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In a discussion that started with a reflection on the market moves in the latest quarter and the extent to which Big Tech has driven the indices, Craig Antonie of AnBro Capital Investments and the usual duo of Mohammed Nalla and The Finance Ghost also delved into the BRNDZ portfolio at AnBro and the strategy around investing in the world’s most valuable brands.
Touching on a number of investment concepts ranging from cycles and balance sheets through to portfolio construction and long-term strategies, this is a highly insightful discussion for any serious investor.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
Full transcript:
The Finance Ghost: Welcome to episode 183 of Magic Markets. My goodness, Moe, we’ve done a lot of these now and we keep having a lot of fun every week and from time to time we get some really great guests on here as well. This week will be one of those shows. He is fresh from his holiday in the Med, which sounds fantastic, and Craig, you have the benefit of not having traveled there with rands, so I’m sure you also actually enjoyed yourself as opposed to spending your first half of the trip just converting the cost of a cocktail or lunch back into a different currency and suffering along the way. It’s great to have you on the show, Moe, as always, you as well, but Craig’s our star today with a nice tan all the way from the Med.
Craig Antonie: Well, hi, guys. Always glad to be here and great to see you again, Ghost and Moe. Yes, fortunately for me, I’ve just come back from some leave, so I’m feeling refreshed and excited and rejuvenated. Yes, and it’s always good to go on holiday with pounds, Ghost, that does help.
Mohammed Nalla: I’m laughing here because I’m clearly the only one doing something wrong here. We’ve had Ghost, who’s gone on his whirlwind tour to Le Mans, and he was in the UK and Dubai. We’ve got Craig, who’s gone through to Greece, which is amazing. And there’s me up here in what I normally call the frigid north, except it’s exceptionally hot. We’re going through a heat wave right now, obviously summer, north of 30 degree temperatures. It feels like I’m on holiday, except I’ve got to work while being on holiday. Craig, welcome back to Magic Markets. It’s always such a pleasure having you and the team from AnBro on the show and I think quite timely right now because we’re actually, now sitting just about a week past quarter end, we’ve just gone through the second quarter of 2024, and it’s been such an interesting time on the markets. I mean, if you look at it every single day right now, you’ve still got the S&P500 pushing to record highs. You’ve got the Nasdaq pretty much doing the heavy lifting, and that’s also at record highs. But if you look at the rest of the market, no it’s not been as stellar. This has really been a market that’s been pushed by a handful of tech stocks, some of the large mega cap stocks doing the heavy lifting there. Craig, I almost want to start off first and foremost by saying what for you has actually stuck out over the course of the second quarter, maybe even just the first half of this year. What’s characterizing and framing the market for you? Because I think that’s a good foundation for the rest of our discussion today. But let’s maybe start off there, Craig.
Craig Antonie: Sure, 100%. Well, you hit the nail on the head. It’s definitely not been a market where everything has risen. Yes, I mean, there’s still this clustering of stocks of epic winners, if you like, which is literally keeping the whole index up. And it’s something we spoke about the other day and a little bit in our quarterly note, which has just gone out where, if one really cuts through the market and looks at the balance of stocks outside of, say, the top ten in the S&P500, it really hasn’t been a great year. If one looks at something like the Russell 1000 value ETF, which has actually got some epic businesses in there – I mean, we’re talking companies like JP Morgan, Berkshire Hathaway, Walmart, Bank of America, United Health – these stocks are actually down almost 2% for the second quarter of the year. Now, if we compare that to six odd percent gain for the S&P500, you got an 8% difference between quality stocks like that and, say the S&P500, and an even wider difference if one just looks at the Mag Seven or the Fab Five or however you’d like to refer to them now. I think what the takeaway for me has been one where it’s really been a market of, I suppose, intense concentration once again.
And that comes with a double-edged sword. At the end of the day, you have these stocks which are doing really well. The market is chasing these stocks. They’re positioned extremely long in these stocks. To be fair, these companies have delivered above-average earnings growth so far in quarter one and going into quarter two, they expect it to grow faster than the whole. But it’s surely reflected in valuations in that for most of them. Two things have to happen – I think either the market needs to sort of take a bit of a breath, which I think shouldn’t be surprising to most, and that can happen either by these big cap stocks coming down or in fact, doing nothing while the rest of the market catches up, or if everything sort of goes through a bit of a tumble and takes a break, then we’re likely to start seeing fears of a recession or correction or whatever you like coming through into markets.
