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Interview: Moneyweb, 29 March 2023

Rising interest rates make many bank depositors more discerning

Paul Stewart, Managing Director
Merchant West MD Paul Stewart’s perspective on banking concerns and why Counterpoint Asset Management rebranded with Moneyweb presenter Ciaran Ryan. 

CIARAN RYAN: Counterpoint Asset Management is a name familiar to those in the investment space. In 2023 it won a Raging Bull Award for the best South African General Equity Fund on a risk-adjusted basis over five years. Last year it won awards from both Morningstar and Raging Bull. It has R8.5 billion in assets under management and a 10-year track record of growth.

So why has Counterpoint Asset Management chosen to rebrand as Merchant West Investments? We asked Paul Stewart, managing director at Merchant West Investments, to give us the background and for his take on what’s happening in the markets.

Hi, Paul. I’d like to start with the big news in the markets. There were three banking failures in the US. They weren’t major banks, but they weren’t small ones either. The Nasdaq Banking Index is down quite a lot, as is the JSE Banking Index. What’s the big picture here?

PAUL STEWART: Hi Ciaran, thank you very much. If you think about a bank, you put your hard-earned cash into a bank and it’s really all about trust. And when that trust is broken markets and investors and depositors become skittish. The big picture really is that interest rates have been very low around the developed world for a long period of time, and last year interest rates started to rise. US short rates rose by about 4% last year.

Many bank depositors weren’t that discerning about where they invested their money in banks because interest rates were so low. But obviously as interest rates started to rise many of those depositors have become more discerning.

So what we’ve seen, particularly if one talks about the Silicon Valley Bank, which is one of the three banks that you referred to, is that they essentially saw a run on their deposits. The tech industry is in a bit of a meltdown. A lot of those depositors from the venture-capital industry started needing their money back, and the short-term liquidity of the banks was breached.

Essentially that meant that they had to go into what they call their long-dated assets they held to maturity assets. These are normally invested in long-dated bonds which they don’t mark to market. But as soon as these bonds are actually traded then they are acquire mark to market, and that’s essentially vaporised the capital of Silicon Valley Bank. That’s essentially what’s happened.

So when investors see one bank go – the other one that failed was a bank called Signature Bank, which is a New York-based bank – the market starts looking for the next weakest link. That’s where you’ve seen that Nasdaq Banking Index pull back so sharply.

We’ve also seen markets starting to become concerned about some of the European banks. The most recent one is Credit Suisse. The share price was down 24%. There was talk about financial irregularities. Credit Suisse has been under the spotlight for some time but, of course, when you have one of these things happening in one place in the world, investors immediately start thinking well, maybe there’s more than one problem. And that’s what we’ve seen.

So the Swiss Central Bank stepped in overnight. [It] pledged 50 billion Swiss francs to support Credit Suisse. But it’s not great. And in sympathy with that, the South African banks have all been hammered quite hard too, so it hasn’t been a particularly pleasant time for investors. This has played out in the markets.

CIARAN RYAN: There were some reports earlier in the year that the South African banking sector was looking quite attractive on a valuations basis. Well, it’s down 7%, 8% at the moment. It’s probably even more attractive – if they are attractive. What’s your view?

PAUL STEWART: That’s quite right. We would agree with that characterisation of South African banks as being cheap. They haven’t really recovered, although their dividend payments to shareholders have recovered and they are back to sort of where they were prior to Covid. The actual share prices of many of our banks have not recovered anywhere relative to their dividend payments, so we would argue that South African banks actually are very attractive.

They’re well managed, they’re well capitalised; we certainly don’t think investors should be panicking. I would think that a banking index that’s down 7.5% does present a very attractive entry for an investor wanting access to the high-quality banking industry in South Africa. So yes, it’s not pleasant nonetheless for anybody who has money invested in the market right now.

CIARAN RYAN: Okay. Let’s talk about the background to the name change. There has been a rebranding. It’s now Merchant West Investments. Why change the name of a multi-award-winning fund manager and why now?

PAUL STEWART: That’s a very good question, and it’s something that one doesn’t take lightly. It’s something that we did think about a lot. Counterpoint had a reasonable amount of brand equity. But the business was established in 2012, and the business was acquired by the Merchant West Group in 2020. Merchant West is one of South Africa’s largest independent financial services businesses and [it] took a strategic decision to build an advisory/annuity-based investment business on the side of the traditional business, which is a lending business, lending into the asset finance working capital, vehicle fleets, those sorts of markets.

The Merchant West brand is bigger and stronger than the Counterpoint brand, and I think it just makes sense in terms of completing the overall suite of products for the Counterpoint business to adopt the Merchant West brand.

