Riskowitz Value Fund 2013 letter to investors. Full PDF at the bottom

Riskowitz Value Fund LP: Report for the Year Ended December 31, 2013

February 2014

Dear Partner,

The Riskowitz Value Fund LP (“RVF” or “the Fund”) is a United States limited liability partnership focused on undervalued South African public companies. The Fund employs a value- oriented investment strategy to construct a concentrated portfolio of public South African companies. The Fund was incepted on January 10, 2011.

For the year ended December 31, 2013, the Fund returned 50.5% net to investors after management fees and expenses. The Johannesburg All Share Index and the S&P 500 returned

–4.5% (in U.S. dollars) and +32.4% (including dividends) respectively over the same period.

Riskowitz ValueRiskowitz ValueSouth AfricaS&P 500
Fund (Gross)Fund (Net)Index1(with

1 Johannesburg Stock Exchange All Share Index measured in U.S. dollars.

2 January 11, 2011 to December 31, 2011.

The following chart shows the performance of the Fund against major indices since inception:


The above chart shows the period end value of $1,000 invested at inception of RVF against major indices. JSE is the Johannesburg All Share Index (measured in U.S. dollars) and S&P is the S&P 500 including dividends.

Investment Approach and Philosophy

The Riskowitz Value Fund’s objective is to compound Partners’ capital at a high rate over thelong-term while minimizing the risk of permanent capital loss. It does this by seeking to identify, understand and invest in a select portfolio of listed companies in South Africa. The Fund focuses on South Africa because:

The General Partner was born and raised in Johannesburg. His expertise has been clearly identified and is known to be confined to South African companies and business dynamics.

The Fund is unique in that it has a durable competitive advantage. The investment management business in South Africa is highly institutionalized, creating opportunities for more nimble and unconstrained funds3. For example, the average mutual fund has 60 positions (in a market where there are 450 listed stocks). Mutual funds are required to hold not more than 5% of their assets in any one position, severely limiting the opportunity for gains regardless of how attractive the opportunity set may be. There is a lack of price competition (due to a short supply of “smart”4 analysts) and a relatively high level of perceived risk (particularly from foreign investors). Furthermore, South African companies generally exhibit wonderful business economics5 and excellent management.

3 Upon careful inquiry there appears to be only 11 other funds in South Africa that match this description. The remainder are mutual funds, life insurers or institutions that represent the vast majority of assets on the exchange.

4 There are many “smart” analysts in South Africa; there just aren’t that many familiar with intelligent investing.

5 It is not uncustomary to find South African companies with 40% long-term returns on capital with no debt. For obvious reasons, it is usually (but not always) difficult to buy these companies at reasonable prices.

Year in Review

The Fund’s 63.2% gross return to Limited Partners was achieved despite a 23.5% depreciation in the value of the South African rand against the U.S. dollar. On a constant currency basis, the gross return would have been 101%. The three-year net return (in dollars) is 239.5%, or 50.3% annualized.

It is futile to discuss the currency but a few words are necessary to contextualize the effects this year. The South African rand is notoriously volatile, subject to the whims of global markets. Only 25%6 of daily rand trading occurs within South Africa’s borders, perhaps explaining why the currency tends to move somewhat independently of the government’s fiscal position. Currencies are hard to predict and the rand is a particularly difficult case. A weak rand does have its advantages: it allows the Fund to acquire shares at lower dollar costs. In any event the General Partner believes a) it is too difficult to forecast the level of the rand relative to the dollar and b) it may make sense to introduce options on the rand to protect the value of the portfolio, but only when the rand is at a very strong level against the dollar.

The Fund is a long-term owner of quality businesses that will grow intrinsic value7 over time. Due to the factors described under “Investment Approach and Philosophy”, South Africa presents an opportunity to acquire such “compounders” at favorable prices (and therefore low capital risk). The General Partner does not have the capacity to predict macro-economic, currency or political trends. Instead, the focus is on buying great businesses that will flourish in a variety of environments over time and measuring their success over at least a five year period.

In dollar terms, the return for the year was driven by the performance of Finbond (up 452%) and Conduit Capital (up 5%). Calgro M3 and the two new positions Capitec Bank and RBA Holdings were flat. Taste Holdings was down 28% and Trustco was down 21%.

With the exception of Finbond, it is interesting to note the divergence over the calendar year between growth in the intrinsic value of a business and changes in its stock price. The rest of the companies in the portfolio have increased intrinsic value at estimated rates between 10% and 50% over the year. This has not yet been reflected in stock market valuations. It is inevitable that the market will recognize the value created by these companies; only the timing is uncertain.

While there is a lot of value being created by the Fund’s investments, this is the part of the letter where expectations are necessarily tempered. It would be prudent to assume that compounding at the almost 60% gross level the Fund has experienced over the last three years is not sustainable. In saying that, within the context of a slowly improving domestic South African economy, a potential rand mean reversion and the inherent quality of the businesses in the portfolio, the five year outlook is exceptionally positive.

6 South African Reserve Bank Financial Stability Review.

7 Intrinsic value refers to the actual value of a company determined through fundamental analysis without reference to its market value. This figure is generally established by discounting future cash flows to present value.


The Fund is fully invested in the following seven companies at year end (in no particular order):

Finbond: Finbond was the best performing stock in South Africa in 2013. In July 2012, Finbond became the first South African company in twelve years to be granted a new banking license, making it one of only 16 domestic banks. Finbond’s cost of funding (retail deposits) is about 9.5% while the yield on loans advanced is 35%. The bank has a very conservative culture demonstrated by industry leading rejection rates. Earnings are expected to increase significantly as new loan products and checking accounts are rolled out. The company is trading around fair value despite the stock price increase.

Conduit Capital: Conduit has announced an anticipated change in strategy to become a focused insurance group. The company sold non-core investments and used the capital to bolster its balance sheet. Conduit’s listing will be transferred to the “Insurance” sector which should result in a re- rating and a clearer understanding of the business to outside observers. Conduit has built a niche in specialized insurance lines and is undervalued relative to the quality of its insurance book. The company trades slightly above book value while peers trade at 2.5 to

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