Mohammed Nalla: Craig, before we even move off that, I have a burning question, because as you’ve indicated, some of those companies have delivered fairly strong results. And I mean, the risk is always that there’s just so much optimism priced in that if you just miss by a small margin, you actually see mega pressure come through on those stocks. But in your head, what is the likely catalyst for a market correction? Because again, I saw this before, it pushed to the record highs and everyone saying, well, you’ve got Nvidia. The market can’t keep on going up on this AI theme that’s really been driving a lot of the upside impetus. And yet, as we talk today, Nvidia is not that far off its record highs, and that’s been one of the key drivers of the headline index. But, I mean, that’s pretty much across any of those big tech stocks. There’s always been this theme of tech eating the world. Well, right now, tech’s the only thing driving markets. What, in your view, would be a catalyst for even a breather? We’re not even talking a deep correction. We’re not talking a bear market, but just a breather because a lot of investors sitting on the sidelines saying we can’t buy in at these levels, but we’re not overly bearish either. They’re just waiting for a bit of a pullback to get involved again and they’re sitting at the sidelines. What are the catalysts that you see playing out, potentially to give us somewhat of that breather?
Craig Antonie: Well, the first point I’ll make, Moe, is just to your point that since we’ve had the market pull back in the third quarter of last year, we’ve literally gone up in a straight line and we haven’t had even a 5% pullback from ongoing record high after record high. It’s been very, very difficult for people to get an entry into the market if you’re looking at it from an index level. Of course, there are other stocks in the market which clearly aren’t doing very well. Again, it depends on the hat you put on, if you’re an investor or a portfolio manager that manages a diversified portfolio. First of all, you haven’t done as well as the market because the market is really concentrated. And secondly, there’s a lot of value in the market, I think, for people that are looking at stocks on a stock-by-stock level, on a stock-specific level. And just simply, we getting into the kickoff and earnings season again, that’s starting now, again at the end of this week. And if one just looks at something like financial stocks relative to the S&P500, they’re probably at the lowest valuation relative to the S&P500 than they’ve been in, gosh, I want to say, two decades. As a diversified investor, you haven’t been rewarded by being diversified. You’ve actually been penalized for that by taking a normal sort of risk-weighted approach, if you like. And I think, the one comment I’ll make is there a lot of guys out there which are starting to say, is the S&P500 even the correct benchmark now? Because it’s really just five, six stocks which are driving that whole market up. And is that the right way to look at it? I mean, if you had to say to someone, invest in your future and you just buy five companies that all tend to be leaning in the same sector with the same sort of drive as well, you wouldn’t be considered clever or that wouldn’t be considered great advice, but that’s where we are at the moment.
I think in terms of catalysts of what could cause it, well, there are a couple of things. I think if one looks at the cash relative to the market cap of something like the Wilshire 5000, which is the overall stock market cap, when you look at cash on the sidelines relative to that, we’re back at levels now which one would consider to be quite neutral. In other words, it’s not attractive to deploy capital, you wouldn’t necessarily be an aggressive seller. But if you look at things on top of this with something like positioning in the put call ratio, which is showing everybody to be extremely long or positioned long, one would have to say that the first thing that would worry me is that ammo is running out. People are running out of cash, they’re really all positioned in the same way. All you need is really something to sort of provide a hiccup to buying or something like that and there’s going to be no one there to really fill the void, if you like, if the market takes a step back.