So even though we’re multi-award-winning, and we’ve a team of people that are well known in the marketplace, there does come that difficult time in your life where you actually have to say, well, what is the best thing for the business? On average we felt that the best thing for the business was to adopt the brand of the parent of our group, so we’ve taken the decision to do that, and that decision was implemented effectively on 6 March this year.

CIARAN RYAN: I mentioned some of the awards that you’ve won over the years and quite recently last year. Tell us about some of the milestones of the business over the last 10/11 years.

PAUL STEWART: The most important ones relate to the development of the multi-strategy boutique in 2020 with the acquisition of RECM [Regarding Capital Management]. That was the business founded by Piet Viljoen, a very well-known South African fund manager. Also [there was] the acquisition of the Bridge Fund Managers business that came out of the Grindrod Limited group. That was a very important milestone in establishing our multi-strategy business. So we’ve been able to develop a range of products managed across a variety of different asset classes and investment styles, both domestically and globally.

We’ve actually got a full product range – and that was facilitated by the acquisition of the RECM and Bridge Fund Managers businesses in 2020.

Then we also acquired the business of a small Cape Town-based fund management business called Maestro during the course of last year. So we’ve been able to plug very particular skill sets into our overall investment competence. We think that investing is about expertise, it’s not an asset-gathering business.

It’s about expertise, it’s about skill, it’s about delivering investment outcomes to clients that they anticipate, and that’s [what it says] on the tin.

So those have been the most important milestones – making sure that what we do and what we say we do is actually delivered to clients at the end of the day.

CIARAN RYAN: What does the name change mean for your clients and the financial advisors? And have you communicated to them about this change?

PAUL STEWART: Yes, of course. We’ve been communicating with them for some time. So practically this is a cosmetic change. It’s not a change of ownership of the shares of the company. It’s not a change of the regulatory elements of the business. Our registered office stays the same. Our financial services provider number remains exactly the same. Our board and shareholding stay the same. This is really just a cosmetic change to align the brands with the Merchant West Group.

So, apart from the change to the name of our funds, there’s no effective change.

I think the important thing is that the Merchant West brand and the origins of the business have been successful because they have a client-centred culture; they’ve got very much a growth mindset and a can-do attitude.

That’s very much the same DNA that we’ve established in our business, and so the adoption of that brand for our clients I think is a net-positive thing. Obviously, it’s incumbent upon us to make sure that they understand the reasons for the brand change. But there’s no change in personnel; there are no other changes. It’s really just a cosmetic change.

CIARAN RYAN: You’ve obviously got a very experienced and talented management team. You’ve got Piet Viljoen, who’s very well known for value investing. You’ve got Brian Pyle, your chief investment officer, and Ian Anderson, who’s respected as a property-investment expert. How do you see your competitive edge, and does this rebranding impact that in any way?

PAUL STEWART: That’s probably the most important thing, because I often get asked [about] the number of asset-management companies in South Africa, and some might say the market is over-traded. ‘How do you all survive?’ And so the competitive edge, Ciaran, is probably the number one aspect that one has to consider when you are managing clients’ money and trying to grow a business.

I think, first of all, we are an active manager. We genuinely believe that active managers with the right skill coefficient can actually convert information into better returns and outcomes for their clients over time.

One of the most important elements of being active is actually being able to take active positions in the market. And one of the things that some of our much larger peers would recognise is that, as you get larger, your ability to take active decisions in relation to the index – because of the exposure that are in both Cisca [the Collective Investment Schemes Control Act] and Regulation 28 of the Pension Funds Act – means that the larger you are, the less active you can become.

So we are able to take active positions in pretty much every single stock on the JSE, as well as other stock exchanges around the world. That flexibility, that size advantage, certainly contributes to better investment returns over time, and that’s a pretty powerful tailwind for our strategies and our clients to enjoy. So I think that’s important.

And then, secondly, we’ve got, as you’ve mentioned, a very strong and experienced investment team. But we’ve also got a very strong research capability. We’ve been investing in data and we believe that data and the smart use of data in time will improve investment decision-making and improve the efficiencies across our business and help keep costs down.

So I think those are really the key things that we focus on – good people, good processes, and being small and nimble and agile.

That certainly all adds up to a business that has some significant competitive edges.

CIARAN RYAN: Paul Stewart, managing director at Merchant West Investments, we are going to leave it there. Thanks very much for joining us.




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Merchant West Investments
6th Floor, The Terraces, 25 Protea Road
Claremont, Cape Town, 7708
+27 21 492 0200 |

Merchant West Investments  FSP 44508


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