To market, to market to buy a fat pig. I sat here yesterday and heard more people on the business channels talking about entitlements and that America has a spending problem. Probably true. What is also true is that they spend more on healthcare as a percentage of GDP (around 18 percent) than any other nation, and that includes the French, who of course have universal health care. The French spend around 11 percent of their GDP on healthcare, which is really high, but still manage to deliver world class healthcare to their citizens. The national health insurance plan in France has a pay in rate of around 25 percent. Meaning that around three quarters is subsidised in normal run of the mill type stuff, but the high cost stuff almost entirely. But everyone is covered.
In the US however, the spend to GDP is far higher and much higher on a per capita basis, around 8250 Dollars per person, whilst in France it is just shy of 4000 dollars per person, half. Here in South Africa it is 930 dollars per capita, but as a percentage of GDP it is 9.2 percent. What can we say about about public health system other than if it were so good that there would not be this incredible desire for better private services. Healthcare is a very emotive issue, because when it is you, your mind changes very quickly!
There were 323 medical aid benefit options as at March 31 2013, 178 being open schemes (to the public) and the rest being restricted scheme options. The average increase in contributions across these schemes was 9.7 percent. Add in the money part and you are talking about even more emotions here! And the fastest growing ailments amongst South Africans covered by medical insurance? Hypertension, Hyperlipidaemia, Diabetes mellitus type 2 and Hypothyroidism. Diet and stress related, too much eating and not enough exercise, type 2 diabetes condition in South Africa grew by 84 percent from 2006 to 2011 and now affects 22.1 per 1000 folks covered. Wow. Where am I getting this all from? Here -> Council for medical schemes annual report 2012-2013. In 2012 there were 8,679,473 beneficiaries of medical aids in South Africa, including the 3,815,431 million principal members.
But what does that have to do with Washington DC? Well.......... and this is the point that I always make, if Americans were a LOT healthier, they would need to spend less on medical ailments. Chronic disease in the US accounts for 75 percent of health care costs -> US Preventative Medicine, National Situation. And those chronic diseases account for 70 percent of all deaths in America. Preventable. But I ask you with tears in my eyes, who is going to stand up and tell Americans the truth? Nobody wants to hear that there is a difficult path ahead. As per that page: Five chronic diseases - heart disease, cancer, stroke, chronic obstructive pulmonary disease (e.g., asthma, bronchitis, emphysema), and diabetes—cause more than two-thirds of all deaths each year.
And the other huge spending issue never gets airtime. Military spend. 19 percent of the budget, compared to 23 percent for Medicare and Medicaid. And only 6 percent on interest payments for outstanding debt. So tell me, which ones are the "problem"? The discretionary spend of 17 percent? Or the other elephant in the room, military spend. Nobody wants to stand up and say, we spend too much on military spend and too much of medical programs because we are unhealthy. How popular is the truth? Not so much.
Anyhow, raising the debt limit is the first obstacle, and of course the most pressing right now. And there seems to be some progress in that department, according to the lead story in the WSJ: Senate Leaders in Striking Distance of a Deal. I suspect a day or two, this has gone on about 15 days longer than we thought around here! I do hope that the voters remember when the midterm elections come along. Those not in office must be licking their lips at the prospect of pointing out to their voting base how things don't get done.
Holdsport. This is a tricky investment theme, but one that I think has legs, no pun intended. For all of the reasons that we have mentioned above, more people are starting to take their health seriously as the best alternative to living a healthy life. It is far better to prevent the diseases than to battle them. Think about when you walk into the pharmacy, there are rows of health supplements and equally slimming products. We all want to be in shape and recognise that by being out there participating in sports and related activities that we can live a longer and healthier life. Truth. Sporting apparel and equipment is a much more competitive market than it used to be, there are loads of choices.
But at the same time people do not mind wearing the big brand names in apparel as fashion items, Nike, Adidas, Puma, Under Armour, Reebok, even Billabong and Quiksilver in the watersports arena, and then there are the niche brands like The North Face. Manchester United (Nike) and Real Madrid (Adidas) sell 1.4 million shirts apiece each year. Wow. Someone needs to sell them, as well as the other football teams that we love so much, FC Barcelona, Chelsea FC, Liverpool, Arsenal, AC Milan, Inter Milan, Bayern Munich and the list goes on, I apologise if you missed your football team, I did not mean to.