The second thing I’d guess is just the macro. Everyone’s still looking at inflation prints. I mean, Fed chair Powell was out today saying they’re comfortable to cut when they’re sure that inflation is coming back down. Again, you’ve had this case of seven odd interest rate cuts being priced in at the beginning of the year, all pretty much removed now. It’s only one, really, that guys can look to be banking on. And that’s the next thing: are you going to get help from interest rates and interest rate cuts at all? If that doesn’t happen? Again, anyone that’s positioned that way is likely to start getting frustrated and perhaps a little bit worried. And then I’d look to the US unemployment rate and yes now it is starting to trickle up a bit. You’re seeing unemployment figures come out. I mean, last week’s numbers again were strong at the headline level, but massive revisions in the previous numbers. And that seems to be a very big trend. Numbers coming out, on the surface they look good. Fast forward a month or two, they get revised down by pretty big numbers. Also, what I have noticed, and perhaps this is just a little bit of electioneering and that going on, but the number of job vacancies in the US government jobs has rocketed over the last couple of weeks or so, which is keeping the job market looking pretty buoyant in terms of demand for jobs and employment. That’s another thing where one’s got to watch that government figure. It’s really been one of the main drivers behind job creation over the last four to six months or so. There are a couple of things, but primarily for me, what I’m looking at most importantly is the jobs market and the unemployment rates. If you start seeing that roll over, that’s a very good sign in my mind that a recession is potentially on the way and markets are likely to come back if that happens.
The Finance Ghost: I think what’s quite fun is you actually chart the S&P500 versus the Nasdaq 100 year-to-date. If you do that, you actually see that until basically the end of March – so the end of the first quarter – it was literally neck-and-neck. By the 1st of April, and this is not a joke, this is true, the S&P500 was up 10.56% according to Google, and the Nasdaq 100 was up 10.57%. That’s literally a photo finish there, end of the first quarter. And then suddenly that second quarter, to your point, Craig, it’s been driven by these tech mega caps within the S&P500. The easiest way to see that, I always think, is to go and draw the Nasdaq index against the S&P500, because obviously the Nasdaq is even more driven by those tech stocks. And all of a sudden, there’s just been this big opening up in outperformance. The money continues to pour into these big tech stocks that are chasing this growth.
They’re sitting on tons of cash on the balance sheet. And I think part of the problem for those value stocks is, yes, they’re cheap, but as they continue to operate in a relatively modest growth environment with high levels of debt, in many cases, unfortunately, with higher interest rates and lots of refinancings, a lot of corporates were able to put off refinancing their debt, waiting and hoping that rates were going to start to come down. But eventually they run out of road. They have no choice. They need to refinance. They need to do that kind of stuff. Then it becomes expensive. The banks effectively get a bigger piece of the economic pie on those smaller companies. And those sort of problems don’t happen in the growth stocks, which are literally just cash machines. They have so much money, they barely know what to do with the stuff. They’re just in a completely different environment. Those companies can invest right through the cycle and just keep going, whereas a lot of smaller companies, a lot of more marginal models, they don’t have that kind of option. They’ve got difficult balance sheets to manage.
Craig Antonie: Well, exactly right. And I think one sort of thing you’ve mentioned there, Ghost, and I’ll allude to it in my note that we brought out, is we’ve almost seen what is a bit of a stealth recession, if you like, happen in the market and in the economy. Where to your point about companies that are operating in the real economy, they’ve almost been affected by higher interest rates, like you would expect companies to be affected by higher interest rates. They have essentially seen a slowdown in business. They’ve seen a slowdown in demand. This has been reflected in their earnings, been reflected in their margins, that’s been reflected in the higher cost of debt as they refinance that debt, etcetera. Again, away from these behemoth companies that generate all this cash, the rest of the market is actually performing probably like it should, considering interest rates rocketed like it did, and the economy is eventually starting to show signs of weakness and slowing.
You’re really going to need a pivot to take place for the balance of the market to catch up, whether it be a sort of breath of relief from lower interest rates or lower interest rates affecting the consumer, which allows them to kick back up. Although to be fair, they’ve been extremely strong this cycle. But for the rest of the market to participate, you almost do need to see rate cuts starting to come through and the rest of the market to really operate like it would in an interest rate cutting cycle. You hit it exactly on the head there, Ghost. That’s exactly, I think what’s happening on the ground, although you’re not necessarily seeing it at an index level where the index of powering higher, but divergence between the haves and the have nots is, is probably wider now than it’s been in a long time.
