Ninety One’s ‘crazy’ investment bet that worked

In the lead-up to South Africa’s 2024 elections, Ninety One made a big move by investing in South African shares, which proved to be a big win for the asset manager despite detractors calling this move “crazy”. 

A few weeks before the May 29 elections, John Biccard, portfolio manager at Ninety One responsible for Value Equity Strategy, released a piece explaining the company’s position before the election.

He said South African equities were undervalued, “weighed down by state capture, load-shedding, rising sovereign debt, failing infrastructure and heightened crime levels, not to mention concern regarding the outcome of the upcoming election on May 29.”

However, the Ninety One Value Fund saw potential in ‘SA Inc.’ stocks due to their low valuations, high dividend yields, and depressed earnings.

He highlighted a reduced level of load-shedding as a key catalyst for growth, which could boost GDP, lower inflation, and improve corporate earnings. 

Even with the uncertainty around the election, he believed that the market overestimated the probability of a negative outcome.

Biccard encouraged investors to act before the election while liquidity was low and since stock prices could shift significantly afterwards. 

The Ninety One Value Fund was heavily invested in domestic stocks, favouring companies trading near COVID-era lows, such as Life Healthcare, Netcare, Spar, Reunert, and ABSA, which comprised 27% of their portfolio.

In response to this position, many accused Biccard and the fund of being “crazy”.

However, the formation of the Government of National Unity (GNU) completely shifted investor sentiment towards South Africa. 

On top of this, improvements at Eskom have resulted in the utility halting load-shedding for over 200 days.

Other green shoots, such as public-private partnerships and improvements at Transnet, have also helped boost the country’s economy for the months since. 

“It was one of those moments where you’ve got to make hay when the sun shines,” Biccard said on The Investment Perspective podcast.

He explained that in his nearly 25 years of experience running the fund, most of the money they have made can really be broken down into only around four big trades. 

The May 29 election was “one of those big opportunities” which only come around every five years, with stocks being “unbelievably cheap”.

“When everyone hates it, when everyone’s completely out of it – and it’s a very extreme situation, and when that happens – you’ve got to load up as much as you can because you might have to wait another five years to get another opportunity like that.”

“It was the cheapest it had ever been in absolute terms. It was the cheapest it had ever been relative to the world.”

“Foreigners had completely sold out of South Africa, and even locals had massively reduced their positions because of the Regulation 28 changes, which got them to take money out.”

According to Biccard, when many people say “you’re crazy” – the response to his pre-election piece – that’s really a sign “that you’re on to something good”. 

“You only say that when you’re so so sure. And when you’re so so sure, everyone’s sure, and everyone’s positioned the same way.” 

For 12 to 18 months leading up to May’s election, Ninety One steadily bought South African shares, focusing on mid-caps and small-caps rather than large-caps.

They built their position gradually, taking advantage of daily price drops to accumulate shares and by May 29, they were positioned for a moderate election outcome.

“There were a lot of days that I felt like I was the only buyer in these midcap shares because liquidity dried up in the JSE, and everyone was negative about Eskom and then the election, and there were only sellers,” he said. 

At that point, roughly half of the JSE was made up of South African-exposed shares, and half consisted of offshore stocks, including rand hedges like Richemont and Naspers, and commodity shares.

Ninety One’s portfolio was heavily weighted toward South African stocks, with 70% of the fund invested locally, of which 65% was in SA-focused shares. 

They avoided rand hedges and commodity shares entirely, which paid off after the election.

Over the past six months since then, Ninety One has gradually reduced this overweight position in South African equities. 

Some detractors have said that Biccard and Ninety One simply made a lucky bet, which happened to pay off after the elections. 

“I think it’s very true that the outcome was lucky in that it was unbelievably good,” Biccard said. 

However, South African shares were so cheap before the election that even if things had gone badly, the fund still would have made a return on their investment.

“We wouldn’t have lost money because the shares had already discounted that.” 

Fortunately, the formation of the GNU was the best-case scenario for the asset manager, with South African shares going up 40% to 50% in rand terms and another 5% in dollars. 

“If you had a good South African portfolio, you’ve made 50% in dollars in six months. So forget about NVIDIA and Bitcoin and everything. South African shares have beaten them all because they were that cheap.”

“The stock market is not about buying things that everyone agrees with,” Biccard said. “It’s about playing the odds and the odds were 90/10 that there was going to be a bad outcome in South Africa. That’s what the market had priced in.” 

“In the end, we actually got the 10/90 outcome, which was the GNU. And that’s when you make outsized returns.”

Essentially, the basis of this investment strategy is being contrarian “because being the contrarian is where you make the money.”

When everyone thinks the same way about a certain stock, there could be an opportunity to unlock a lot of value where it is priced much cheaper than it should be.

However, being “blindly contrarian” isn’t advisable since there are sometimes good reasons for everyone to bet against a certain stock.

This includes companies like Kodak, which saw its share price sinking years ago because it was really “the end of the line”.

Sometimes, “people all agree with it, but unfortunately, it’s true.”

Instead, he advised investors to take out the 10-15% of contrarian bets that definitely will not work before picking your “crazy” stocks.