So what is it exactly that Holdsport does? Well, they have three businesses, the biggest by a country mile is the Sportsmans Warehouse brand, which sells approximately 1 billion Rand worth of sporting equipment and apparel each and every year. Or roughly 2.739 million Rand worth of sporting equipment each and every day (if it were open all day long, every day of the year), it is not really that much if you think about it. Their other major business is the smaller Outdoor Warehouse, where you can buy your camping and related equipment. This division as of the half year results was responsible for 22.5 percent of group sales (141.9 million out of 630.9 million ZAR in total), whilst the bigger Sportsmans Warehouse constituted 72.6 percent of group sales. The third business, is the niche sporting equipment, under the First Ascent brand, and includes the recently acquired smaller CapeStorm. Performance brands for outdoor sports, think mountain biking, trail running, hiking, paddling, even skiing. That division is tiny and accounts for only 4.9 percent of total sales, or 30.9 million ZAR.
There are only 35 Sportsmans Warehouse outlets, 19 Outdoor Warehouse locations, whilst the performance brands have quite a good quality online presence. Holdsport do not own any of their properties, they lease them all, I suspect that this gives them the flexibility that they need to be in the locations that they want. They have however recently built a distribution centre, a 50:50 with Redefine properties, a fairly sizeable transaction for Holdsport, having invested over 72 million ZAR (including in this half currently) on warehousing in the Cape for their retail distribution centre and more recently (September this year, that is last month) the company started constructing a smaller warehouse for their performance brands. Right next door to the finished retail distribution centre.
The weakening Rand is not necessarily positive for their business, nor is it for their suppliers, because the knock on impact to your pocket. You and I will have to pay more for our favourite sporting goods, apparel and the like. But as a sporting nation with wonderful outdoor weather, a growing middle class and a relatively small market with lots of potential, I do think that the pretty low growth rates seen thus far will turn. The company has compelling investment fundamentals, the stock trades on a 12 multiple with a yield of around 4.9 percent (forward). Potentially cheap for someone to take out, although if you cast your mind back, Massmart tried and failed at the competitions authority hurdle. So it would have to be an outsider. But I suspect that is not what the management are thinking, they only recently brought this back to market. Kevin Hodgson, the CEO is a significant shareholder, as much as 12.5 percent. Another reason to hold them, management (and Coronation with odd 25 percent) are in waist deep. Accumulate on weakness!
Michael's musings. What the Nobel's are telling us.
Yesterday the Economic Nobel prize winners were announced in Sweden, there are three winners this year. This year's winners are Eugene Fama, Lars Peter Hansen & Robert Shiller. They are being awarded for their individual contribution to the understanding of how asset prices, with Fama and Shiller's work contradicting each other at times. The basics of their work is that Fama says that markets are efficient, meaning that trying to beat the market with an actively managed portfolio is futile. Shiller's research on the other hand says that investors are irrational, meaning that there is room for active managers, and lastly Hansen's contribution has been in the development of academic financial models, which uses less assumptions when compiling financial analysis.
For us as fund managers, it is Fama's and Shiller's work that is of interest to us. According to Fama the best way to make returns on your money over the long run, is to use a passive index following fund. His basis for saying this is that, according to his research, markets are 'correctly' priced at all times, so having a professional do stock picking for you, they are essentially guessing what to put your money in. The example used by him is that paying a stock picker for getting a call right is like paying someone for guessing a coin toss correctly; I'm paraphrasing but you get the gist of what he is saying.
Shiller's research points to markets not being correctly priced all the time, with one of his most compelling examples being the dot come bubble. His research has been one of Fama's biggest opponents. By giving the Nobel Prize to two people with opposing work, it shows us that finance is not a fine art yet.
What does all this mean for us? In my opinion stocks are fairly priced most of the time, but share prices do get it wrong some of the time, when our emotions get the better of us. Looking at stock prices with that assumption, most of Fama and Shiller's work tie into each other. If stocks are fairly prices then it means that quality stocks are going to be more expensive than other stocks, so paying for quality. Also if our emotions have got the better of us pushing share prices to extremes, ignore the moves because emotions will be short lived, prices will return to their "correct" value. Fama's research points towards the buy and hold strategy which we prescribe to here at Vestact.
Home again, home again, jiggety-jog. Mr. Market is up on the basis that a deal is near in Washington, an extension of the debate really. We will have to see how it pans out over the rest of the day, but I suspect that in the end we will get the desired result. Nobody wants to go over the edge here.
Sasha Naryshkine and Michael Treherne
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