Regarding… Vol 3 no 12 – Tomorrow Never Knows

Much like collective investment schemes (CISs: unit trusts and ETFs), investment holding companies (holdcos) offer investors access to a managed portfolio. There are significant differences and similarities.

The similarities are:

• Holdcos own a diversified portfolio of assets.
• These assets are managed, sometimes very actively.
• There is a cost to this management. Both in terms of fees and other management costs.
• They can be liquid.

The differences are:

• The costs of managing these portfolios can be substantially higher than CISs.
• Holdcos generally trade at a discount to NAV, while collective investment schemes always trade at NAV.
• Holdcos typically own “private” assets – i.e., unlisted assets – while CISs own listed “public” assets.
• Holdcos are listed on a stock exchange and are subject to both company law and exchange regulations. CISs have their own set of regulations.
• Holdcos can be illiquid.
• CISs can have a CGT advantage.

In the final analysis, an investment in a holdco is subject to a decision-making process similar to that of a CIS:

• Will it perform well? The holdco’s track record and the manager’s investment process should be considered.
• Consideration should also be given to the underlying assets. Just like a CIS, the assets held by a holdco might include some less desirable ones. Beauty, as always, is in the eye of the beholder.
• An appropriate discount should be placed on the NAV of the Holdco to compensate you for:
  • The costs of managing the investments – a discount you never get on a CIS.
  • A poor investment track record – another discount you are never offered on a CIS.
  • The potential illiquidity of the holdco.

I have identified seven investment holding companies in South Africa that investors may want to consider. Here are their track records since December 2010, or since they were listed, whichever is longer:

Let’s look at each one individually, counting down from worst to best:

Ethos was historically one of the top-tier private equity players in South Africa until it listed EPE in 2016, ostensibly to give the investing public exposure to “private equity”. Since then, its reputation has declined in lockstep with its NAV.

A 2.9% annual decline in NAV during a period when the JSE returned a solid 10% p.a. is disappointing. It doesn’t reflect well on private equity in general and Ethos’ investment skills in particular.

Ethos appears to be suitably embarrassed and has proposed winding down the vehicle and returning what remains to shareholders. But not the fees.

My take: One can be forgiven for having the impression that EPE was, from the outset, nothing more than a vehicle to channel fees from unsuspecting investors to the management company owned by Ethos. And the fees they were able to channel were significant. In short, it does not serve as a good advertisement for investment holding companies.

This company was listed in 2018 by the famous “Two Johans” – Dr Johan van Zyl of Sanlam and Steinhoff fame and Johan van der Merwe, also of Sanlam fame. In this endeavour, they were backed by Patrice Motsepe, and as such, ARC’s original aim was to become a pre-eminent BEE investor. Their strategy was to buy assets cheaply – i.e. with a BEE discount – and then charge a high fee to provide investors with this exposure, which is hard to get if you’re not Black.

Given that the founding trio were highly connected, the odds were that it would be a successful strategy. Unfortunately, it hasn’t turned out that way. A combination of nosebleed fees and diluting shareholders to raise additional funds to pay the fees has resulted in subdued growth in NAV per share.

Here, management is also embarrassed enough to want to buy out minorities and take the business private. But not embarrassed enough to pay a reasonable price to do so. They are proposing to buy it out at a significant discount to NAV, a NAV they were happy to charge fees on.

My take: Disappointingly, ARC turned out to be a fee-generating vehicle for management at the expense of shareholders. Despite owning some outstanding assets (Rain, TymeBank), shareholders are left holding the bag. Another bad advert for holdcos.

This is the OG of investment holding companies; the company that put Stellenbosch on the map. Criticising this “grand dame” of holdcos can get you beaten up in Stellenbosch.

Unfortunately, since it tragically lost Thys Visser’s steady guidance, it has become somewhat unmoored. Its NAV per share growth – the single fundamental indicator that all holdcos rely on – has underperformed compared to the All-Share Index. Admittedly, they have unbundled several assets (Trans Hex, Impala, and RMH), which, if included again, would add approximately R50 per share to their NAV. However, this would only contribute about 1% p.a. to their NAV growth.

The discount to NAV has reached 44%, which you would think more than compensates for poor performance and costs. Costs, which, to their credit, have consistently been reasonable. However, this article by Keith McLachlan presents a different picture.

My take: the only individuals who have profited from Remgro in the past decade are the management (regular sellers of shares) and investment banks, who benefit from fees generated by Remgro’s hectic deal-making. This is one Stellenbosch-based asset that’s best to avoid. And I guess I should avoid going to Stellenbosch for a while.

This investment vehicle was listed by Johann Rupert in 2008. Legend has it that he believed that the fund management industry was taking the piss and he could do much better at a lower cost.

Reinet was his vehicle to prove the point.

Given that most fund managers – especially the large ones – underperform the All-Share Index, Rupert has proved his point. Over the past 15 years, Reinet has compounded its NAV per share in line with the ALSI.

