Thus, an outstanding quality business does not mean that more value cannot be derived from it.
He added: “Quality businesses very often seem to be fully valued and may appear to be expensive, but in the end the better the business can continue to deliver, the more people are willing to pay for it.
“It is almost unrealistic to expect an outstanding business to be cheap. With hindsight later it may appear to be cheap, but at that moment, considering [you are] buying a quality business, don’t expect it to be cheap.”
The benign capital markets have been creating low market volatility for some time now, but Mr Smit is unperturbed as there is continuing growth, albeit very modest and moderate inflation.
He said: “The fact that we haven’t got the extreme cyclicality in any of the major economies any more is actually very constructive, because it brings more certainty to management to plan for the future. Everybody’s perception is that growth is quite dull, but continuing growth is better than fluctuating growth.”
Much of Mr Smit’s convictions have been heavily influenced by his 25-plus years working for Sanlam’s international portfolios, as an equity analyst, chief investment strategist and chief investment officer.
He joined Stonehage Group in 2008 prior to the firm’s 2014 merger with Fleming Family & Partners, ran by relatives of James Bond creator Ian Fleming, which formed Stonehage Fleming Group.
Mr Smit said his previous experience saw him get involved in research and restructuring businesses in a similar fashion to private equity involvement.
As chief strategist, he was also very focused on macro issues, a period that gave him a better understanding about the intricacies of businesses.
“You cannot only rely on good assets in a business,” Mr Smit said. “You are very dependent on the quality of the people, their foresight, strategy and philosophy and how they go about nursing and growing the business.”
This is why he sees opportunities in technology, healthcare and consumption.
Despite threats facing the technology sector, as a result of tighter regulation around data privacy, and following the fallout over Facebook’s handling of customer data, Mr Smit stressed the tech sector is a different beast to what it was in the run-up to the last tech bubble.