Mohammed Nalla: Craig, I want to change tack a little bit here because we’ve spoken a lot about tech, but we also speak a lot about these big companies. And I mean, this ties into something that we’ve discussed with yourselves at AnBro before, and you’ve got a fund called BRNDZ. I’m going to go directly to BRNDZ because BRNDZ tends to invest in the biggest brands in the world. Not necessarily the biggest companies, but the biggest brands in the world. It was such an interesting concept when we discussed this at the launch of your fund. And I think now is a good opportunity for us to just have a look at that portfolio and maybe just to start off there, a quick recap from you in terms of just how the portfolio is put together. Maybe one or two lines for the listeners that may have missed the original show. But what I really want to get into is how has the BRNDZ portfolio done since its launch? It’s probably been around now for the last quarter there and thereabouts. And on that basis, how have the biggest brands in the world done on the backdrop of the fact that this has been tech and sometimes your biggest brands are not tech. I mean, if I think of something like a Nike, and we can get in some of the details there, Nike has been a stock that we’ve spoken about here at Magic Markets previously and it’s been one of those chronic disappointments despite the fact that it’s one of the biggest brands. I want to try and reconcile just how has the overall BRNDZ portfolio done and then what some of the highlights, the puts and takes have been from your experience with BRNDZ over the course of the last quarter, Craig.
Craig Antonie: Well, the first thing I’ll talk about briefly then is how we construct the portfolio. To your point, Moe, it’s based on the world’s top 100 brands and it’s done on a basis where we actually look at brand value. It’s not pretty much company or company value or company market cap, it’s literally brand value. We use things like the Keller and Aaker brand equity models to calculate brand values. Now you also can use things such as goodwill on the balance sheet to determine value of intangible assets, which could be something like your brands. We also look at things like actual tangible net asset value and all the rest of it. We pull all of this into a model and then we determine what the hundred biggest brands are in the world by brand value. And then we buy a portfolio of stocks, which pretty much mirrors that.
But the important thing is that it’s based on brand value and not market value. If we talk a little bit about some of the big performers and laggards in that portfolio. Well, in terms of its inception, we’ve had it in two guises. It’s been alive in offshore guise, directly invested offshore in Frankfurt since March of this year. That’s relatively new. It doesn’t have much track record from that perspective, but that portfolio is up around about six odd percent. If we look at the JSE listed one, which has been around since September last year, the year-to-date performance on that portfolio is about 14%, so it’s done pretty well, considering the diverse nature of the portfolio. Now, what might surprise you is, yes, the best performer in the world’s biggest brands portfolio this year has been Nvidia, which I guess doesn’t surprise anyone. But if I look at the best performing stocks in that portfolio since inception, which is now since September – again, not necessarily a heck of a long time – but it’s not just tech stocks, which is interesting. Something like Costco is in there, which has had an incredible run. It’s up 35% odd in this portfolio since inception. Even something like Bank of America is another one that’s been a pretty high flyer and sits in the top ten since inception. So you have not just tech, obviously, tech is there – I mean the second best performing stock the portfolio since inception is Qualcomm – again, it’s not perhaps what you consider to be the most obvious in the likes of say Microsoft or Meta or anything like that.
But it’s a nice diverse spread of stocks. And not just tech is contributing to the returns. As you alluded to Moe, the worst performer in the portfolio since inception is Nike. That one I’m sure we can talk a bit about in a second or so. The way this portfolio is really built is looking around the sorts of companies that resonate with people on a daily basis. If you look at the brands that we use, that we consume, that we see out there on a daily basis, these are the sorts of companies we invest in and these are the sort of companies which historically have shown to provide really, really good returns and in fact market-beating returns.
The Finance Ghost: I think just on Nike, Craig, and maybe just the whole concept of the portfolio and everything else, it’s easy to look back obviously and say, oh, Nike hasn’t worked. And we did cover it in Magic Markets Premium and we had some concerns around it. And in this case we were proven to be right. There’s been many other cases where we didn’t necessarily get things right. That’s the markets. The point I wanted to make is in a portfolio like your BRNDZ portfolio, you can’t pick 50 stocks or 100 stocks that are always going to go up. It’s not possible. And that’s such an important thing for investors to understand: within this overarching thesis of buying valuable brands, there are going to be some that do incredibly well, like a Costco. That’s not an easy thing to have picked and have guessed that that would have done really well this year. There are going to be some that underperform and maybe don’t do as well as one would hope. And Nike was maybe one of the easier ones to spot in that regard, but usually it’s very hard.
