Denker SCI Global Finacial Feeder comment - Oct 17 - Fund Manager Comment05 Dec 2017
September saw the end of an era as I said goodbye to a CEO who we backed in 2004 when he came in as a turnaround specialist. He is now retiring after successfully turning around the company and selling it at a high multiple on behalf of shareholders to an acquirer.
Reflecting on the past is always instructive, and in this particular case study even more so:
- Turnarounds always take much longer than anticipated, and this one was no exception.
- When managements set goals, they really do believe they are achievable. They seldom are. This is not a fault of the CEO, just a fact of life.
- In the meantime, competitors steal market share.
- As an investor, despite investing in turnarounds at very attractive multiples and (in this case) exiting at high multiples, when doing comparisons years later we find that the more expensive competitors (at the time of investing) generally turned out to be better investments. Why? Simply because over a five- to ten-year period they grow shareholder value at a much higher rate, the compound effect of which exceeds gains from the turnaround's rerating.
These lessons are very applicable in 2017. Banks and insurers that are now on the front foot will grow shareholder value at a much higher rate than their still challenged peers. Few investors realize the effect of this compounding over five years.
So, during 2017, we've stuck with quality companies where we have a higher degree of certainty about their ability to grow shareholder value (of which we measure the track record by our own internally developed scorecards) and the recent results released by the banks and insurers confirm our thesis.
The advantage we have in managing the fund is that few of the 'quality' companies are expensive, making it easy to remain invested.
Having said that, a number of our holdings generated even better results than we anticipated and were rerated by the market. Four of them - TCS (44%), Sberbank (37%), Itau (24%) and Credicorp (13%) - performed particularly well and are in our opinion at the beginning of what could be a two- to three-year positive cycle.
As we said in our previous quarter's review, we believe we are only at the beginning of a period which will favour banks and insurers:
- The end of the low growth, low inflation, low interest rate environment.
- Increasing confidence.
- And the fact that the upswing is starting from a very healthy and low base and the financial sector generally has strong and clean balance sheets.
Our recent company visits have so far confirmed our views and in fact highlighted a few fresh opportunities. That is the part we like most: discussing company prospects with managements and evaluating our take on it against market expectations and valuations. Based on our visits we remain of the opinion that the financial sector globally remains mispriced and presents an excellent investment opportunity.
Fund Name Changed - Official Announcement05 Sep 2017
The SIM Global Financial Feeder Fund will change it's name to Denker SCI Global Financial Feeder Fund, effective from 01 September 2017