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RYK VAN NIEKERK: Welcome to this week’s Be a Better Investor podcast. It’s the podcast where I speak to finance and investment professionals about their investment journeys and their approach to investments. We delve into their past and discuss how their perspectives on investments have changed over the years, and the idea is to find a few tips and tricks from their personal experiences to assist amateur retail investors to become better investors.
My guest today is Charl de Villiers. He’s head of equities at Ashburton Investments and has an interesting background. He first studied engineering, then moved into the financial world. He received an MBA from the University of Cape Town, and is also a CFA.
He started his investment career in 2003 when he was a management consultant at Nebula [Financial]. Two years later he moved to Aylett [& Co Fund Managers] as an equity analyst, and in 2008 he joined Sanlam as a portfolio manager and joined Ashburton in 2021 as the head of equities.
Charl, thank you so much for your time today. First of all, give us a bit of background. Where did you grow up and when were you first exposed to the investment world?
CHARL DE VILLIERS: Thanks, Ryk. I’ve gone on a roundabout journey, as you’ve alluded to. I’ve maybe not gone through the usual channels doing accountancy and ending up in a financial institution from the get-go. I was born and raised in Port Elizabeth in the Eastern Cape, so although I’ve been living in Cape Town for many decades, I still consider myself as an Eastern Caper, should I say.
Leaving school one doesn’t really know what you want to do with your life, and I think having two parents who had very little understanding of financial markets, I didn’t know what I didn’t know, really. So I didn’t really know much or anything at all about financial markets and what the potential career opportunities were in financial markets – and I ended up doing one of these aptitude tests.
I thought at the time that I didn’t want to end up working in an office, and I wanted something that was stimulating and rewarding from a remuneration point of view.
And so the aptitude test pointed me in the direction of engineering and off I went. I finished up getting my qualification and ended up working in engineering for a few years. At that time it was quite popular for a bunch of young people post their studies to end up in London on a working visa.
I went that route to get a bit of real world experience and a bit of life experience, and ended up working in engineering in London.
During that period I think I realised that that wasn’t really filling my bucket, so to speak.
I started looking at what else I could do to maybe change my career path. At that point in time I still had really no view of financial markets or understanding [of] financial markets and asset management per se, and ended up enrolling to do my MBA back at the Graduate School of Business in Cape Town. I ended up initially planning to do it on a part-time basis because I had to pay for [it] myself – and was working in London.
I was saving up for that and I think you can cast your mind back. The rand really fell out of bed as I was about to move back from London to South Africa. That allowed me to look at actually doing my MBA full-time instead of part-time, otherwise I would have to work to supplement it. So I brought all the money back into rands and managed to do my MBA on a full-time basis.
It was during that year that, for the first time, I experienced the time value of money.
I didn’t know what that was prior to writing my MBA. I actually realised, during those modules of the MBA, that that was an area that I really, one, enjoyed and, two, had competence in, I suppose.
One gets the opportunity within the MBA to decide where you want to focus your energy in terms of electives and that, and at that point in time I decided to push all my electives as much as possible into financially orientated areas of financial markets, etc.
So that’s a roundabout route as to how I got where I am at the moment.
RYK VAN NIEKERK: That was, as you said, a roundabout route. But doing an MBA and focusing on the analyses of investment opportunities, you would have battled without an accounting background, I would assume. Just take us through how you adapted to be able to really become proficient in investment analysis without accounting.
CHARL DE VILLIERS: Obviously there’s an element of accounting that one does in business school. It’s one of the core subjects that you do, so you understand the basics. And, post completing that one, one obviously does a lot of reading and your own research around it.
I don’t think understanding accounts is rocket science for any listeners out there. There is an element of common sense to it.
Obviously there’s a lot of detail that, you know, you do when you do your formal accountancy degrees, etc, and a person who hasn’t done that won’t get that nuance. But the skills one needs in my opinion to analyse the company’s income statement, balance sheet and cash flow and understand more importantly around the business model, the risks, etc – I think there’s a level of base understanding that one can get.