Here’s the interesting part – Reinet has owned only offshore assets since its inception. Initially, this included mainly British American Tobacco, the sale of which enabled it to acquire a significant stake in the UK-based Pension Insurance Corporation Group. All its funds are offshore and denominated in euros. Despite this tailwind, which South Africans value so inexplicably highly, its performance has merely tracked that of the JSE All-Share Index.

Here’s the kicker: With the crystal clear vision of hindsight, if Rupert had merely kept his British American Tobacco shares and not “diworsified” into other assets, he would have been even richer than he is now:

My take: Be careful what you wish for.

This is a majority Black-owned investment holding company, where the CEO, Johnny Copelyn, makes capital allocation decisions. Over time, he has built an impressive track record, outperforming the ALSI by 2% per annum.

Beyond oil and gas, most of this holdco’s capital is invested in strong South African businesses that have historically generated significant cash flows. By utilising these cash flows, Mr. Copelyn has repurchased nearly half of the outstanding shares of HCI over time, contributing to the increase in per-share value.

During the COVID-19 panic, HCI was among the few investment companies that did not need to seek outside funding. Remgro, EPE, and ARC had to conduct rights issues at prices that diluted shareholders, a key contributor to their poor performance.

The past few years have seen HCI’s outperformance recede somewhat, as cashflows have been allocated to developing oil and gas reserves off the coast of Namibia and South Africa – an investment that has yet to pay off.

Insiders have also been consistent buyers, which is always a good sign.

My take: I have a lot of respect for Johnny Copelyn’s capital allocation skills. Long-term investors in HCI have been treated well. This is one of the top holdings in the MWI Value fund.

I regard Sabvest as the best investment holding company in South Africa. It has an unrivalled long-term track record, with the NAV per share compounding at over 20% p.a., beating the ALSI by almost 10% per annum. Anyone who knows anything about compounding will realise these are insanely good numbers.

The principal capital allocator behind this success story is Chris Seabrooke, who has been running the firm since its inception. Despite being in the hot seat for so long, he has shown no signs of slowing down. His outperformance has continued over the past 5 years, albeit at a slightly lower level.

Sabvest also didn’t have to raise outside capital during COVID-19 and has repurchased shares consistently. It owns predominantly unlisted businesses, so it’s hard to replicate the portfolio. Not that you should want to try and do better than Chris!

My take: Chris Seabrooke doesn’t get the recognition he deserves from the market. He has been an impeccable steward of shareholder capital. Sabvest has rewarded long–term shareholders well – even more so than HCI. It is the top holding of the MWI Value fund.

I have left Astoria for last, not because it is the best – its track record is way too short to be meaningful – but because I am personally closely involved in managing its affairs. My business partner, Jan van Niekerk, does most of the heavy lifting, but I also put my shoulder in occasionally.

Over its brief four-year lifespan, Astoria has outperformed the ALSI despite experiencing a significant setback last year in its diamond mining business. Astoria is also one of the holdcos that didn’t need to raise capital during COVID-19. Insiders have also been consistent buyers. However, it is one of the most illiquid stocks on the market.

My take: Let’s see what the future holds for Astoria, but at the current discount to NAV, the market is clearly signalling to management (that’s Jan and me) what it expects us to do. We are proud of what we have built here and will continue to do our best for shareholders.

This is an excellent piece on institutions and how they evolve. I saw it in a piece by Byrne Hobart. Byrne is a chartered financial analyst, and his newsletter, The Diff, focuses on the intersection of finance and technology.

The Hanseatic League was a collection of late medieval North German mercantile city-states that banded together to fight off pirates and establish rules for trading. They carved out free trade zones where they could ship goods cheaply.

Ultimately, the League encountered the classic cartel problem: it’s costly to establish a cartel, yet profitable to join one, fostering shirking and cheating. The League functioned as an economically optimal structure when state capacity was limited. However, as nation-states developed and became functional, their advantages reduced.

My take: Here in South Africa, we operate under the constraints of a failed and incompetent state. Developing alternative structures is key to creating a better business environment. Sakeliga’s goal is to do just that, which is why I support them. Have a look at their website – if you own or run a business in South Africa, you might also want to join me in supporting them.

A four-part series on Netflix. It is a visceral exposition of a young boy’s reaction to being socially rejected in this “always online” age we live in.  It starts with a bang when the boy is arrested – in a distressing scene; the police use what looks like the entire reserve force to apprehend him while he is asleep in bed.

After that, the action slows down to crawl. But it is not a boring crawl, rather a crawl laden with emotion and pathos. The Brits do series so much better than the Americans! Each scene was shot in one continuous take, giving it a personal “in the midst of the action” feel.

My take: It’s one of the best series I’ve seen in a long time. The fact that it only has four episodes is an added bonus.

That’s it for this week, except to say Eid Mubarak to all my Muslim readers!

Also, a shout-out to my son Nic, who just today heard that he passed his CFA level 1 exam.

Be very careful out there – if it’s not the taxes, it’s the tariffs that will try to get you!

Piet Viljoen
RECM