The Steinhoff Meltdown… there are advantages to staying small, investing carefully and steering well clear when a company defies understanding. Introducing Fenestra Asset Management CEO, William Meyer.
– Financial Mail
Warren Buffett offers some rather sage advice on investing. number one: never lose money. Rule number two: never forget rule number one.” It is a discipline that has been entrenched in Cape Town-based Fenestra Asset Management’s approach since it was founded by William Meyer in 1990. The key is not only to pick winners but to avoid companies with a big risk of calamitous price collapse. Not for the first time, Fenestra has proved itself adept at avoiding capital-destroying disasters by having shunned Steinhoff, a share held in abundance by big-name asset managers including Coronation, Sanlam, Foord, Old Mutual, Investec and Liberty.
The damage in what is being dubbed “SA’s Enron” is severe, with Steinhoff’s share price having fallen more than 80% since it announced the resignation of CEO Markus Jooste amid “accounting irregularities ”. This has wiped R280bn off Steinhoff ’s value. What did Meyer see that many other highly experienced analysts and fund managers did not? “I have never been able to understand Steinhoff’s accounting or see where its cash flow is. It is all just too complicated,” says Meyer, who qualified as a chartered accountant in SA and a chartered financial analyst in the US. “By avoiding Steinhoff I feel we have the right to blow our own trumpet this time,” he says. Three years ago Fenestra found itself well clear of another disaster, African Bank, built on a shaky business model. Fenestra also did its clients proud during the equity market collapse of 2008 by hoisting liquidity in portfolios to around 50%.
“We limited the fall in portfolio values to 1 5 % ,” says Meyer. At its worst, the JSE all share index (Alsi) was down more than 40% at the time. As asset management companies go, Fenestra is small and generally flies well under the radar. This is by design, says Meyer. “I do not follow the corporate crowd,” he says. “Being the biggest does not mean being the best.” For Fenestra’s clients, of which Meyer says there are a “few hundred”, the reward has been long-term market-beating returns. Between January 2011 and December 2017, Fenestra’s clients’ portfolios had a total return of 88.77% against the Alsi’s 80.6%.
“We have a very personal relationship with our clients and for many, it’s changed their lives in a very positive sense,” he says. Clients, he explains, have two bespoke portfolios: one focused on domestic equity and the other on foreign equity. Meyer, who undertakes all research, also has an investment approach that differs from most of his competitors. “Portfolios are concentrated in a small number of well-researched shares,” says Meyer “We rarely have more than 10-12 in a portfolio. Our experience is that concentrated portfolios usually achieve significant outperformance .” Buffett — who has said that diversification is simply a protection against ignorance but makes little sense if you know what you’re doing — would approve.
Meyer has a strong leaning towards smaller companies with fast-growing earnings, trading at a discount to intrinsic value. “It is easier for a smaller company to double in size than for a big one to do so,” says Meyer. This approach has enabled Fenestra to pick what proved to be winners over the years. City Lodge was bought in 1992 at R5.50/share and eventually sold at R95/share. Famous Brands was bought at R2.50/share in 2003 and sold in 2016 at R136/share. Meyer’s preference for smaller companies is not cast in stone. Domestically, Fenestra’s biggest holding is Naspers, which this year has gained almost 90% in value. He is also bullish on recently listed Long4Life, now Fenestra’s second-largest SA holding. With Long4Life he is backing founder Brian Joffe, who started Bidvest as an R8m company in 1989 and grew it into a multibillion-rand empire. But Meyer’s preference right now is for offshore companies with his slant towards those in Australia, New Zealand and the US tech and consumer-goods sectors. Among his favourites are Apple, Amazon, Google and Yum, owner of the KFC brand. “We started buying Apple at $46.83/share and Amazon at $ 1 8 5 /share,” says Meyer. Apple is now $169/share and Amazon $ 1, 162 / share.
While Fenestra has no desire to become a large asset manager, in the wake of the Steinhoff debacle Meyer feels it is an opportune time to attract new clients. “If people are unhappy with their portfolio’s performance or would like a second opinion I would urge them to call us for a confidential consultation,” he says.