First in and first out - China as the vanguard for COVID-19 recovery
China’s path to normalisation offers guidance for other countries’ exit from the lockdown. Where are the opportunities for investors?
9 Apr 2020
Moderator – Lindsay Williams
Hendrik du Toit
Disclaimer: This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is not an invitation to make an investment and should not be construed as advice. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Ninety One. The value of investments can fall as well as rise and losses may be made. In South Africa, Ninety One is an authorised financial services provider.
Moderator: With me today is Hendrik du Toit, who is the CEO of the recently listed Ninety One. Hendrik, your tag-line is “investing for a world of change” or one of your tag-lines and it couldn’t be more appropriate in today’s environment and also in a future environment. You entered your 30th year as a business on April 1, so, firstly, happy 30th birthday, and you have experienced therefore a fair amount of turbulence and change but this is probably one that rivals most.
Hendrik du Toit: Good morning, Lindsay. That is absolutely the case and change is what we are actually about as active investment managers. We have to make sense of an ever-changing world for clients and navigate that and, if you don’t enjoy it and if you don’t relish it, you could be extremely depressed and, at this point in time, quite clearly we all have lots of data but limited insight on the future.
So what we must do over the coming weeks and months is understand or try to understand how the corona impact on the world economy and markets will unfold and affect real business and, in a sense, we are in terra incognita. We are dealing with the severe economic consequences from an all-out fight against a dangerous pandemic and that is new for many of us but extremely challenging and interesting.
Moderator: It is very challenging and interesting. I spoke to somebody yesterday and I asked him his view on what is going to happen in the future, a very well-seasoned commentator and he says: “Lindsay, I would be lying if I said I knew; nobody knows”, but what you do know, Hendrik, is that there is something different this time and you also have to adapt to this. How has your business adapted to these different circumstances?
Hendrik du Toit: I think the difference is really the fact that we are facing a health disaster, a war against it and a consequent severe economic slowdown, which obviously could be addressed by cooperation between all sectors of society but needs to be addressed if markets were to respond positively. In many industries business has ground to a complete halt. This leads to liquidity shortages and eventually solvency shortages and, when the wheels of commerce grind to a halt, the economy needs life support.
Now, in 2008, it was the banks which needed support and which, in a sense, caused the crisis. This is different. This is governments shutting down industry and I think we all have a part to play across the investment structure – banks, asset managers and, of course, governments – to make sure we give business the lifelines to get back to the production levels of before and the timing of that is going to really determine how markets will behave.
Moderator: I have heard a couple of your interviews with other commentators and read a couple of articles attributed to interviews that you have conducted and you said in one of the previous interviews that the response to Covid-19 should be war-like and it has been a war. Covid-19 has waged war on our health, everyone’s health, our economy and also our communities’ livelihoods. What is the most important role that Ninety One, as an investment manager, has to play in this fight? What can you do because, to my mind, you do have a responsibility?
Hendrik du Toit: Absolutely. First and foremost, it is about being committed to the welfare of the clients, the clients’ assets. Remember we have been entrusted by them with vast amounts of capital. So we need to remain calm and focused and navigate these markets and position portfolios in the very best way to benefit from whatever recovery may come and also avoid pitfalls and we at Ninety One are absolutely committed to delivering that and working calmly towards that.
Secondly, we will not be able to achieve that if we didn’t take care of our employees and their families in times like these. This is a human capital business. Our people are our business and, in spite of revenue pressures from weak markets, we have been very clear that we have no intention to announce job cuts in these times when our clients need all hands on deck and when we need to be calm and collected rather than internally focused.
But more than that, I think asset managers need to think about their wider stakeholder base, including shareholders, when they apply their skills in a situation like that. We need to allocate rationally and sensibly for the long term. You know we can’t all run for the gate at the same time. We can’t all buy the one small opportunity that looks great at the same time.
What we are about is making capital markets work properly and price risk properly. So I think we should see ourselves not just as managers trying to beat a benchmark but we also act as owners on behalf of our clients and, therefore, owners and credit providers to enterprises in the economy and right now we need to pick the businesses which will survive this, support them and we need to withdraw capital from businesses which have no hope to survive a prolonged downturn.
I think our firm also sits on, or firms like ours sit on, substantial intellectual capital and we therefore have an obligation to participate in the debate about the way out, engage authorities. We, obviously, work very hard through industry bodies, where we have people who play active roles, and that advocacy is not about our business and our short-term interest but advocacy should be about the integrity of the markets and the required response from society as a whole to this challenge because it is a challenge.
Moderator: It is a challenge. You have sort of answered elements of my next question and it starts with governments. Governments also have a responsibility, you do, everybody does but governments in particular and, where there is fiscal room to do so, they are stepping up and I must say that the South African government has covered itself in a good deal of glory over the last few weeks. So well-done to them but there must be other things that can be done as well and this is where Ninety One comes in.
