Meet Gerhard Cruywagen, Sanlam Investment’s Chief Investment Officer

He is probably one of a handful of investment professionals who doesn’t own an iPad and doesn’t have emails or price feeds on his cell phone. That’s because he doesn’t want to be caught up in the day-to-day whirl of the financial markets, preferring to keep his eye on the medium to long-term horizon because he knows that’s how long it can take to get the most out your investment portfolios.

What has stood out the most for you in the financial markets and economy over the last few years?

We were in the midst of the US sub-prime crisis when I joined and went onto a sovereign debt crisis. Both these events, not completely unrelated, will have a long-term impact on global political and macro-economic policies in the Western world. Our role as asset managers is to determine the fair price of assets. We do this using the assumption that the current world economic order continues. What stands out is that for the first time in my investment career the validity of this assumption is being seriously questioned.

How do you sleep at night when markets are as turbulent as they are?

As one can so easily get caught up in short-term price movements and can be influenced by news headlines, I try to remove myself from investment/work-related issues when at home. I do not receive email or price feeds on my cellphone and I do not own a tablet computer. So usually I don’t know what happened in the financial markets from the time I leave work until the following morning meeting’s market recap. When I am on leave, I don’t follow the markets. However, I do sometimes enjoy watching Charlie Rose’s interviews on Bloomberg television, depending on who is being interviewed.

Who has been a great mentor to you?

I cannot single out any one person, but there are quite a number of people I have learnt from over the years. I do think I gained a tremendous amount of asset management experience as a participant in Prudential’s global asset allocation process. The team members who were spread across the world met regularly in London and how they thought about – and analysed – the financial markets was exceptional at that time.

What do you consider to be key attributes of a successful investor?

I believe a successful investor should be emotionally detached from the financial markets, as well as the short-term performance of the portfolio of assets.

In essence an investor should be able to interpret the news of the day or week in the context of a much longer time frame. One technique that has been suggested is to read newspapers only a month after they have appeared. It would prove to be a very quick read then, as most of the stuff is irrelevant in terms of asset pricing.

Secondly, the ability to delay gratification, I believe, is a valuable attribute to have as an investor. Often the opportunities that are available will only bear fruit three to five years from now.

Lastly, I think it does help a lot if one is a bit of an inborn contrarian or has a slightly cynical outlook on life. I don’t believe in the ‘wisdom of crowds’ when it comes to financial markets as it seems as if crowds are only wise when independent individual decisions are aggregated.

How would you describe Sanlam Investments pragmatic value investing philosophy?

One of the central assumptions we use is the concept of normalisation over the medium to long run. This assumption is used for asset classes as well as individual assets.

We require that assets and asset classes that carry more risk in terms of loss of capital should generally offer better prospective returns.

We use required real return ranges for the asset classes in which we invest. These ranges are based on what has been historically experienced; what we call the ‘normalised’ levels.

For specific companies, normalisation typically would imply a basic assumption that the return on capital of companies should normalise over the long run. If the return on capital is very high, this is likely to be eroded by competition (unless there is a monopoly). If it is very low, it is likely to return to normal if the business model is intact. Often companies are not priced for this normalisation to happen – and therein lies the opportunity.

We call ourselves pragmatic to differentiate ourselves from the very traditional dogmatic approach, which might use typical rules such as, buying only companies with price-to-earnings ratios (PEs) of below 10 or price-to-book ratios of less than one. There are cases where we would buy high PE companies and high price-to-book companies as these might trade below fair value when compared to our normalisation assumptions.

How does it differ from the other value managers in the market – of which there are many?

It is difficult to say that our investment philosophy is unique, as many other investment houses in the SA market claim to be value managers. It is easy to claim to be a value manager and probably not too difficult to explain the concepts behind value management. One can attain a thorough understanding of this investment style by studying books and reading reports by famous ‘value’ portfolio managers. But in my opinion this knowledge is not enough. It’s all about the ability to implement the investment philosophy – something with which the best value managers continuously struggle. This reverts to my earlier points regarding the ability to be emotionally detached, contrary in nature and long-term focused.

You can easily explain to somebody the theory of riding a bicycle. You can read numerous books on cycling and explain to other people how to cycle, but this does not mean you can actually do it.

So at Sanlam Investments we’d like to believe that we have the ability to implement a value philosophy. Unfortunately, just by saying that does not prove anything either. The best way for consultants and clients to judge this statement is to actually analyse each of our investment decisions to gauge whether we are remaining true to our beliefs. It is also useful to look at our performance relative to the value indices – in other words, do we outperform when the value style outperforms and vice versa.

What would you say sets Sanlam Investments apart as an investment manager?

Sanlam Investments is one of the largest asset managers investing in the SA market, which means that we own meaningful stakes in companies on behalf of our clients and can therefore have some influence in terms of corporate matters. We have been involved in a number of cases in the past where we were able to add value to our clients’ portfolios thanks to this.

Also because of our size we are involved in the unlisted credit markets and can access investment opportunities for our clients that would not be available to clients of the smaller managers.

Due to the fact that we are part of a big insurance company, our corporate governance processes are very strong. It should also be a comfort to investors that Sanlam Investments is owned by a strong parent with a strong balance sheet.

How do you balance having a kid and the fast-paced, stressful life of an investment professional?

As we are long-term investors, our lives as asset managers are not really that fast paced. One could probably compare some aspects of our jobs to that of a farmer who has planted his crops and hopes that the weather will be kind to him – on average the weather is kind, but sometimes disaster strikes. So while waiting for our investments to bear fruit, I spend my time with my family and read books on investments. One of the investment books I really enjoy, and have read more than once, is Fooled by Randomness by Nassim Taleb. I also try to limit overnight travel.