And then I also did my CFA shortly after completing my MBA once I realised this was an area that I wanted to spend the rest of my working career in. So that also gave me another step up in terms of understanding the accountancy side of things and other elements that maybe I hadn’t covered previously in my MBA.
RYK VAN NIEKERK: Now the CFA qualification – I think that’s the premier investment qualification you can get, and you learn a significant amount about the analysis of equities, especially.
When did you make your very first investment, an investment with money you actually made yourself?
CHARL DE VILLIERS: It would probably be significantly later than most people would assume. As I’ve mentioned to you, I ended up finishing my MBA and by chance met Walter Aylett’s brother-in-law – who was actually a school friend of mine – on a trip back from somebody’s birthday. I can’t remember exactly what it was.
He mentioned to me that his brother-in-law had just left Coronation and was opening up an asset management firm and was looking for people to join him in terms of growing that business.
That was a bit of fate or luck or whatever you want to call it. With what I’d just gone through in terms of my MBA, I knew that was the area I wanted to end up working in. So I got into working with Walter [Aylett]. That was after I had a brief stint doing some consulting engineering, which you mentioned.
My work with Walter was my first real experience into the financial world. At that point in time we weren’t really actually investing well. At first you didn’t have a lot of money to do your own investments and the staff there obviously invested via unit trusts. So you only really got into making your own investments in terms of shares late in life.
In looking back and understanding the value of compounding, one of my greatest regrets is not starting earlier in my investment career.
I think that was a huge missed opportunity for me there, knowing what I know now. I’ve got teenage boys and they already tease me. I’m always harping on about compounding, and then I would say it’s the wonder of the world. I’ve already got them their own share trading accounts and they’re already investing and have done pretty well already.
RYK VAN NIEKERK: So when did you start, when did you realise compounding is excellent, but we haven’t started early enough?
CHARL DE VILLIERS: I didn’t start it that early. I only started during my tenure at Sanlam really – if you can believe it.
Fortunately, subsequent to that I think investment decisions have gone well. I think I can say I’ve got some competence in doing it well. So I’ve probably been able to catch up some of the lost opportunity that starting earlier would’ve brought me.
But still, as I mentioned to you, I think that’s one of the biggest regrets, really, about not having started earlier, and it’s more a function of just not knowing what I didn’t know.
And when I did know the value of compounding, I didn’t really have any money.
I was paying for my MBA and the like. But as soon as I was in the industry and had funds available, that was when I really started.
RYK VAN NIEKERK: Were those investments contributions to a pension fund or were they discretionary investments in addition to contributions to a pension fund?
CHARL DE VILLIERS: Both discretionary and, obviously, the RA [retirement annuity] contribution. I had very little control over that. But obviously we had the ability to invest on a discretionary basis as well. So a bit of both, really.
RYK VAN NIEKERK: Let’s talk about the discretionary portfolio. What was the very first investment you made?
CHARL DE VILLIERS: Phew, now you’re asking me. If I just think back, it would probably be a company, I’m not sure if you’ll even remember it, that used to be on the JSE – Delta EMD.
It used to have material that goes into alkaline batteries. For a long period of time I was an analyst at Walter [Aylett], at Anderson & Company, as well as at Sanlam [and] it was still listed; it obviously delisted many years back.
And another company that springs to mind was UCS, which was an IT company that I was also analysing many moons back. Those are two that spring to mind.
RYK VAN NIEKERK: And did you make money from those?
CHARL DE VILLIERS: Yes, I did and at a stage did very well out of them. So I haven’t had too many disasters from a discretionary investment portfolio point of view, which is hopefully a good thing.
RYK VAN NIEKERK: I’m going to ask you about the disasters in a minute – oh, let’s get to it. What has been the biggest mistake or dog of an investment you’ve made?
