Quarterly Commentary - Q3 2020

Happy (or mad) Hatters

“Now I’ve been smiling lately, thinkin’ about the good things to come… ”    Peace Train, Cat Stevens   

Granate has turned out somewhat unconventional. We named our business after half a fruit. The pomegranate is a very special fruit, with deep symbolism and an ability to flourish in both conducive and trying conditions. Unfortunately, ‘Pomegranate Asset Management’ doesn’t quite have the same ring to it as major corporate fruit names like ‘Apple’ and ‘Orange’. We had to drop a couple of syllables.

We are based in an old water-powered mill with dungeons, very thick walls, warm wood paneling and antique cast-iron windows. Our ‘Key Performance Indicators’ are very simple: a shared purpose and a relentless commitment to our values. We have channels in Microsoft Teams called ‘Granate Gives Back’, ‘The Happiness Channel’ and ‘The Dumbest Things’ (a channel dedicated to our collective mistakes). We have a book club. We don’t have a chief investment officer, because we believe it’s the most sensible voice that should be the heaviest, not the most senior. We are the Granateam and call ourselves Granatians. By building an asset manager according to our convictions, with limited regard for convention, we have turned out a bit different (maybe even weird?).

The eccentricities all bring joy, but the greatest contributor to our happiness is our internal diversity: diversity of gender, backgrounds, religions, schools, qualifications, senses of humour, passions, and mother tongues. Bronwyn is a singer, Catherine is a runner, Alex is an ex-game ranger, Phila is an artist, Dalya is a pianist, Tyron is a baker, Vivian is a chef and our intern, Nkosinathi, has his song listed on iTunes. There are many more talents that conventional corporates might regard as hobbies. We embrace and integrate these talents into the Granateam, as we are convinced that happiness happens when your ‘private life’ and your ‘professional life’ become somewhat indiscernible. This is also hugely beneficial to our clients. There are many passionate angles to our debates, and every angle reduces the odds of mistakes.

This results in a collective open-mindedness, which is important to ensure that our portfolios change when the facts change and could result in our portfolios looking very different from our peers. Having portfolios that deviate from peers is certainly not by design, but more a case of ‘different vines making different wines’.

Examples of how our open-minded culture manifests in our portfolios

Our portfolios change as the facts change:

Let’s consider the evolution of the Granate SCI Money Market Fund over the last 12 months. At the end of September last year, 54% of the fund was invested in bank floating-rate notes, which offered attractive real returns. As the money market yield curve steepened, longer fixed-rate instruments became more compelling and we moved about a third of the fund from floating to fixed-rate paper. To date, the drastic repositioning of the fund has served clients well, as we locked in rates that are now long gone after multiple recent repo rate cuts.

The Granate SCI Multi Income Fund looked quite different to most of our peers going into the crisis. We had been reducing credit duration for the prior 18 months, as we were not finding value in credit assets. This resulted in significant cash holdings. We were therefore in a position to start taking advantage of the large sell-off in government bonds in March, thus increasing duration in the fund. We continue to see little value in floating-rate credit, as interest rates are at all-time lows. We believe that short-dated real rates will not produce inflation-beating returns for a while, given the subdued growth and inflation environment that will feed into Monetary Policy Committee determinations. We are finding opportunities in fixed-rate government bonds in the seven to fifteen-year maturity bucket (the ‘belly of the curve’) and in short-dated inflation-linked bonds.

Our equity-centric funds (the Granate SCI Balanced Fund and Granate SCI Flexible Fund) are currently somewhat different to many peers:

In the equity market, the low share prices of South African companies – even those with long records of profit growth – indicate scepticism about an economic recovery. These include South African companies with long track records of consistent profit growth. Having these companies rather than JSE-listed offshore companies among our largest positions is a deviation from many peer portfolios. If well-run companies like Mr Price, Capitec Bank, Hudaco, Nedbank and Italtile are not worth far more than their current share prices, the future for South Africa must be very grim. We do not see evidence to hold such an extreme negative view. Bad news is often over-indexed, and in South Africa we believe there has been extreme over-indexing. However, we are starting to see glimmers of public optimism.

We do believe in global diversification, given the massive opportunity set with very different growth drivers to the local market. 30% of our equity-centric funds are allocated to offshore companies, all of which have capable management teams and compelling economics. A number of these companies are in rapidly growing industries, like semiconductors and Asian insurance. Many of these names may not be well known and might not appear in many other domestic portfolios.

Is it of concern that our portfolios could end up performing very differently to most other domestic unit trusts?

We are personally very heavily invested in our funds and obsess about every position’s long-term prospects, with no interest in short-term performance relative to peers. We will openly acknowledge that there are some domestic portfolio managers with accomplished records of generating good returns, and we consider how they are positioned for yet another angle to our debates. In investments, you need to make peace with the fact that you will be wrong from time to time – perhaps even very wrong – but you also need to have the courage of your conviction. Dealing with this dichotomy is where team dynamics become crucial. We believe courage is a double-edged sword: very dangerous in the hands of the hasty, but powerful in the hands of a diverse but tightly woven team. Our team can stomach performance that deviates from peers. Anybody who would like to join us on our deviating journey will need to be able to stomach the answer to the following question:

What is the hardest part of long-term investing?

Waiting a long time.

A share or bond price reflects current sentiment, with little regard for the economics of the individual company or issuer. This means you need to believe in the businesses or issuers rather than the prices. This is far easier said than done, as prices can significantly deviate from a ‘rational value’ for sustained periods of time. However, when sentiment improves, prices improve. The market again remembers its darlings and starts chasing their prices higher. We try to be ahead of this chase by not forgetting our darlings, even if we must wait a very long time. You need to decide if you can wait with us. The reward can be big, but waiting a long time is not always easy.

“We are all a little weird and life’s a little weird, and when we find someone whose weirdness is compatible with ours, we join up with them and fall in mutual weirdness and call it love.”

Dr. Suess

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Written by Vaneshen Naidoo

Portfolio Manager

Vaneshen joined Granate Asset Management in December 2015 and currently manages the Money Market and Cash portfolios in the Fixed Interest Team. He joined Cadiz Asset Management in 2006 as a graduate and during this time analysed the credit and property sectors for the fixed interest and multi asset class teams. Vaneshen holds a BSc. Hons (Engineering) and M.Sc.(Engineering) from The University of Cape Town, and is also a CFA.

CFA ®
M.Sc. (Engineering) (UCT)
BSc. Hons (Engineering) (UCT)