2015 was a very tough year for value driven stock pickers all around the world, with many of the best investors with very long track records experiencing their toughest year, in relative terms, since the dot-com bubble. While Buffett, Klarman and others have battled to keep up, short-term focused investors have continued to seek gratification in passive and momentum based strategies. This behaviour is not unusual and, as always, will create opportunities for patient investors with a longer investment horizon. The aim of this note is not to make forecasts for the coming year, but to highlight our current thinking around investments we are making for the next five years or longer.

While not a forecast, we do expect that fundamentals, both here and abroad, are likely to remain tough in the year ahead. The start of the year has been a harsh reality check in this regard. This means that company earnings growth is likely to be muted and there is significant room for disappointment. Because of this backdrop we remain very selective investors and are only prepared to own companies that are already priced for a poor fundamental environment and where expectations are low.

During periods of heightened volatility we will look for opportunities to add to our best ideas at better prices. Imperial Holdings is a good example of this. We were buyers of Imperial into weakness last year as the share price declined from over R200 towards R160-R170. At those levels we were of the view that it offered good long-term return prospects, despite the short-term pressures on parts of the business. The weak rand and poor domestic economy are clearly a major headwind for the vehicle import, distribution and dealership division. We think this is more than priced in at current levels, particularly as cash flows are increasingly being redirected into other areas. The charts below show how foreign earnings have grown and that non-vehicle businesses now represent nearly 60% of operating profit.



During December and early January the share price of Imperial has fallen further (trading at R114 at time of writing) and we have been adding to positions in what we think remains a good company, with excellent management, that is now trading at an exceptionally cheap price.

In addition to adding to existing holdings like Imperial, any further market weakness is likely to lead to new opportunities in companies that we do not yet own.   Having some cash available for such opportunities is core to our approach.

Despite the tough environment, 2015 was a reasonable year for our client portfolios, despite not owning some of the big winners (SAB, Naspers).   Not owning these shares was partly balanced by the offshore portion of portfolios where the weak currency was a major tailwind, but perhaps more importantly, it allowed us to buy good quality global companies at a reasonable price, something we have been battling to do in the domestic market.

As we head into 2016 we expect market conditions to remain challenging, but are optimistic about the long-term return potential of the companies we own, both locally and globally.   We have resisted the call to invest all of our cash and are ready to take advantage of any opportunities that Mr Market might present us.