Rudi van Niekerk, why are you digging for investing diamonds in SA?

Rudi van Niekerk is an outspoken expert for investing in South Africa. He is following a long-term-oriented value approach in a rather inefficient market. Here you can find the video and transcript of our conversation:

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[00:00:00] Tilman: Hello Rudi. It’s great to have you here for an interview. You’re currently sitting in South Africa. It’s summer there. How are you enjoying summer? 

[00:00:10] Rudi van Niekerk: It is great. Weather is lovely. You know, its Mediterranean Cape Town, so it’s marvelous!

Penguins and Lions

[00:00:16] Tilman: Yeah, Cape Town is a great city. And this leads me to my first question, because your fund is named Desert Lion. Have you ever thought about naming it like another South African animal, maybe Cape Town Penguin fund or something like this?

[00:00:36] Rudi van Niekerk: There are obvious names that you can choose, which are quite recognizable like, Table Bay or Table Mountain or Cape Point, something like that. But these names are quite generic, and I love nature and I love traveling around. And Namibia is one of the neighboring countries of South Africa. We do a lot of self-drive tours out there and in the North-western parts of Namibia, there are a few remaining lions wandering in the desert on the brink of extinction. And it’s truly amazing the resilience that they are showing, in how they are surviving in a very difficult environment. So, the name kind of struck. Having had an insight into those animals and it, kind of resembled something – the tenacity and the persistence operating in very harsh and difficult environments.

[00:01:43] Tilman: And honestly have you thought about other South African animals to name your fund after, or are there other animals that fascinate you?

[00:01:53] Rudi van Niekerk: There are many other animals that fascinate me. I am an amateur birder and there are quite a few, birds, including birds of prey. But again, I think that there are two things about names. The first is, many of those are kind of generic or has been chosen already. So, I’m not aware of any other Desert Lion capital funds. There are many better lures and peregrines and other birds of prey fans up there. But the other thing is. What is in a name?

Over time, what you do with the fund or the company and the values and the actions that it espouses attributes the quality of the name and not the other way around. So, we’ve played around with a few names.  We haven’t chosen Great Penguin, or we haven’t thought of that, but we’ve played around with many different names.

[00:02:55] Tilman: We should have met earlier than, might have been the Penguin. They’re so cute. I saw them when I was in South Africa, 2013, and there’s just this colony.

[00:03:06] Rudi van Niekerk: Well, it, might have been appropriate because, we’ve been huddling along for some time in the South African market. So, it could have been quite appropriate.

Rudi’s career as a grain trader

[00:03:18] Tilman: Might be a great idea for the next fund. Before I show the disclaimer, I just want to pose another question. And you can think about it because it’s going back in your history. You started your career as a grain trader. What did you learn from that that is useful for you as an investor?  Before you answer, let me just drop the disclaimer.

[00:03:45] Rudi van Niekerk: Okay.

[00:03:49] Tilman: As always you can find the disclaimer link below. It says: “Please do your own work. What we’re doing here is a qualified talk. We are also trying to have fun while talking about penguins and maybe some stocks, but all of this is no recommendation. Please, always do your own work. And this is no recommendation. Do your own work” So, thank you for listening to the disclaimer.

Let’s go back to the question on your past as a grain trader. What did you learn from that, that’s important for you as an investor today?

[00:04:25] Rudi van Niekerk: Yeah. The question is way more relevant than one might think. You know, I haphazardly entered the grain trading industry. I didn’t really know what I wanted to do. Came from a farming background and studied Agricultural Economics and just stumbled upon the grain trading industry. And that was a period that South Africa still had grain boards. So single marketing channels, which meant that, for the different grains, wheat, maize, et cetera, the price would have been set in advance ahead of the planting season. So, farmers went into the planting season, knowing exactly what price that they would receive obviously eliminating a lot of uncertainty from a pricing perspective. Now that market deregulated into a free market system, by the time that I entered in, it was a very niche market. We were one of the early players and I interacted directly with the farmers. My role was predominantly to procure grain, drive around in the countryside, meet the producers, the farmers, and contract the grain then manage the book, manage the price, and then sell it to millers again. And the free market system, as you know, Tilman, is prices moving up and down every single day.

And this was a major transition for farmers. To offer them a price today, say, I’ll just, use index numbers, say, 100, and tomorrow the price might be 110, and farmers would have thought you have done them in somehow. Because the market moved up or down and if the market moved down, it’s a psychological call option. If the market moved down, farmers would have told you that, they made the right decision, but if the market moved up, they would blame it on you. So, what I’ve really learned there is about human psychology. That’s what I learned. I learned about temperament. I learned about psychological duress, emotional duress.

I come from a farming background. So, I’ve been on both sides of the fence and farmers can be quite gruff and rough with you if they wish, especially if it’s,  their main income that you’re dealing with. So, we’ve learned a lot. I have really learned a lot about human psychology and to implement it.

I come from a farming background. So, I’ve been on both sides of the fence and farmers can be quite gruff and rough with you if they wish, especially if it’s,  their main income that you’re dealing with. So, we’ve learned a lot. I have really learned a lot about human psychology and to implement it. The other thing that I learned is that it was also my introduction into financial markets in the sense that I was a registered trader for futures, derivatives options, et cetera. And being young and extremely naive, I thought that there was a way of beating the market.  It didn’t take me too long to realize that commodity markets, especially like that with the rudimentary approach that we had, it, was a zero-sum game. It was a fool’s game. So that was kind of the precursor to me to start looking for something more in the markets.

Learning from negotiating with farmers

[00:07:45] Tilman: How much farmers dealing strategy did you copy for your dealing with companies? What elements did you take away from this that you have today as an investor?                                      

So, don’t underestimate their intelligence by trying to manipulate or drive a conversation in a direction when you have genuine and true empathy and genuine and true interest in a subject matter that is important to the people that you’re talking to. And when you have respect for the individual that you are dealing with, that kind of creates an environment where there’s way more transparency and a willingness to be forthcoming.

[00:08:00] Rudi van Niekerk: Yeah, I think especially, when it comes to elements like conflict resolution and respect for the individual, I have learned that people are generally way more intelligent than what you think they are. So, don’t underestimate their intelligence by trying to manipulate or drive a conversation in a direction when you have genuine and true empathy and genuine and true interest in a subject matter that is important to the people that you’re talking to. And when you have respect for the individual that you are dealing with, that kind of creates an environment where there’s way more transparency and a willingness to be forthcoming. And the other thing that I’ve learned there is that the best relationships were cultivated during tough times when we had to resolve conflicts. To this very day, I have a lot of very good friends in that farming community.

 And I think that business isn’t always smooth. I have learned a lot from the inside operations of the business. I’ve had managerial roles in that business and business is not smooth. If you haven’t seen the belly of the beast and the managerial side and you just read the company filings, the annual reports, it looks like this pristine clinical model that you can invest in. But it’s haphazard, it’s volatile, stuff happens and there are friction and conflict to be resolved. And I’ve learned that about business.  To be understanding and trying to assess, how many management is dealing with conflict, how management is dealing with challenges. I think that is something that I was able to bring along and have a reference framework when I evaluate management as well.