But the point is you’re buying a theme and the theme you’re buying is, over time, the best brands do well. They withstand downturns, they have proper balance sheets so that they can invest through difficult times. They can come out the other end stronger than ever. They have the best power to negotiate with suppliers and with customers. I mean that is the thesis at the end of the day is to say in this portfolio, in my investments, would I rather own really high quality stuff for the next 20 years, or do I want to dabble in more marginal things? And I think the BRNDZ portfolio works well as something to kind of buy and forget. It’s a typical investing portfolio. There will be good times, there will be bad times, but you’re buying high quality stuff.
Craig Antonie: There’s two points I’ll make with regards to a underperformer, like something like Nike. The first thing I’d say is for any good quality business throughout its life cycle, they go through periods of good times and bad times. If one looks at Nike and what’s been happening in the business there, it’s pretty fair to say that they getting to a point now where they likely need a bit of a refresh, on the brand, on the business and what it is they’re trying to do. And they’re probably in the very early stages of a multi-year process, I think, of getting that done. The point is, and it’s the point you made a bit earlier, is when you are a massive brand with a strong balance sheet, you have a product and brand equity and a loyal customer base, they are likely to give you the benefit of the doubt before they are likely to give a newcomer or someone that they don’t necessarily have the same experience with or sense of quality with or allegiance to. That gives these companies that have been around the block, that have built a massive brand and have a quality business a little bit of leeway against periods when they don’t necessarily perform as well or when they suffer.
The other point I’d make is that this portfolio looks at brand values on an annual basis. What we’re actually doing is keeping track of how brands perform over time, and there’s a natural ebb and flow and evolution of this portfolio as time progresses. If Nike, for example, were to become an investment which were to really become a chronic underperformer and lose its status as the world’s number one sports brand, it’s a very good chance that Nike will ultimately fall out of this portfolio and will be replaced by something else that is doing better and is resonating better with consumers at the time. And I think one looks back, say, for example, I don’t know, 50 years or so. And if you look at, say, the constitution of the Fortune 500 in the States. Now, okay, this is a global portfolio in BRNDZ, but we’ve got a history obviously going back really far. If we look at something like America, the top constituents in the Fortune 500 in those days would have been car manufacturers, oil companies, perhaps big industrials, General Electric, that kind of thing. As the world’s evolved and you look at it, say 30 years ago, you start seeing the evolution of some technology stocks that start coming in, whether it be the likes of AT&T or IBM, companies that have been around for a while. And then the sort of big industrial behemoths, oil, manufacturing, etcetera, became implicitly smaller. And then you get to today, and obviously today the biggest brands and the things we resonate with most are your Microsofts and your Apples and that kind of thing. The portfolio itself has evolved over the decades, if you like to be relevant to today’s investor and what is appealing to the market today and to the world today and to the companies and themes which are performing today. And I think that’s why it’s got such a great track record. If one backtests it to how its performance has been, its really been impressive.
Mohammed Nalla: Yeah, Craig, in fact, I went and I pulled up a chart because I was actually under the impression that it was a lot more recent in terms of the launch of BRNDZ, and you correctly indicated that you’ve been running from around September of last year. And so I just quickly had a look at that. And I mean, the fact of the matter is, when you look at the South African listing, you’re up around 18%, just looking at the chart now, and the rand over that same time period is actually strengthened by around 3%. A lot of times people are like, oh, but it’s just the rand performance. Well, in fact, over the course of you having this fund up and running, the rand’s actually detracted from that performance, which then actually means that the portfolio has done substantially better than is actually indicated by the underlying performance. I mean, that’s just a point to note.
