Firing lineMay 23 2018

‘Where assets appear cheap there is a good reason for it’

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‘Where assets appear cheap there is a good reason for it’

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.”

Growth

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.”

Strategy

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.

And even with Amazon facing a threat of a breakup from Trump’s administration, all these risks have not made Mr Smit averse to seeking investment in the technology sector.

He is interested in businesses with a genuine long-term strategy and a focus on diversifying.

“Google has satellites and driverless cars. Their recent topline [organic growth] in currency terms was up 20 per cent; that’s close to a quarter on a very high base,” Mr Smit added.

Other businesses he likes are Visa and Accenture, particularly due to the digital transformation work the consultancy firm is doing with businesses and its investment into artificial intelligence.

In healthcare, Mr Smit typically keeps away from businesses with higher legal risks and where there is a danger their product will become uncompetitive, as is seen with human drugs.

For example, a company may introduce a new blockbuster drug, but the patent will have a time period, after which the formula is opened up to the rest of the market, making the drug cheaper.

The part of the healthcare sector Mr Smit is more interested in is animal drugs.

He said: “In animal drugs you don’t sell as many drugs to the government, so you don’t have the concentrated buying power, which immediately lightens the pressure on margins.

“It is a fraction of the [legal] risk that you have with human drugs. [Additionally] as wealth improves anywhere in the world from a relatively low base, those people eat more meat, drink more milk and those products encourage animal farming [and more] drug sales.”

The perceived growth in animal drugs is 4.5 per cent against 3 per cent for humans.

But one philosophy certainly not on Mr Smit’s list is taking a higher risk to have a fair return.

He added: “You get fair return by acting responsibly and focusing on sustainability and quality, and not trying to outguess cycles.”

Ima Jackson-Obot is a features writer of Financial Adviser

Career highlights:

2008 – Present - Partner, head of equity management, Stonehage Fleming

2002 – 2007 - Partner, head of research, boutique asset manager, ACPI Investment Managers

2000 – 2001 - Head of global balanced portfolios, Sanlam Investment Management

1996 – 1999 - Chief investment officer, portfolio manager, Sanlam International Asset Management

1993 – 1995 - Chief investment strategist, Sanlam Asset Management

1980 – 1992 - Junior/chief investment analyst (and corporate actions analyst), Sanlam Asset Management