Why Investing?

[00:10:09] Tilman: It sounds like you already had a very interesting and challenging career as a grain trader and in the grain industry. What made you bet on this scrubbing penguin, the South African market that’s winking along for the last years? I think since you started investing it’s up 6% per annum. It’s not that kind of big of a performance. So, you decided to bet on your career by investing in South Africa. What chance did you see? I think it was around 2018 when you launched the fund, but you started investing in 2013 maybe.

So, the fund was launched in the Desert Lion capital fund launched in April  2019. I have been managing outside capital since 2013.

[00:10:55] Rudi van Niekerk: Yes. Sure. So, few moving parts. Let’s see if we can touch on all of them. Let’s start with the last part first. So, the fund was launched in the Desert Lion capital fund launched in April  2019. I have been managing outside capital since 2013. And over that period, you are correct that the South African market has only returned 6% per annum. I have to qualify that by saying that the market, and I guess we’ll get to that a bit later, you know is so inefficient. And there are so many opportunities in the market that we have been able to outperform that, multiple times purely because of the structure and the nature of the market. So, I would be the first to say that, if you look at the South African equities market as an entity, then I wouldn’t necessarily say it is such an attractive opportunity to invest in. I am not advocating going out, rushing out, and buying South African index trackers for anyone. My background to your first part of the question: What got me interested? Why am I playing in this play pin of the South African equities market is pure because that’s where I cut my teeth.

What got me interested? Why am I playing in this play pin of the South African equities market is pure because that’s where I cut my teeth.

I started from that. First introduction to financial markets was  grain prices trading on the derivatives market. I ventured out and I started looking at companies and investing in companies. And I bought my first company or shares in a company in 2004 whilst I was still active as a grain trader. And that’s where it really took off. It was parallel to a process of reading about fundamental investing. Just immediately the concept clicked with me – the concept of being able to buy something for less than what it’s worth and the concept of exponential growth. So, it’s merely a function of where I’ve cut my teeth. At that stage I didn’t go and take a top-down view and say, where are the most attractive markets in the world to invest in? I did what was right in front of me and over that period, I made a lot of mistakes initially, but I cut my teeth from 2004 to 2013 for those first nine years doing my own thing in the market.

And what I realized is that the market is so heterogenous. It’s so dispersed. There are so many smaller opportunities of which the return profiles are not representative of the market return as general. I realized that there is a huge opportunity, which by definition, will be overlooked or not identified if you just look at the South Africa market as a singular entity.

And what I realized is that the market is so heterogenous. It’s so dispersed. There are so many smaller opportunities of which the return profiles are not representative of the market return as general.

Desert Lion’s position in the South African financial industry

[00:14:11] Tilman: Are you the only desert lion in this South African capital markets? Are there many other players that have the same approach as you have, or is the financial industry more conservative, more classical?

[00:14:32] Rudi van Niekerk: Yeah. Excellent question. So, let’s, talk about the structure of the market and take a step back.  It’s a relatively small market. We have about 325 listed equities, depending on how you define it, and of that, the top 40 completely overweighs the market. So, 80% of the total market capitalization is vested in those top 40 stocks. And then you have the remainder of about 280  stocks which constitutes the remaining 20%. And the top 40 is fairly efficient because that is where all the institutional players play. It’s highly liquid. There is a lot of information. There’s a lot of analysis and the South African financial market is quite sophisticated.

But when you get to the small and the mid-cap side, there are less than 10 mutual funds registered, at last check, that invest in this space. And even those are highly regulated.

 To give you an idea, we have more than 1000-unit trusts or mutual funds that invest in this relatively small market. But when you get to the small and the mid-cap side, there are less than 10 mutual funds registered, at last check, that invest in this space. And even those are highly regulated. And they are limited by regulatory restrictions. So, there’s a high degree of groupthink of an institutional approach. And there are very few who are willing to really venture off the beaten path. Career risk is a very real thing here. It’s not as. I would say audacious and entrepreneurial and individualized that you will see in developed markets, especially like the US for example.

And there are very few who are willing to really venture off the beaten path. Career risk is a very real thing here.

And then if you look at the entry point, I honestly think there are a few individuals who manage their own family offices or manage private companies whom I regard highly as good investors in the South Africa market. But they do that for themselves and they do it unconstrained. When it comes to formal vehicles doing what we do. I think that is what really separates us, in that I am not really aware of any other US-based funds that do exactly what we do in the South Africa market. So, we follow a completely unconstrained mandate within the South African equities market. And if you look at our portfolio, you will see that it’s highly concentrated. And it doesn’t resemble the index. It’s all in. If you look at the dispersion of our returns, it’s very lowly correlated with the index.

So, we follow a completely unconstrained mandate within the South African equities market. And if you look at our portfolio, you will see that it’s highly concentrated.

The South African stock market

[00:17:47] Tilman:  If you think about the South African market, a name comes into mind, that might be known globally in the investing scene. It’s Naspers. How big is Naspers in the share of the South African market and also attached to this question: How global is the South African market? Because if I’m thinking about what you’re telling me, it sounds a bit like Germany, where you have the Mittelstand. The DAX is not that easy to invest in, but some Mittelstand and small mid-caps that are quite interesting to invest in. They are often global companies.

[00:18:22] Rudi van Niekerk: Yeah. Naspers and let’s include Naspers and use the two terms interchangeably because Naspers owns slightly more than 70% of Prosus. They completely dominate the market. Give or take where you are, about 25% of the total market cap of South Africa. So again, if you just take the salient financial characteristics of the market, that’s hugely distorted by Naspers if you look at the price-earnings ratio of the market, for example, and other elements. Just one or two thoughts about Naspers, and then we’ll get back to Naspers’ role in the market and then the rest of the market.

Naspers is quite interesting. I’m not going to talk about Tencent since we know that well enough.  But it is quite amazing, that Naspers as a South African listed company is a victim of its own success in the capital allocation that it has done. And if on a look-through basis, Naspers is now trading at about 50, 51% discount to its underlying some of the parts. So, you are buying Tencent arguably at half price.

And if on a look-through basis, Naspers is now trading at about 50, 51% discount to its underlying some of the parts. So, you are buying Tencent arguably at half price.

And there are many other moving parts, both within Tencent and process, which I believe are undervalued. So, the discount might actually be even higher. And, Naspers, I believe is trading so low due to a few factors. It could be that people simply just don’t like the holding structure. We have seen holding company discounts around the world, but definitely, I do believe it is that it’s South Africa and people are willing to rather buy Prosus, which is more Netherlands based, or Tencent directly. So, you’re getting a global company at a South Africa discount. It’s an example of that. And another reason for Naspers versus big discount is, all the institutional funds have limits as to what they are willing to invest in. And they would all tell you it’s imprudent to have 20 or 25% of all portfolio allocated to a single company which in itself is kind of strange that you have the largest company on the JSE actually offering one of the most compelling value propositions currently.