How are you attempting to assist businesses and communities during this time of stress outside of your normal fiduciary role as custodians of your clients’ money? In many of the countries you have a presence, it presents not only a health crisis but also a humanitarian crisis. Do you feel responsible for the latter, the humanitarian crisis and the health crisis, and you go above and beyond your fiduciary duties?
Hendrik du Toit: Absolutely because we are, in the final analysis, a business supported by a broad community in many countries. So, firstly, we need to look at how we behave as a business and, if we want to help society, we have got to make sure that our employees are adequately secured and protected, also from a health point of view.
Secondly, we have to direct some corporate spend to the various efforts and, in particular, in the countries where governments don’t have the fiscal room to address the issue in full, we need to help and I think, therefore, Ninety One has also committed R50 million to the various solidarity funds in the Southern African region.
I think that is important but, more important, all around the world we must take lead from our staff. Now we have asked our staff to contribute generously where they can and we have provided a matching scheme to help and that means things like the local hospital when they run out of some equipment or when a particular group of nurses don’t have transport, we should at least, in our personal capacity and leveraged by corporate money, try to help in this challenge because we are all at war against the coronavirus and against the economic impoverishment that government health policy reaction is causing and has caused.
I think, importantly, in markets where government support is not coming through enough, we should also look at special measures alongside asset owners and alongside other players in the financial industry. I think in some markets the banks have really been well-organised, supported by the central bank, to provide liquidity. I think, as long-term owners of risk, we need to really think about that solvency challenge and I don’t have specific detail but we are exploring options, along with industry bodies, of what we could do to make sure that productive business doesn’t fall victim to what is sensible health policy.
Moderator: Well, indeed, and on that last initiative note, how would that initiative – you say you haven’t got details at the moment but you mentioned a sum of R50 million earlier on in your answer to my last question but how will the last initiative that you spoke of work in practice, in practical terms?
Hendrik du Toit: Now the corporate contributions are essentially – in reality, that is small change compared to the capital we as an industry have a mandate to guide. We need to look at that capital pool and say how can we help perfectly good businesses that are in our portfolios today which are suffering a severe loss of revenue, a temporary severe loss of revenue, because of the policy response to the health challenges that societies face; for example, businesses that have been shut down or are in near shut down positions simply because they will not have revenue for the next few months and I am thinking here about the hospitality industry, I am thinking about those industries involved in tourism, in transport, etc.
Now it is important for economies right around the world that those companies do not just go to the wall and the productive capacity lost, particularly in places where it will be difficult to re-establish them. I think the US, being as flexible as it is, is probably the best geared to deal with bankruptcies and re-establishment and the Chapter 11 laws help a lot. In China, of course, the state was extremely supportive.
I think in the markets in the middle, we will need private sector and government to cooperate and to apply skills and we know our skills and capital allocation as an industry can definitely make a contribution in this process and, as I said before, I am very, very impressed to see how quickly the banking system this time has started to respond to the need that is out there.
Moderator: Let’s conclude this chat now and talk about Ninety One, formerly Investec Asset Management, because, in my experience with you and I have worked closely with you over a number of years, Investec Asset Management now Ninety One doesn’t do things by half measures. You are actually – when I say noisy, don’t take that in the wrong way – you are very forthright in your approach.Now you are 3 weeks into your listing. What an incredible 3 weeks it has been because on the 16th March you listed, on the 23rd March the market reached a low, the stock markets that is, many stock markets. It was in free fall. It must have been a hell of a ride for you.
Hendrik du Toit: Absolutely, Lindsay, but you know you have got to take on life as it is. You have got to be bold, you have got to be agile, you have to go for it and I think we just decided – we had a plan. We had the demerger to effect, we had a subsequent listing and a rebranding and we weren’t going to change because of markets because (number 1) we didn’t need capital. What we needed was certainty and thank heavens we got there because it helped us to be in a very clear position to deal with what was coming, naming the coronavirus-driven challenge or fall in markets and our clients and shareholders have been extremely supportive through this process. It is absolutely only right to thank them publicly.
Right now, we are actually in the best possible position to deal with the challenges of the markets for our clients. We have a simplified organisational structure. Our culture has been clearly well-developed over many, many years and has withstood these changes very, very well and our business is clearly focused. We only do one thing – we manage other peoples’ money to the best of our abilities. All our people are now owners. They are highly motivated to grow the business over the long term and also to withstand challenges like these.
From my point of view, it is very good to have all those corporate restructuring and other plans behind us and to be able to look at the challenges for the next few years and do our best for our clients and it has been an absolute privilege to witness the calm and professional way in which our people have coped with these volatile markets. You know, just the fact that we could shift within a few days to remote working without a glitch is something to be proud of. You cannot buy team spirit. You cannot buy experience. You can only earn it over time and I think the people of Ninety One have done it and right now it is resilient and ready for the challenges. So, you know, I would not have done anything any differently.
Moderator: Hendrik, thank you so much for your time. That is Hendrik du Toit, CEO of Ninety One.