What I want to do is I want to sneak in one last question here because I want to get into the weeds just a little bit because I try to inform what we’re doing here at Magic Markets Premium as well. And the question is around how is the interplay between the brand value and does that actually matter more in your B2C business models or in your B2B business models, because your portfolio has a mix of those two, and are you seeing it disproportionately on one or the other? What does that look like? Because I think that also informs just the outlook for should you be looking at B2B businesses, should you be looking at B2C businesses – is there any disproportionate impact from a brand value as a factor on those two distinct types of companies?
Craig Antonie: I’d say, Moe, that in this particular portfolio, because we focus predominantly on brand value, it doesn’t necessarily lend itself to any one model or the other. But if one does look into the portfolio as a whole, I mean, you would see that both types of models are represented there, so the parameters that we use to value the brands are such that obviously the brand value comes first. Then what we do is we obviously assume that underneath this business that is performing as well as it is and resonating with this brand, under the hood, there are companies that are ticking many boxes in terms of what their customers want, whether they be business customers or normal consumers, people like you and I. And also what we’re trying to make sure then that there has this business strength and brand strength and that the two correlate together to drive business performance or business outperformance if you like.
And the funny thing I think I would comment as well on is this, is that what you find ultimately at the end of the day in a portfolio like this is that the brand in itself creates many more levers for business to pull. For example, many companies might start out with an initial product. That product then becomes a really big brand. It resonates with customers. That creates in itself a sense of reliability and loyalty with its customer base. That allows companies to generally be more aggressive on pricing, that pushes margins up, that benefits cash flows. Cash flows obviously boost the balance sheet. If a company is doing incredibly well, I mean, we could take a look at Apple as an obvious example. I mean, their iPhone moment came and it just creates enormous amounts of cash flow and brand resonance and now suddenly they’ve got all this cash flow and they go, well, let’s try build an earphone that’s wireless and that you can just use on your phone and let’s try to shake up the whole headphone market. Now suddenly, they’ve got the money to do it. They’ve got the brand appeal, if you like, customers are likely to try that product and not be as harsh on them for trying something new, because they’ve got that loyalty and that brand appeal, for lack of a better word. Also, at the same time, as these companies grow and do better, this allows them to explore new markets, new territories.
And what we really found is it’s that sort of quality that comes around, this sense of having a product or brand which opens up just varying levers of an optionality for businesses to grow over time. You’ll use the example, say, of something like Ferrari. Very few people out there in the world can afford to buy a Ferrari, but you might now be able to buy a Ferrari fragrance. And it’s because of that brand appeal and the affiliation that people have to these brands that they’re willing to try other things that these companies come up with and that immediately gives them, I think, a leg up against perhaps peers or competitors out there.
The Finance Ghost: Craig, it’s been great to just lift the lid on the BRNDZ portfolio again and understand so much of the thinking that goes behind it. I think we can wrap it there, just given the time we spent talking about it, really has been fantastic. And I’m sure our listeners have enjoyed it as well. Of course, the right place to finish is for those who are interested in seeing more about the BRNDZ portfolio – where do they get information and how can they invest in it?
Craig Antonie: Sure. Well, I mean, the portfolio is listed on the JSE at the moment. The share code is BRNDZ. Obviously, if you want a bit more information, you’re welcome to reach out to any of the team at AnBro. We also have a dedicated website for the portfolio that is brndz.global. And of course, if you just go to the AnBro website, there’s a whole lot of links there which you’ll be able to use to click through to BRNDZ or to Unicorn or Dynamic Compounding or any of the other portfolios that we have.
The Finance Ghost: Fantastic. Craig, thank you so much for joining us.
Craig Antonie: Sure, it’s a pleasure. Thanks for having me, guys.
Mohammed Nalla: Yeah, Craig, always exciting discussing the stuff with you. We’re probably going to have you back on again because there’s just so much going on, not just in the BRNDZ portfolio, but the other portfolios that you’ve indicated as well. That’s unfortunately where we’re going to leave it this week. Hit us up on social media. It’s @magicmarketspod, one word, @financeghost and @mohammednalla, all on X. Or go and find us on LinkedIn, pop us a note on there. We hope you’ve enjoyed this. Until next week, same time, same place. Thanks and cheers.
The Finance Ghost: Ciao.
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