But until recently the rest of the market excluding Naspers has been at valuation levels last seen more than 10 years ago, between 10 and 15 years ago. We are at a multi-decade low.

And that’s the dichotomy with what you were working with on the South Africa market. For the rest of the market, let’s look at valuations. If you stripped out Naspers the rest of the market until recently we have had quite a strong run over the past few weeks. But until recently the rest of the market excluding Naspers has been at valuation levels last seen more than 10 years ago, between 10 and 15 years ago. We are at a multi-decade low. Quite interesting, but again, we need to understand that the market is not homogenous.

So, it is made up of companies that genuinely are old business models or business models that will struggle given the prevailing socio-economic and political environment in South Africa. And then again, on the other hand, there are companies that are actually growing quite fast and doing much better. So, within that, what people think to call – excluding Naspers – you have a few of the international companies like AB InBev, Richemont and those companies which are blue-chip, hard currency hedgers – apart from that, the so-called SA IC companies, there is really a wide dispersion of an opportunity set and the tails are quite fat. The tails are quite thick. And you will find that there are many landmines. It’s not an easy environment to navigate.

But again there are many extremely compelling opportunities, and these are also trading at very depressed prices relative to where they would have traded if they were in a different spotlight or in a different environment. So that is what you need to navigate. Although this market’s so small, it’s extremely important to understand that the dispersion of the data points is extremely wide. And that exactly is where the opportunity lies in the market.

Where Rudi van Niekerk would go long or short

[00:23:12] Tilman: Let’s try to experiment with the distribution curve. Let’s say someone asked you which industries you should short and which should you go long or look for longs or shorts. That doesn’t mean that they automatically are shorts or long.

[00:23:40] Rudi van Niekerk: Okay.  I’m willing to take a jab again with the provision that even within those industries, you might find opportunities. The ones that I say “short” within that you might also find stock where I would go long. But I would say that the industries where there are opportunities – that I would go long are industries that widen access. So, industries in the financial services industry in South Africa. There are structural tailwinds. The education industry, the very niche areas within the construction industry, niche opportunities within the mining industry, especially given the macro environment that we are going into now. And basically, anything that is tech-enabled, where tech is an enabler to grow and scale further. On the short side, just for what is in front of us right now, I am still concerned about basic industrial manufacturing – locally oriented, basic industrial manufacturing. I am concerned about certain pockets of retail. The economy is struggling.

[00:25:13] Tilman: How big is the unemployment rate at the moment?

[00:25:15] Rudi van Niekerk: It’s high depending on how you measure it, but let’s say it’s 30%. So, it’s a very high unemployment rate. And we also have very high-income inequality. And then I also think, you know, we have had quite a glut – not a glut – but a very, very healthy, very strong supply of physical retail space. And I do think that physical retail space is also something that will be under pressure for some time.

Books to read on South Africa

[00:25:49] Tilman: If someone would ask you for books to read about business in South Africa, what would you recommend? For the viewers we will add some links to the books.

[00:26:00] Rudi van Niekerk: So, Tilman, let’s let say to the viewers that your questions weren’t circulated beforehand, but I have listened to some of your podcasts, and I kind of preempted this question. And one of the books that I would recommend is someone who has inspired me quite a lot is Jannie Mouton. He is the founder of PSG and his book “And they fired me” * is just phenomenal. The book is not very eloquent, but it is instructive in its raw honesty and its raw account of how he is a true entrepreneur, but a capital allocator at heart. Actually, what he is, is an activist capital allocator. He built up a business, started late in his life, you know, near his 50s. And built up a business that compounded at about 40% per annum, over a 25-year period. It’s just amazing. And it gives accounts into the various businesses that he invested in, et cetera.

I think if you go a bit further back, that’s more contemporary. If you go a bit further back it’s worthwhile reading up on people like Anton Rupert,* the founder of the Rembrandt group.

It is also worthwhile unfortunately he has lost most of his wealth now at the end of his professional career. Well, actually he has retired already, but towards the end of his life: Christo Wiese – Risk and Riches *.

So, this is where there’s this massive difference between what the average tells us, the average is not inspiring, but I can highlight a few individuals and success stories that are truly phenomenal of what people have achieved. But that book is a worthwhile read to get an authentic South African flavor of the opportunities and how one can go about the opportunities.

The best capital allocators in South Africa

[00:28:10] Tilman: You already mentioned Jannie Mouton. I hope I got the name right. He is one of the best capital allocators in South Africa. What are great capital allocators?

[00:28:27] Rudi van Niekerk: No, I think Brian Joffe who headed up Bidvest for many years is a great capital allocator. Currently, in the contemporary environment, we’ve had someone like Andries J van Heerden who is heading up Afrimat, an aggregates and construction materials company. Exceptional capital allocator.

We have seen some mining executive, that’s coming to the fore. He has made mistakes in the past, but I have to say recently, it seems like he’s learned from his mistakes. And the track record has been quite phenomenal over the past almost 10 years, eight years or so is, Neal Froneman of a Sibanye Stillwater.

Yeah. I prefer not to go into the fund management space. I think it’s, it’s, it’s treacherous to talk about that. But those are the operational and, I apologize, I probably left out quite a few, but those are the ones that come to mind now, and that has been instructive to me in the past and that have influenced me.

Scarcity of Capital

[00:29:49] Tilman: If you have some to add, you can send it to me, and I will add them to the transcript so people can see the addition. We’ll be talking about capital allocation. We also have to talk about capital in Europe and the US. We currently have enough of it. How scarce is capital in South Africa? Is it different if you aren’t here in Europe and the US, but you can say it from your African perspective: Wow scarce is capital?

Very. And I think that’s the reason for the opportunity. For capital to truly function, it needs a hurdle and the expected return on capital is quite high in South Africa due to the limited amount of capital.

[00:30:25] Rudi van Niekerk: Very. And I think that’s the reason for the opportunity. For capital to truly function, it needs a hurdle and the expected return on capital is quite high in South Africa due to the limited amount of capital. What we have seen until recently, and I have written about this expected return of capital to South Africa, but until recently until middle towards the end of last year, 2020, we’ve seen over about a period of three years, three and a half years of constant outflow of liquidity from the markets.

And you have witnessed that some companies posting excellent results and regardless the prices just go down, go from a 10 PE to 8 PE to a 6 PE. And that was on the back of indiscriminate redemptions and withdrawals. And people are buying funds and people just exiting the market in sentiment as a fickle thing. In the end, it is, true what Ben Graham said, about the market: “In the short run, it’s a voting machine in the long run, it’s a weighing machine.” But you know that fulcrum, those pivots, need to be oiled and you need liquidity to oil. Otherwise, it can be stuck in the voting status for a prolonged period of time. And we have seen that in the South African market, a constant withdrawal of liquidity for three, three and a half years with that, obviously it brings opportunities because you see this constant, de-rating to the point where capital is scarce.

And we have seen that in the South African market, a constant withdrawal of liquidity for three, three and a half years with that, obviously it brings opportunities because you see this constant, de-rating to the point where capital is scarce.