CHARL DE VILLIERS: Well, I suppose in professional capacity we were investors in Steinhoff at a point in time. In my career at Sanlam, we were really material holders of Steinhoff at a point.
Fortunately for us we had reduced our Steinhoff exposure significantly when they started off on their M&A drive on the back of increased risk, etc.
So by the time that the pawpaw hit the fan we were significantly smaller investors in the company than we were initially.
But be that as it may, it was still something that [gives you] scars on your back that you carry with you for the rest of your career.
Those are good things; you learn from mistakes and as long as you don’t make the same mistake twice, I think mistakes are not the end of the world for all listeners out there.
We expect that our team, myself included, has made mistakes, and we’ll all make more mistakes in future. But I think our objective is not to make the same mistake twice – and to move forward.
So it’s part and parcel of why I find the investment career so appealing. You’re not getting everything right on a day-to-day basis.
You’re going to be making mistakes, you’re learning about new industries, and you’re dealing with a really great calibre of people and intellect. It’s a challenge on a day-to-day basis. Just when you think you are top of the world, something can come from left field and really take your legs out from under you.
So you need to continue to have a huge amount of humility in this profession, really – because if you don’t, you’re asking for trouble in my opinion.
RYK VAN NIEKERK: Obviously that also ties in with a diversified portfolio. If there is [one] badly performing investment, the whole portfolio is not affected as much. But in many cases amateur retail investors listen to a company CEO or senior analysts in the industry when they talk about certain companies – and the CEOs can sometimes be very, very persuasive and talk a good game. But when the results are published it is not as attractive. How valuable do you find the comments CEOs or senior directors of a company make, and does that influence your investment decision? I would imagine in Steinhoff’s case Markus Jooste spoke a good game, and look what happened.
CHARL DE VILLIERS: I think you’ve got obviously not to rely on management teams and management communications as to being one of the foundations of your investment case.
Management communications are merely there to provide maybe some colour to your underlying assumption, and not assumptions around the investment case and what you’re building into your valuations, etc.
So, as you say, invariably management teams are overly optimistic and are going to be obviously looking at the world through rose-coloured glasses. So I think what’s more important for investors out there – both private investors and professional investors – is to do your own homework, to go in and read the annual reports from cover to cover and build your own model and, more importantly and most importantly, understand the business model.
What are the drivers of the business model, which of those drivers are under the control of management versus out of the control of management? And understand the return-on-capital profile of the business and the volatility of earnings within the business over many cycles.
Only after you’ve gone through that process, talking to management, [can] you overlay those comments with your understanding of the business.
Often you find that those don’t tie up, and in those cases over time you learn to trust certain management teams more than others.
And you learn to also take a lot of what management says with a pinch of salt, and to actually rely on your own fundamental research.
The same goes for also relying on sell-side analyst recommendations, etc, which are often driven much more by short-term thinking as opposed to long-term thinking, which investment teams try to focus energy on.
RYK VAN NIEKERK: That’s an interesting view. You have professional investors, fund managers, who do the very, very detailed analyses, they’ve built their models – and then you will see in the portfolios that there are very divergent views. Some asset managers would own a particular share while another asset manager would hold a competitor’s share. So these analyses do not always match up. Maybe the question is: Is it a science, investment analysis, or is there also some art to it?
CHARL DE VILLIERS: It’s most definitely part art, part science. As anybody who has built a financial model will know, there’s a whole host of inputs that go into a financial model – be it discount rates, be it growth rates. There’s obviously the whole capex around working capital assumptions, etc. All these elements affect your future free cash flow that a business can generate, and it’s usually dependent on what your inputs are.
So valuation is most definitely not a science. With our team we get to a valuation point which we think is our kind of fair valuation; we by no means think that that is a precise valuation.
We understand very well there’s a range of outcomes that could potentially play out over the future. Because of that we rather like to think of it as a bear case [versus] a bull case.
