Built to last

On value investing and the value of diversity

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In the 21 years that she has spent in the industry, Perpetua Investment Managers’ co-founder and chief investment officer Delphine Govender has witnessed profound transformations in the investment landscape, from the days when investment management was dominated by the institutional insurance companies, through the rise of the professional mega-managers, to the founding of her own boutique firm based on the principles of value and diversity. Now, with R13-billion in assets under management and counting, Perpetua has achieved lift-off. We asked Govender for insight into her approach.

She began her career as an analyst at Old Mutual Asset Managers, but it was the 11 years spent at Allan Gray that gave Govender the experience she would use to launch Perpetua.

Those were phenomenal times, when “South Africa’s most admired asset manager” was transforming into the mega-manager of today.

“When I joined Allan Gray, its assets under management were R15-billion, and I was the 58th or 59th employee. When I left 11 years later, it was close to R450-billion, with over 800 employees,” Govender recalls.

“To have been part of that business and to have seen and witnessed that growth burst both in assets and as a business was a huge learning experience for me both from a portfolio manager perspective and as a director.”

However, even though “the easier decision was to stay and not to leave”, in 2011 Govender decided it was time to move out on her own.

The real potential Govender saw in looking at the entire South African market over the previous two decades was the high failure rate among boutique firms.

“When things are riding high, everybody thinks they can start a firm,” she reflects. “Two people might set up with a billion or two under management, have a great performance run and think they’re rock-stars. Then markets tank, the tide goes out, and you see who’s wearing swimming trunks or not. The graveyard of dead fund managers is quite big and continuously growing.

“So we asked what we could do differently. The opportunity I saw was that the market was genuinely missing what I call scaled boutiques. This sounds like a contradiction in terms because ‘boutique’ implies ‘small’, but that’s what we were trying to challenge. Our mantra was that a boutique is not small per se – a boutique is specialised, offering something that’s different to what is currently available a) in terms of the way we exploit an investment opportunity in the market and then b) in terms of the way we put our firm together,” Govender explains.

Investing in value

What sets Perpetua apart from index-based investors is that the firm is fundamentally a value investor.

“Simply because a fund manager says they work out the value of a share doesn’t necessarily mean they are value managers,” says Govender. “A value manager works out the true worth of a share based on their reasonable and realistic assumptions as opposed to paying for future optionality today.”

For Govender, success means protecting the money that clients entrust to the fund. “The least we want to do is give them back their money that’s maintained purchasing power,” she explains. “Obviously, we also look to exploit opportunities to invest that money and grow it in real terms: we want to improve the quality of our clients’ lives, and what better way than in the form of hard-earned savings which directly affect the quality of their lives at retirement. That’s why we don’t invest with the benchmark in mind. If we think Naspers is overvalued, we own zero. I am not prepared to look out very far into the future and pay for all that future profit today in the share price.”

This aversion to the benchmark has earned Perpetua its share of criticism, but the turn markets have taken has vindicated the value-based approach.

“For the last seven years, it’s been particularly tough to be our type of investor because the market has been driven by more technical things, such as low interest rates globally, perception of risk, attitude towards risk, bond proxies, growth, etc. The huge positive sentiment attached to this meant that multiples went way beyond what a fundamental investor would normally say would be sustainable,” says Govender.

“Now the tide has shifted towards our approach. It’s ended up being the best test of what we set out to do.”

The value of diversity

Diversity is a value intrinsic to Perpetua’s identity. “The South African market is incredibly homogenous. We emphasise diversity, not just in terms of the South African narrative which generally focuses on race and gender, but also cognitive diversity. Not everybody has to be a CA or actuary straight out of UCT,” says Govender.

“We look for three key elements in the ideal investment player. One is analytic curiosity combined with the humility that comes from knowing we don’t know everything. Investment is a probabilistic endeavour and we’re trying to work out different scenarios for the future.

“The second characteristic is the inner drive to protect and grow our clients’ hard-earned money. We’re not disinterested researchers, we’re investors researching whether a particular outcome will be a good investment or not.

“The third quality is the relational component. What is your level of self-awareness? How constructively can you relate in a team environment? The number-one soft factor that contributes to success is whether we are invested in each other’s success.”

This mutual investment is reflected in how teams pool knowledge across areas of specialisation.

“When we discuss global stocks, the entire team sits in,” says Govender. “Equally, when we discuss global stocks, the domestic team sits in because we believe there’s a very strong cross-pollination effect, particularly in the current environment. When I started as an analyst, it took a good five years for global trends to hit our South African companies, but the gap is closing fast.

“Technology now enables the consumer base to know what they want faster than ever before, so the pace at which adoption needs to occur is much faster. As a result, we’re finding that when we’re looking at global food companies, or global retailers, or global banks, etc, we are learning rapidly the trends that will manifest in our domestic companies. So it’s actually benefiting our domestic work, and it’s making the analysts excited about what they do.”

Global vision

Right from inception, Govender wanted Perpetua to have a global outlook. In 2012, globally, the boutique tail commanded a significantly higher share of assets under management than in South Africa, where boutiques command 10 to 15% as opposed to 35% globally. That 35% represented an attractive space to play in.

“Part of our thinking was to quietly build our global capability. Once we had earned the confidence of our clients in the domestic space, they would trust us to deliver on the global side. We made our first global hire about four years ago and now the global team has six people. As a bottom-up stock-picking house, we don’t have to cover the entire world; we’ve got to work out how we can have an edge and be mindful that the majority of our clients are South African clients who already trust us with their domestic assets.

“The way we’ve tried to diversify that single strategy risk is that everything is tied to our core approach of true value equity – so we’ve got straight domestic equity, domestic multi-asset class, global equity and global multi-asset class. Along that spectrum, even if domestic equities have a tough time, we could still have a global strategy that would do well and vice versa.”

Built to last

The Steinhoff case proves that homogeneity is antithetical to sustainability, whereas diversity provides a foundation for a lasting legacy.

“If I look back at the last six years of running Perpetua, we’ve often been asked why we mainly do not own Naspers and Steinhoff. We simply believed they were over-valued – but why did so many other investors not see that? It’s almost as though the board of Steinhoff was constituted of the kind of individual that we have almost been programmed to perceive as successful, so they were above criticism,” says Govender.

“If you look at the individuals that had the highest exposure to Steinhoff in their portfolios, I think they almost suspended their normal judgment because they were blinded by who they were dealing with. There was a huge amount of agreeability. If one of the richest men in South Africa is the biggest shareholder in a company, how could you be so audacious as to think that you would know better than him? What is your track record of wealth?”

The more diverse the team, on the other hand, the more likely it is that the client will be looked after.

“The nature of our industry is that we tend to build up star managers, prima donnas. This is great for the individual’s bonuses and profile, but is it in the interest of the client? When a client entrusts their money to AN Other, they want to know that the inter-generational transfer they were promised for the next 20, 30, 40 years will actually be delivered.

“In starting this firm, it was clear to me it wasn’t going to be DG Capital, my initials – it was going to be something that could absolutely outlive me. The name Perpetua means enduring so that it could be something that we would stick to, to be steadfast and then last.”

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