And now with capital flowing around in the world, with at last check, it’s probably 18 $ trillion. How much is the negative-yielding data around the world? Now, last time I checked was something like $17 or $18 trillion. You have that, and you have a South African total market that’s about $1 trillion and you have global exchanges that are at very high multiples and you have very low-interest rates.

And I get that. I mean, it’s a reality with what we are dealing with. And then you’re setting with South Africa, which still has positive real rates ranging from 3% to 6%, depending on how far you go out the curve. We have inflation that’s under control. And we have high expected returns on our equities. So, it is quite an anomaly that capital is so scarce, and I think there are understandable reasons for it. Because people think when people look at our South African fund, it’s difficult for them to evaluate the South African fund without taking a top-down approach and looking at South Africa. And if you look at South Africa, you look at the headlines and you look at the statistics. The optics are not good.

Because people think when people look at our South African fund, it’s difficult for them to evaluate the South African fund without taking a top-down approach and looking at South Africa. And if you look at South Africa, you look at the headlines and you look at the statistics. The optics are not good.

You know, Tilman, before COVID last year we hosted an investor trip. Four people globally. We’ve had fantastic people from places like Russia, Dubai, UK, the US, France, all over the world. And many of them have never been to South Africa or haven’t been to South Africa for a long time. And I specifically asked them to kind of formulate a view of South Africa before they arrived. And at the end of the trip, I asked them to relay what their new impression is of South Africa and without a single exception, they were all blown away. They were surprised by the infrastructure, the quality of the businesses, et cetera. So, it is a difficult sell, capital is very scarce in South Africa. That is why the market is so inefficient. So, I have this dichotomy, this contradiction. On the one end, the reason we can go off the beaten path and find opportunities that outperform the market with significant margins is that capital is scarce. On the other hand, you have all these opportunities, and you cannot really capitalize on them because you do know they have enough capital. So, it’s a state trope that we are walking.

How good is the capital allocation in South Africa?

[00:35:07] Tilman: There is less capital available in South Africa. Does this make the quality of the capital or locations of African companies better? I did get a question from Twitter from someone who asked. Why do South African companies see poor international expansion instead of high cash generation and buybacks or mergers? How would you answer this question?

[00:35:29] Rudi van Niekerk: Yeah. The thing is South Africans in general, and this is not just a personal opinion that I’m exposing now. There has been quite a wide range of market survey that has been done on this. South Africans in general, tend to be more pessimistic about the country than what the reality dictates.

[00:36:07] Tilman Versch: They could be Germans.

[00:36:13]Rudi van Niekerk: You have the same problem there?

[00:36:15] Tilman Versch: Somehow. In some parts of the country, too.

[00:36:18]Rudi van Niekerk: So, you would find, that when posed with an opportunity to externalize a portion of your capital by investing offshore – whether on a retail basis for an individual when he has an option to invest in a locally-focused vehicle or investing in an internationally focused vehicle or when companies at a company level as surplus capital to allocate, they tend to pay quite a high level of consideration to externalize some of that capital and to diversify from what they perceived “Risk of South Africa” is and based on the perceived negativity towards South Africa. And the reality is that, in the bulk of the cases, those who went offshore. The investments didn’t work out as well. And those who focused internally and focused on the opportunities that were here – regardless of the terrible news headlines and what the media says and the very real political and socio-economic challenges – were able to still post very decent, more than satisfactory returns. So, I do think to a large extent, it is a function of human psychology and being overly pessimistic at our own home level.

And those who focused internally and focused on the opportunities that were here – regardless of the terrible news headlines and what the media says and the very real political and socio-economic challenges – they were able to still post very decent, more than satisfactory returns.

Why companies delist?

[00:37:43] Tilman: Another question about going abroad: Why are some South African companies delisting from the local index and going to Europe or the US? You could think of Naspers and Prosus.

[00:37:59] Rudi van Niekerk: Well, that’s a very good question. And it’s actually related to your prior question about the scarcity of capital. We have many, especially in the smaller and the mid-cap space companies, we’ve seen roughly between 40 to 60 delistings over the past two years or so. And it is a function of smaller and mid-cap companies, which are completely overlooked. They do have compliance issues, or they do have to comply with all the regulations. So that’s an additional compliance burden. Their stocks aren’t rated, so they cannot use the market for what they want to use the market for. They cannot go to the market.

I mean, what is the market function? What was the initial idea? The initial idea was to go to the market, to open it to the public, to get the public to invest in your company, to enable you to grow in a direction when you don’t have access to that necessary capital. And then also for the market to create a liquid platform with that can then exchange and value can be realized. Now for many of those companies that function has very much, been suboptimal over the past few years. So why stay listed if you have these regulatory burdens and your stock is trading at 20% or 30%, what you deemed to be the intrinsic value? The good question is why more of them haven’t done share buybacks? I think two years ago, it would have been a more reasonable or more valid question.

Now they are kind of caught up. I see many more companies doing share buybacks at depressed prices or lower prices. We’ve also seen corporate action ramping up. We’ve seen a bit, a few type privates but it’s a function of the market not attributing fair value to the companies. That’s the main reason.

Now they are kind of caught up. I see many more companies doing share buybacks at depressed prices or lower prices. We’ve also seen corporate action ramping up.

South Africa’s progress

[00:39:49] Tilman: Maybe let’s talk about progress also in the longer-term view and go back to the 1990s and see where South Africa is today. What has changed since then? Also, in relation to maybe crime, I have this funny anecdote as I was in South African in 2013. You were so much warned that there might be crime, that I went to the ATM, took like 30 Euros in South African Rand and lost it on the way back to the hotel because I was so scared about crime. It was just like stupid.

But it’s this image. That, is it still true that you have to take care of yourself much more compared to other countries? Or is it getting better in South Africa?

It’s more a function of people being poor people, being hungry, people being opportunistic which one can understand. And it’s a failing. Crime is without excuse. It’s a failing of governance and of the economic system.

[00:40:50] Rudi van Niekerk: Two parts to that question. I think. Yes, it is so true that you have to be more vigilant in South Africa than you have to be in most other countries. Crime certainly is front of mind. And to a large extent,  it’s not that people are deliberately malicious. It’s more a function of people being poor people, being hungry, people being opportunistic which one can understand. And it’s a failing. Crime is without excuse. It’s a failing of governance and of the economic system.

That said if you take the Hans Rosling view of Factfullness *. And you take a snapshot at where South Africa was socioeconomically in 1990, for example, and where it is today. Then on many levels, we are so much better off stuff like housing, access to water, people living below the poverty line, access to education. All of that is way better. And we’ve seen a genuine improvement in the population in aggregate.

So, there’s a saying which I have internalized, which is that South Africa is never as good as it should be, but it’s definitely never as bad as it could be. And South Africa has amazing resilience and the ability to continue to grow through crisis from crisis to crisis. And again, it’s quite heterogeneous, there are areas where there are extreme problems, and then there are areas that are first world and very, progressive. So, it’s, an interesting melting pot of risk profiles, private initiatives, and cultures that you find here.