And the one point that we use as our valuation is kind of a midpoint of that range – and that’s our best estimate of how things may play out. But we know very well that things could be a lot worse than that, and the other side might be a lot better. Various investors will have different views of the future, and of discount rates to use, so they can come to very different answers.
RYK VAN NIEKERK: One of the biggest challenges for retail investors is underperforming investments. Let’s say you buy a share, you believe it will fly, but then it doesn’t; it performs really poorly. How do you think such investors should take out emotion in that decision, but still take a decision which is ‘let’s cut our loss and invest in something else’.
CHARL DE VILLIERS: I think if one has to take a mature view – and this comes through years of working in the industry and also working with the right people and the right teammates – [it is necessary] to understand that there are going to be points in time where share prices will decline after you buy them.
I always say to my team nobody rings a bell at the trough of a share price, so invariably you’re going to buy into shares and they’re going to carry on going down. It doesn’t mean your investment case is wrong and that you need to change tack.
But you need to be mature and have a mature outlook [so] that where you’ve got a bunch of assumptions that have got you to a point – that you believed this was a good investment case and, as time goes on, you know that when you’re making a forecast of the future you’re invariably going to be wrong – where your forecasts are materially wrong, and those are material drivers of a company’s valuation or investment case, you need to have the maturity within the team as well as yourself to say ‘I’ve made a mistake and things have changed’.
At that point in time you should have no qualms about selling something, even if it has dropped 30% from the point at which you bought it.
Put your hand on your heart and say ‘I was wrong, things have changed, things are not as I understood them and I’m not happy to sell’ – but you are selling because you would rather deploy that capital in an investment opportunity [where] the probabilities are more skewed in your favour, the risk return is more in your favour, versus something where things have changed.
RYK VAN NIEKERK: Lastly, if you could go back in time and speak to yourself when you were 20 years old, what would you tell yourself about how [one] should approach investments?
CHARL DE VILLIERS: I would go back and say start early, as early as possible. I would [also] love to tell your listeners that investments shouldn’t be daunting, and are not rocket science.
Understanding a company, even building a simple discounted cash flow model with basic Excel skills, is quite within the capability of, I would imagine, a significant portion of the population that has the appetite and the willingness to actually apply their minds to it.
So you don’t just have to listen to investment professionals like myself and other people wo are telling you to buy and sell shares. You can do a lot of your own work and [gain] an understanding – albeit it seems daunting. But once you get into it, there’s a huge amount of resources available out there to learn about that.
So start early. Don’t be scared to do the hard work. Roll up your sleeves and reach out to people who can help you. I think most investment professionals and people within your circles will be willing to help, where you come across people who have shown a willingness to learn, and you have an appetite to increase the base of knowledge.
I would love to have started earlier and I consider myself very blessed to work in investment management. It’s an area that gives me a huge amount of career satisfaction.
I come to work every day and enjoy what I’m doing. There’s a Japanese term – I think it’s ‘ikigai’ – which means how one finds meaning in life. I think that’s doing what you have a passion for.
I think I’ve been fortunate to end up in a vocation that I’ve got a huge amount of passion for. I don’t feel that coming to work every day is a burden. I am really excited to come to work. So I think I’ve been fortunate to end up doing what I’m doing.
RYK VAN NIEKERK: Yeah, that’s a valuable life lesson. Do what you love to do, and then it’s not work. I think the outcomes are very, very positive and the effort you put in is a lot more valuable to the firm than if you just do a job. And if you’re successful doing a job, then try and pursue your passion.
But Charl, thank you so much for your time today and for sharing your insights with us.
CHARL DE VILLIERS: Ryk, thank you. It’s a pleasure and I hope it can help some of your listeners out there and provide some context.
RYK VAN NIEKERK: Yeah, I think the tip is: ‘It should not be daunting, just do the hard work and you can make good investments and hopefully get more right than you get wrong.’ I think that’s a valuable insight.
But thanks again for your time. That was Charl de Villiers, the head of equities at Ashburton Investments.
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