As a fund manager, you always learn more by listening than by speaking. That is a sobering — and humbling — thought, though nevertheless a very important one; thus it is useful to listen closely to what other people are saying. It is even more important, however, to look at what they are doing, and particularly at where they are investing. In our view at Investec Asset Management, where people put their money is a much stronger expression of their conviction than whatever opinion they may be expressing at a particular time. In short, we thought it would be worthwhile dwelling on what the smartest people in the room are doing now — and why.
One of the biggest M&A transactions of all time is the acquisition of SABMiller by Anheuser-Busch InBev, the terms of which were finalized last week. The controlling shareholders of the latter have grown the business from regional brewing operations to the world’s largest brewing company and are now engaged in consolidating the U.S. food industry with stalwart investor Warren Buffett. The deal, which is said to be worth more than $105 billion, represents a giant further commitment to emerging markets — where SABMiller’s operations are largely based — by the shrewdest businesspeople in the global brewing industry.
Another conversation we’ve been listening keenly to is taking place in China. So far this year, we have seen more than $30 billion of proposed going-private transactions from management and private equity in China, principally in the information technology, media and health care sectors. One way of looking at such transactions is as a giant arbitrage play with other financial markets to exploit price differences. Many of the entrepreneurs taking their companies private are looking at much higher valuations in private markets compared with public ones or on China’s National Equities Exchange and Quotations. The latter is a lesser-known market for privately owned small and medium-size enterprises in China, where regulation is light and valuations high. Delisting also allows some of these companies to carry out much needed restructuring away from the public eye and to avoid the tyranny of quarterly reporting.
Finally, the area of greatest stress in our universe is perhaps at the meeting point of the emerging markets and the broader resources sector. And, yes, even there, we can see some smart people buying. Mick Davis, the well-regarded former chief executive officer of mining company Xstrata, is reported to be looking to buy Australian coal assets — perhaps the ultimate contrarian play — from Rio Tinto through his private equity–funded vehicle, X2 Resources. In South Africa, Sibanye Gold is taking advantage of distress in the platinum industry to buy assets from Anglo American and combine them with contiguous assets that it is acquiring through the planned takeover of Aquarius Platinum. In Latin America, copper producer Grupo México quietly continues to increase its stake in its major copper-mining subsidiary, Southern Copper Corp., of which it now owns 87.5 percent. The family owners of Grupo México have seen many cycles and understand the opportunities they can potentially offer to those who know their assets well.
Together, these three situations exemplify legendary value investor Benjamin Graham’s beautiful allegory of Mr. Market: a manic-depressive who every day offers assets to the buyer at valuations which range over the cycle from very pessimistic to wildly optimistic. At the moment, Mr. Market is offering assets at pessimistic valuations. Some very smart buyers are beginning to believe that such valuations are discounted, though, and present long-term opportunities to those with the luxury of a long investment horizon, a deep knowledge of the asset and its cash flows and an ability to restructure it going forward. Their conviction is indicated by the roughly $150 billion they are prepared to invest in backing their ideas. This should give us pause before we merely accept the current doom-laden emerging-markets zeitgeist.
Archie Hart is a portfolio manager and part of the 4Factor Equities investment team at Investec Asset Management and a contributor to its Investment Institute’s research.
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