Inequality in South Africa

[00:43:08] Tilman: Yeah, it was quite interesting when I was in South Africa, you could drive by the highest income gated community. And after two kilometers, you will see some informal settlements. In Pretoria, you have these malls where you think you’re in the US, somewhere in California, also from the climate. And then a few kilometers in the inner city of Joburg, you have this high rise, that’s squatted by people from Northern Africa.

[00:43:45] Rudi van Niekerk: Yeah. And notwithstanding the problems, corruption, and political problems that they are. – Is this bothering in the background? Are you hearing it or not?

[00:43:55] Tilman: Okay. I hear it a bit, but it’s okay. I think.

[00:44:00] Rudi van Niekerk: Okay. Notwithstanding the corruption and the political challenges that we face South Africa on average is constantly busy, widening access and addressing these problems. So, we see a lot of construction in housing. We see a renewed drive into energy and into a better service delivery when it comes to that, we see infrastructure. Roads are being built. Yes. I can take you to roads full of potholes, but I can equally take you to two new roads that are being built and its world-class roads, it’s not just a short-term solution. So, growth is happening. It’s just South Africa. The data points are so diverse, whatever theory you have, if you are a journalist you will find confirming evidence for whatever theory you have about South Africa.

And that is why I say that I can understand why people are skeptical about investing in a fund that invests in South Africa. If you do not understand the local nuances, sure there are areas of challenges, but there are areas of massive opportunities, which are completely overlooked. And this is just how granular it is.

And that is why I say that I can understand why people are skeptical about investing in a fund that invests in South Africa. If you do not understand the local nuances, sure there are areas of challenges, but there are areas of massive opportunities, which are completely overlooked. And this is just how granular it is.

Why his seed investors seeded him

[00:45:25] Tilman: You also have a mission of widening access for international intelligence or maybe “not so stupid capital to South Africa”. And you have two seeds investors. Scott Miller of Green Heaven Road and Charles Royce, who was an expert in the small micro-cap space.  Have you gotten the impression from them: What made them finally invest in you and then your fund? What was the quality they saw there? I should ask them this themselves. But maybe I can try to go get an answer.

[00:46:00] Rudi van Niekerk: Yeah. You should ask them that. Maybe I can relay the story, the way I recall it, how this all happened. There was an exchange of letters between Scott and me, which led to some FaceTime – a call like this. And Chuck is a mentor and a co-investor seed investor of Scott as well. So, he was in the meeting and it wasn’t an amazing conversation truly, which was followed up by another conversation. Now, apparently, the story goes that after that second conversation Scott and Chuck turned to each other and they said:

“We like the environment: The fact that it’s inefficient, so you can make off the beaten path investments. We like where it is in the cycle. It’s completely depressed. It’s icky, no one wants to invest, and they are very good contrarian investors if the facts merit it. And we see an opportunity here, but we do not know how to invest in it. There’s no formal structure that actually makes it ideal to invest in it.”

“We like the environment: The fact that it’s inefficient, so you can make off the beaten path investments. We like where it is in the cycle. It’s completely depressed. It’s icky, no one wants to invest, and they are very good contrarian investors if the facts merit it. And we see an opportunity here, but we do not know how to invest in it. There’s no formal structure that actually makes it ideal to invest in it.”

So apparently, they turn to each other and they said, why don’t we make it happen? And why don’t we propose that we set this up? And we will use our local contacts and we will be the seed investors and, Tilman, I believe they are happy with what has happened, given the context with which we have operated in so far.

And from my side, I cannot be grateful enough and I cannot praise them enough. I’ve never had partners that have been so supportive and have played such a level of mentorship and just support the fund. Often, it can turn out wrong and it can bring negative energy, or it can distract you from what it is that you need to do. But I really want to take my hat off for them. They created an environment and facilitated it in such a way that I can focus singularly in on, what it is, where I want to focus. So, it’s just been an absolutely great journey.

Why he underperformed in 2017

[00:48:42] Tilman: You started your fund in 2019. In your materials, you also show private accounts. In them, your compounded capital at 17% per annum. The index made 6% per annum. But in 2017, you had a year where you lost against the index. I think you lost 10% by the index. What happened there? Maybe you can shine some light on that.

But since we started, we are now in our ninth year we have outperformed eight out of the nine years.

[00:49:15] Rudi van Niekerk: Yeah. Just pure volatility. If you don’t index hug, it’s going to happen from time to time. What happened in that particular year, you know, since, since we’ve been going, and I’m not sure if I’m allowed to say this, if I’m not, let’s just edit it out. But since we started, we are now in our ninth year we have outperformed eight out of the nine years. And that particular year was the one out of the nine years when we’ve underperformed and we underperformed handsomely in that year and it was due to position sizing. I had quite a high conviction, a high position in a certain company. And the company was not overly expensive. We entered the company at about 7x PE trailing earnings. The company was fundamentally a good company, but it was at the time where you saw this indiscriminate withdrawal from small and mid-caps.

I think that this is in the nature of what I do, is to have very high conviction portfolios. Try and know our companies very well. So we have high conviction, a highly concentrated portfolio, and the ride is going to be lumpy. That said over multi-year periods, the returns have played out satisfactorily.

And this was a company that was highly illiquid. And we’ve seen the withdrawals. And when you have such a high weighting and you see the company half, and it goes down from a 7x PE to a 2x PE that’s going to hurt your performance. I think that this is in the nature of what I do, is to have very high conviction portfolios. Try and know our companies very well. So we have high conviction, a highly concentrated portfolio, and the ride is going to be lumpy. That said over multi-year periods, the returns have played out satisfactorily. So, it’s going to happen. We’re going to have massive dispersions from the benchmark. And certainly, we’re going to have more, more down years. It’s going to happen again. Absolutely.

Learning from mistakes

[00:51:21] Tilman: In the seven or eight years, you’re investing in a professional or a semi-professional setup. What were the mistakes that you learned most from?

[00:51:32] Rudi van Niekerk: So, this is ironic. The mistake that was most instructive is a company called Steinhoff, which you might know. But we didn’t lose money on it. We actually made more than a hundred percent. We made double our money on it yet that was being lucky. You know, we invested in Steinhoff because we thought the price was attractive at that stage. And again, bear in mind. Now I’m talking about 2013, 2014. So, I’ve also evolved as an investor. I wouldn’t necessarily do what I did then today. And. I really liked the diversity of the company, the apparent structural tailwinds. The one thing is it was a big company. There were a lot of moving parts. It was extremely difficult to do your due diligence on that company. So as there was a lot to like, but it was tough to do due diligence.

And then Christo Wiese, who is one of the gents I mentioned earlier, and I had the highest admiration for, and had this almost impeccable track record of making extremely intelligent investing decisions in retail became a massive shareholder in Steinhoff and me, with the conscious or subconscious attributed some of the due diligence, which I couldn’t perform to the fact that he was an investor. So, he was a proxy for that due diligence. And there was a bit of a halo effect there and the price did run-up. And I did exit because I picked up a few things, which I wasn’t really comfortable with and we’ve made our money.

