Most investors seek some form of margin of safety in the investments that they make and this can come in many forms. For some it will be paying a very low price for a low quality asset, whereas for others it will be paying a reasonable price for an asset of high quality. We use both of these approaches when constructing portfolios and are guided by the prevailing opportunity set. From time to time we find investments that are a combination of the two, something that features strongly in our managed share portfolios at the moment.

Businesses are often made up of different divisions or assets with very different economics. When you are able to find a business that in total is of poor or average quality, but has an asset or division that is of high quality that is not being correctly valued, there is often a mispricing that creates opportunity for patient investors. While we own a number of companies that are laden with such hidden treasure, one of them is about to come out of hiding and we are watching it with great interest.


Fiat Chrysler Automobiles is a global automaker with a strong portfolio of motor vehicle brands. These include Jeep, Chrysler, Maserati, Alfa Romeo, Dodge, Fiat and Ferrari. A key part of our investment thesis in Fiat Chrysler Automobiles is their 90% ownership of Ferrari. A Ferrari is more of a luxury good than a car, as is demonstrated by its recession proof nature. It was the only global automaker to grow revenues in the financial crisis. It has a two year waiting list and the cars are appreciating assets, especially the limited edition vehicles.

Ferrari is due to list this month, appropriately under the share code RACE, and the initial valuation range has just been set. Looking ahead, a careful increase in production should maintain the scarcity factor of the vehicles, but could lead to a large improvement in margins and profitability. Just like its

vehicles, the shares will have limited availability with only 10% being sold by Fiat to new shareholders. They plan to distribute their remaining 80% during early 2016.


Ferrari provides a solid underpin to our investment thesis, but we do think the rest of the business is worth considerably more than the stake in Ferrari. The Jeep brand continues to grow and has shown 24% annualised volume growth since 2009. Aided by the planned rejuvenation of Alfa Romeo and an expanded Maserati range, group margins and profitability are on an upward curve.

Fiat Chrysler Automobiles operates in an industry with poor economics. It is because of these poor economics that we are able to own one of the world’s most iconic brands at a very reasonable price. While Ferrari may be the treasure, we think that Fiat Chrysler management is in the process of bringing a shine to the other brands as well. This combination creates a very compelling long-term investment opportunity and is a core holding in appropriate local and global portfolios.

Our core objective when managing client portfolios is to produce “above average returns at below avereage risk” over a full market cycle. Our expectation in managing client portfolios is in line with the profile outlined by Warren Buffett in his 1960 partnership letter:

Our service and approach is client centric and we are of the view that this sort of return profile is in the best interests of most investors. We are happy to lose out on some of the gains made during frothy, momentum driven periods, but expect to thrive in tougher market conditions. Given the recent raised levels of market volatility we thought it appropriate to revisit our approach to risk management within a portfolio context.

We deliberately distinguish between what we call Core Blue Chip Holdings and Special Value Situations when constructing portfolios. We do this so that clients understand how we construct portfolios, but also to help us manage position sizes and risk. We prefer to hold established Blue Chip counters, but also seek exceptional value opportunities in companies that are perhaps less well known. We do not necessarily view this portion of the portfolio as more risky given the discount at which we look to purchase these companies.

At the moment the market is paying up for earnings growth and punishing companies or sectors where there is greater uncertainty. This has created an extreme difference between the popular and unpopular areas of the market not seen since the dot-com bubble. This has created an extremely challenging environment for active investment managers, with many of the great global investment managers going through one of their worst ever short-term performance periods. Franklin Templeton recently wrote on this topic and I’ve included a chart from their note below.


“I have pointed out that any superior record which we might accomplish should not be expected to be evidenced by a
relatively constant advantage in performance compared to the Average. Rather it is likely that if such an advantage is
achieved, it will be through better than average performance in stable or declining markets and average, or perhaps
even poorer-than-average performance in rising markets.”

We are very wary of debating the merits of different styles of investing as a growth investment of today can become the value investment of tomorrow, or vice versa, and in reality all investors try and buy bargains. What we can say is that we think the future will be brighter for active stock pickers than the recent past has been. Our Blue Chip Value approach will prevent us from betting the farm on potential value traps, but we will also embrace volatility and uncertainty as an opportunity to buy companies at large discounts to their worth. As we have highlighted in recent commentary, this may increase the short-term volatility of returns, but will sow the seed for the long-term returns we seek on behalf of our clients.

Here is a short note on a few of our current holdings that are currently facing significant uncertainty, but where we think the valuation mitigates the risk.

Group Five

It is difficult to imagine that it was a mere 7 years ago that construction stocks were the darlings of the market that portfolio managers were ridiculed for not owning. Given the high level of industry uncertainty Group Five shares are now very cheap, the balance sheet is solid and we are encouraged by new shareholder friendly management eager to extract value in the years ahead. We are comforted by their investment and concessions business which has a large annuity income component, is a good quality business and which management has stated may be worthy of a separate listing in due course. While the market may be focused on the lack of domestic infrastructure spend and the fact that the Winelands Tolling Project is unlikely to happen, looking a few years out we think the investment and concessions business could be worth the current share price. Given that this division only makes up 7% of group revenue, any recovery in building margins would be extremely rewarding for patient shareholders.


Despite being underweight the resource sector, we do have exposure to Glencore which has been in the news for all the wrong reasons recently. A very sharp selloff gathered pace on the back of an analyst report that has driven the share to extreme levels. Key to our investment thesis in Glencore is the large shareholding of management, who added to their stake just two weeks ago. We are by no means commodity bulls, but think that the panic selling is overdone, that Glencore will be one of the survivors in the commodity space and that significant value will be realized from current levels.

Sustainable Capital Africa Alpha Fund

Much has been made of the growth opportunity in Africa, yet for every success story there are probably two or three failures, Tiger Brands being a notable recent example. Our investment in Africa is one of diversification and valuation when local equities are far from cheap – taking profit in an expensive market and allocating it to one that is extremely cheap. We do not have the expertise to select stocks in Africa, but we know the team at Sustainable Capital well and are comfortable investing alongside them as they buy into what are extremely depressed, sentiment driven valuations on the continent.


Gold is a contentious investment for many. We are unemotional in our analysis of gold, but have recently added a small position to both local and global portfolios via Anglogold and Barrick Gold. While the position is small, we view it as a portfolio hedge and not an investment. In a way it is a humble admission that we do not know how this unprecedented period of financial engineering ends. The fact that it is a hedge that is unloved, under owned and very cheap on most metrics is a bonus. In some way we hope that demand for gold as a safe haven is not restored, but we do think a small holding is appropriate.
It goes without saying that as custodians of our clients’ capital, we are very risk conscious and manage each weighting according to the risk of each investment. We are also invested alongside our clients in each of the companies we own.


Investing amidst uncertainty is uncomfortable, but unfortunately it is a prerequisite for generating superior long term returns. We have been through an extended period of comfort in global markets, but more and more cracks are starting to appear at a company level. We embrace the uncertainty as an opportunity to selectively apply cash to investments that offer attractive long term risk/reward characteristics. In short, we think that very often it is uncertainty that creates low risk entry points for brave investors. It seems appropriate to end off with more words from Mr Buffett himself:
“Face up to two unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.”