I didn’t see what was coming, at that stage anyway. If I really did the deep diligence, we would never have invested in the company in the first place. But I did because I saw this halo effect. I thought that the mere fact that a very reputable investor is investing in this company means that it should be okay.

But if I’m in fair honesty, I didn’t see what was coming, at that stage anyway. If I really did the deep diligence, we would never have invested in the company in the first place. But I did because I saw this halo effect. I thought that the mere fact that a very reputable investor is investing in this company means that it should be okay. And for me, that was the biggest mistake, even though we didn’t lose money on it. It was the biggest mistake. And it was the most instructive lesson that I learned. Doesn’t matter how reputable the investor is, do your own work. Do the deep dive. Everyone can make mistakes.

[00:54:11] Tilman: Yeah. With the concentrated portfolio, you have to do your own work for every position.

[00:54:20] Rudi van Niekerk: Exactly. Absolutely. And I mean that was instructive. And also position sizing. If you do have a concentrated position of 10% to whatever, I mean Steinhoff when goes close to zero. It is not worthwhile having those kinds of drawdowns for taking that type of risk. So, it was very instructive.

Position sizing

[00:54:45] Tilman: How do you go about position sizing? If you want to keep it at eight to twelve positions, that means 10% an average per position. How do you construct your portfolio based on the facts you have? What’s your framework for this?

[00:55:07] Rudi van Niekerk: Sure. So, we typically would be invested in seven to fifteen positions. We are currently invested in eight positions. And what I do is, it’s not a very elegant Excel sheet of very formalized approach that I follow. But I would try and explain it as follows: There’s a huge opportunity set up there. So, what we do is our universe is not that big, that we cannot keep tabs on most of the moving parts of most of the companies that are in the opportunity set. And some of them, I just deem un-investible and I just don’t consider them in my investible universe. So, I eliminate them. And that would include, these that are going onto the two hard piles. And then for the risks that you deem are worthy of evaluating for the investible universe.

You constantly try to keep tabs and that interaction between where the fundamentals are going versus what the price is doing, those are the two main determinants on what you can expect for future returns.

You constantly try to keep tabs and that interaction between where the fundamentals are going versus what the price is doing, those are the two main determinants on what you can expect for future returns. And I then construct what I call the opportunity cost curve. So, if there is a business which I have a high degree of conviction in, that is likely to compound for 30%, that would be quite high up on the opportunity cost curve. And if there is a business that I think is a high degree to compound the 5%, that would be lower in the, of the opportunity cost curve.

And I see that as the major dictating factor in how we construct our portfolio because I want the best of the best up at that portfolio curve. And then I will also wait according to that. So, regarding weighting, the maximum position size that we can take is 20% currently, but if it gets there and it runs, we wouldn’t necessarily trim unless it’s warranted to trim it so we can let the position run.

[00:57:30] Tilman: You don’t have to trim if it’s getting to 30%?

[00:57:35] Rudi van Niekerk: So, what we say is, we will not buy more beyond 20%, is what we say. So currently in our portfolio, we have a position as small as 5%, and we have a position as large as 25%, a company that has grown into that. The allocation is according to an expected outcome. And then I weigh a level of probability to that how much conviction do I have in that expected outcome? And if those two come together, the more those two align, the higher it goes and the higher the waiting goes and the less they align or the more uncertain, the smaller, the position sizing or not a position sizing at all.

And that then also informs how we might reposition or restructure the portfolio. If suddenly a strong player emerges that warrants a place under the top three or top four then we will rebalance the portfolio to give that. We constantly want to select from my definition of the opportunity cost curve. We constantly want to select the best of the best from that. And we want to position size it accordingly within the seven to 15 position portfolio.

[00:59:00] Tilman: That’s interesting. And it’s very hard to get the right formula to make position sizing.

[00:59:06] Rudi van Niekerk: No, you couldn’t. I’ve read Kelly formula and I’ve read so many papers about position sizing. And then in the end you put in the parameters and you realize that it’s all subject to judgment in any case. So now if the Kelly criteria kicks out, but you should put 55% of your portfolio into it. You’re not going to do it. And it’s because of the inputs, the variables that you put into the Kelly criteria to begin with. Might’ve been wrong or overly optimistic, et cetera. So, it is a bit of a balancing act. There is judgment involved and, in their judgment, you have to be very cognizant of your own potential blind spots and biases, and the risks that might be involved and not being overconfident.

There is judgment involved and, in their judgment, you have to be very cognizant of your own potential blind spots and biases, and the risks that might be involved and not being overconfident.

The mining and education sector

[01:00:04] Tilman: Let’s start talking about sectors: You already mentioned mining and education as partly interesting sectors in South Africa, maybe we can try to get a general spotlight on these two sectors. What mining companies exist in South Africa and what mining opportunities are there?

[01:00:25] Rudi van Niekerk: Let me give the disclaimer that I’m not a mining expert. And we have some impressive mining experts in South Africa. That said, I think we are in for a very interesting cyclical trend and era for mining in South Africa that might just have many positive knock-on effects. Currently, what you are seeing is iron ore is doing well. We are rich in iron ore, especially in the PGM platinum group metals. South Africa remains one of the largest contributors of platinum group metals in the world. The top three Impala, Anglo American, and Sibanye Stillwater completely dominate the market. Very good operators. You have this and you have the structural macro tail wins, going green a lot of this is used in the auto batteries.

So, and there is some structural deficiency, supply-demand efficiencies in the short to medium term. So, I think that that can run up quite a lot. And then unfortunately the environment has not been as conducive to accelerate what is happening in the junior mining industry and the mine exploration sectors. But there have been very impressive fines by some of these junior companies. Orion Minerals being one of them finding fantastic deposits of base metals and battery metals which now, is at the point where they have to start commissioning into, to extract these reserves.

They are still a big sector for employment in South Africa. So, they create jobs, they provide jobs. The other thing is where commodity prices are now, they contribute largely to a trade surplus for South Africa. Actually, you know, boosting the South African financial situation. And, who knows the future? I mean, I cannot predict the future, but it seems like the central banks around the world are continuing to print money. And it’s very likely if they continue with this unprecedented experiment that you will see surprise inflation, you will see metal inflation. And this is a sector that is imminently well-positioned for that perfect storm of excessive money printing from so many different perspectives. We are invested in one that we invested in towards the second half of last year. It is doing exceptionally well for us. And it’s a sector, not without its challenges, but it’s just the quality of how they operate in the quality of the resources are quite impressive.

Ideally, we would have loved to see the government giving access to everyone, to good quality schooling and good quality colleges and universities. But unfortunately, the delivery of government has been less than ideal. I’m putting that euphemistically and this is where the private sector can step into the fore and actually give a better offering.

Education, we are invested in a company called Stadio and also in a private school called Curro through PSG. And what we have is this is a prime example where the failings of government. Ideally, we would have loved to see the government giving access to everyone, to good quality schooling and good quality colleges and universities. But unfortunately, the delivery of government has been less than ideal. I’m putting that euphemistically and this is where the private sector can step into the fore and actually give a better offering. And below and behold at a cheaper price than the government can do it and still make a very good margin.

So, we have huge pent-up demand, a very big supply-demand mismatch, and that is growing every year. And in something like Stadio, we are seeing that they are coming with a new approach to the market: Multi-faculty, multimode and they have multiple programs. They are inclined towards the world of work. So, they actually go towards the workplace and ask them: When should they deliver the programs? What is it that you want to see in the graduates when they come out if you want to employ them? So big opportunities in that. And an additional one would be homes and housing. There are opportunities for widening excess as well and structural tailwinds in the country.

South Africa’s demographics

[01:05:39] Tilman: How are the demographics in South Africa compared to Europe or the US? The population is still growing strongly, or?

[01:05:50] Rudi van Niekerk: The population we have is 58 million people in South Africa. Population growth is not that strong, to be honest, and you have huge income inequality. So, the bulk, you have – if you use the wider definition of unemployment -, you have about 40% of people who are unemployed.

You have a lot of youth, which is good for the future. And then you have the middle income and the upper-middle-income class which is growing actually. And it’s creating a lot of opportunities within the economy and for the private sector.

Car tracking companies

[01:06:35] Tilman: One topic that comes for some investors to mind when thinking about phone companies is car tracking companies. You have an investment in Cartrack. There’s also Mixed Telematics. What is interesting about these companies? Why are they so strong in South Africa?

[01:06:54] Rudi van Niekerk: Well, you know, the founder of car track Zak Calisto apparently had two cars stolen. And his background is: He was working in the engineering department in the standard bank and he was working on, by that time was when cell phones were just introduced and GSM technology global system for mobile communications. And you realize that you can use cell phone towers, to track objects. So, for him having a statistical and an engineering inclination he went out and they started purely with stolen vehicle recovery. And this is again, one of those unique situations where South Africa probably developed a world-class product by necessity because vehicle theft is such a high occurrence, which has then grown organically and evolved into this amazing smart mobility company that is growing globally and organically currently. And as 1.3 million subscribers they’re processing 40 billion data points on a monthly basis, 98% recurring revenue. Just an amazing business model with such a compelling value proposition for customers.

The return on investment, the payback is quick, one, two years payback on return on investment. So there again when we entered that company we bought.

The return on investment, the payback is quick, one, two years payback on return on investment. So there again when we entered that company we bought. It was listed in 2014. We looked at that company and never really got comfortable with the price and it had a run-up. And then towards, when was it? 2018, 2019 we had some depression in the price, and we bought into it at a price we deemed to be attractive at that stage, but it’s a truly phenomenal company that has done very well for us. Since it listed it’s compounded at more than 35%.

So that’s since 2014, I actually believe it’s going to accelerate. Extremely good managers, Zak Calisto and his partner being 80% insider owners and operators based in industry returns on capital constantly posting returns on equity in excess of 40% and debt-free. And what I like about them is they operate in an industry where a few winners will take most and they already have a leading market share in this industry, but the industry is so large that the market share is still relatively small to the total market. And this is exactly the type of companies that we like to invest in where it’s technology-enabled. Where they can scale where they have a very large market, and they can use that technology to grow into that market.

This is also a company where it epitomizes that concept of a scale economy shared where the more data you have, the better your solution, the more customers you get, the more customers you get the more profitable you get et cetera. And you can get some of that benefit through to the customers and the flywheel just takes over.

And it grows fast. And this is a company that emanated from South Africa. About six years ago, only 6% of their revenue came from non- South African jurisdictions. Now it’s about 30%. And within the next few years it’s going to be 50%.

And it grows fast. And this is a company that emanated from South Africa. About six years ago, only 6% of their revenue came from non- South African jurisdictions. Now it’s about 30%. And within the next few years, it’s going to be 50%. So, it’s truly a global company operating across five continents and 23 countries. That’s been trading at a South African discount. What is interesting now I can talk about it because it is in the public domain is that they are busy with corporate action and they will be moving their primary listing to the NASDAQ again, to your very earlier question. Why do they do this? Because the shares were underappreciated. And now I guess, you know NASDAQ is a proper home for based in industry smart mobility, SaaS company. I think the share price will be appreciated there.

The evolution of Cartrack

[01:12:00] Tilman: Help me understand, what have they done technology-wise to come from a car tracking company to this SaaS mobility company?

[01:12:12] Rudi van Niekerk: Yeah. So, it’s a gradual process. It’s a very gradual process. This is a beautiful concept that I heard from Josh Wolf once where he said:

 ”If you ask anyone how they got to where they are now, then in retrospect, they will give you a beautiful linear account of exactly all the events that happened they brought them to where they are.”

But a priori, when you are there in the moment, you just don’t know all you do is you are faced with randomness and optionality and you take whatever you choose and what is dictated. And to some extent, you know, that is the benefit of having such an agile and intelligent and fine phonetical management team. So, if you have stolen vehicle recovery, then you can track a vehicle and what’s the next natural thing to do is instead of just tracking vehicles, when they’re stolen, maybe we can use it as a fleet solution. So, if you have several different vehicles in your fleet and you just want to know where they are at any given point in time let’s track them and let’s give you a real-time interface that shows you how they attract. And now suddenly that opens the doors to so many other things that you can do because now we can add some hardware to that vehicles and we can say, well, let’s look at the fuel efficiency.

Let’s look at the maintenance and if you have cold storage in the back, let’s put in a few monitors and do real-time tracking of the temperatures in the cold storage in the trailers that you have, let’s look at the driving behavior, and then suddenly you can do maintenance schedules. You can add on cost accounting software. You can do optimal routine accident detection.

They’re constantly just layering and what they did, which truly differentiates them in the sense that they did this faster and better than anyone else, is having one cloud-based “one fits all” solution for everyone.

It just becomes endless and it becomes more and more sophisticated as they go constantly. They’re constantly just layering and what they did, which truly differentiates them in the sense that they did this faster and better than anyone else, is having one cloud-based “one fits all” solution for everyone. Doesn’t matter how small or how big you are, and you can simply go through your subscription, you can select how much of the solution you want or how little of the solution you want. But they essentially have one offering with elements where you can opt-in and opt-out and have the pricing.

And it’s a constant evolution that is actually happening. So, they have an insurance department. So, they are now an insurance aggregator because they have all of these data points and they connect them. And now they have the opportunity going forward as a used vehicles market platform.

And it’s a constant evolution that is actually happening. So, they have an insurance department. So, they are now an insurance aggregator because they have all of these data points and they connect them. And now they have the opportunity going forward as a used vehicles market platform. The traditional old methods of buying a used vehicle: If you or I want to go out and buy a used vehicle five years ago is, we look in the media, we go on eBay or whatever the online site is, and we look for it: Or we go to a secondhand trader and we look at the car and we decide whether we like it or not. We can do an inspection. But the reality is we have no idea how that car has been driven. And whether we’ve been lied about whether that car has really been in an accident or not. If you buy a vehicle, that’s come through the car track ecosystem, it’s been tracked the way it has been driven, the maintenance that has been done or not, whether it’s been an actual view where it’s been driven, every single granular detail of that is in a lock. So, it brings so much transparency in dealing with costs. And it’s just another example of their expansion opportunities.

Capitec

[01:16:14] Tilman: That sounds quite interesting. And there are many opportunities and access to many other markets. Another topic that also came through Twitter is access to financial services. That’s an interesting topic if you’re thinking about a growing middle class and country with not that already grown out institutions. Some people asked about Bitcoin as an access tool for financial services in South Africa. You have Capitec in your portfolio. Why is this bank interesting for this?

[01:16:53] Rudi van Niekerk: Definitely. So, spot on the concept of widening access. I think that is one of the main thrusts of Capitec. The banking industry in South Africa used to be dominated by the so-called big four. And Capitec realized that there is an opportunity to come in as a light entrant and disrupt the way things have been done and deliver a better service, a more customized service, widening access to more people who are unbanked or underbanked, or maybe are banked, but not truly served by the competitors and doing that at a very affordable price. And it’s phenomenal if you see the stellar growth of Capitec, it is the fastest growing bank in South Africa.

And Capitec realized that there is an opportunity to come in as a light entrant and disrupt the way things have been done and deliver better service, a more customized service, widening access to more people who are unbanked or underbanked, or maybe are banked, but not truly served by the competitors and doing that at a very affordable price.

They have the highest customer satisfaction score in South Africa. They have the best digital banking app in South Africa. They have this extremely energetic focus on technology, on data analytics, employing the best machine learning and AI in utilizing the data when it comes to customizing products so that the customer gets a very quick or instantaneous, customized solution to deal with. And it’s still coming from a very low base. If we quickly look at the banking environment in South Africa, there are about 30 million banked people in South Africa and the total bankable population is about 38 million people.

So, there are still 8 million people who are unbanked or underbanked. Now Capitec has about 15 million client accounts. So, by client accounts, it’s already the biggest bank in South Africa. But many of those accounts are so for accounts or secondary accounts or third accounts, people just checking it out. If you measure it by primary banking accounts, Capitec has about 4 million out of a total banking population currently of 30 million. So, it’s relatively low. But that is growing at an exceptional pace and it’s growing because of the service delivery and because of the price point and because of the simplicity.

To give you an idea, I have my wallet here. I have the Capitec. I’m now a Capitec private or primary bank client. And I have been in the branches recently dealing with them. It’s absolutely amazing. Everything is biometric. I didn’t have to use a pen or paper to sign it all. It’s completely technology-driven using biometric eye scanning, biometric fingerprinting, and efficient quick, simple service. And to give you an idea, I don’t know, what do you pay all in, for your bank account? Do you have an idea what your monthly bank fees are?

I’m now a Capitec private or primary bank client. And I have been in the branches recently dealing with them. It’s absolutely amazing. Everything is biometric. I didn’t have to use a pen or paper to sign it all. It’s completely technology-driven using biometric eye scanning, biometric fingerprinting, and efficient quick, simple service.

[01:20:30] Tilman: Zero. Because I’m very price sensitive.

[01:20:34] Rudi van Niekerk: Yeah. Truly zero?

[01:20:40] Tilman: Depends on the credit card. I have to pay if I want to get cash from a foreign ATM.

[01:20:45] Rudi van Niekerk: No, but on your saving or your checking accounts. And so, you don’t pay any management fees or anything like that?

[01:20:53] Tilman: Five EUros with one account but that’s it. Yeah, it’s the German banking landscape that is very competitive in this area.

[01:21:02] Rudi van Niekerk: Which is great and completely different from the US environment. So, my banking fees are five rands a month. Which is like, 40, 50 cents.

[01:21:05] Tilman Versch: Yeah. 35, 40 € cents a month.

[01:21:08] Rudi van Niekerk: So, it’s very cheap. And again, to the question of widening excess, Capitec what they are doing now is, playing the role as FinTech player and as a facilitator. So, onto their platform with the reach that they have, they have partnered and onboarded people like Easy Equities, which gives people the ability to become involved in the market with way lower levels of introductory capital, way lower trading fees. So that gives them access to that.

They have partnered with people in the home loan space, they are expanding into that. So, it’s just, the number of additional services that they can add and people that they can partner with to do this, makes for Capitec to have an extremely long runway. Currently, they only serve about 6% or they occupy 6% of the total retail market in South Africa. So, there’s a lot to go. And maybe just that one anecdote about Capitec relative to the other banks. Because I do think there’s this fallacy where people tend to lump Capitec within the other banks and then they purely do a pure comparison, and they say but Capitec is ridiculously expensive. Why should we buy it? And the reason is Capitec is a completely different animal.

Because I do think there’s this fallacy where people tend to lump Capitec within the other banks and then they purely do a pure comparison, and they say but Capitec is ridiculously expensive. Why should we buy it? And the reason is Capitec is a completely different animal.

You’re not comparing apples with apples and Capitec’s growth comes from a much lower base. If you take someone like FirstRand, First National Bank, the CEO at the AGM said:

 “For us to grow at 20% – Capitec is growing at 20%+ per year the earnings – for us to grow at 20% First National Bank, we would have to add the whole of Capitec earnings every single year.”

And that gives you an idea of how low versus how high the base is that they are growing from.

[01:23:34] Tilman: That’s a quite interesting scenario.

[01:23:35] Rudi van Niekerk: Yeah.

Closing remarks

[01:23:36] Tilman: I think we’re coming to the end of our interview. And I want to give a chance to add something here. A point we haven’t touched, maybe some fun facts on penguins and Cape Town or whatever you want to add, if you have something to add.

[01:23:55] Rudi van Niekerk: So, I think as a final thought, we have been forged by some tough periods now in the South Africa market over the past three years. And to no extent imaginable as a market caught up to what is happening in many of the developed and some of the other emerging markets currently. Now I am not a macro investor and I am not particularly good at predicting the future. I am extremely interested in creating the future by acting appropriately at the moment.

And I do think that there is quite a compelling case. To be made that some of the surplus liquidity will find its way into the South Africa market. And I do think that now might be a very interesting time that we are entering for people who are looking for off-the-beaten-path opportunities. I think we are in for interesting times.

And I do think that there is quite a compelling case. To be made that some of the surplus liquidity will find its way into the South Africa market. And I do think that now might be a very interesting time that we are entering for people who are looking for off-the-beaten-path opportunities. I think we are in for interesting times.

[01:25:02] Tilman: That’s quite a good word to close our conversation. Thank you very much for taking the time for the interview and giving great insights into South Africa. We might also plan a trip to visit South Africa at some point if it’s safe again. So, I’m happy to see you at some point. I just want to say thank you very much for your time and thank you so much to the audience for listening to this interview.

[01:25:33] Rudi van Niekerk: Thank you Tilman. Really enjoyed it.

With the help of Erick Mokaya

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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