The Michelin Guide is like the Oscars of the restaurant world. Chefs dream of them, diners flock to them, and some restaurants even wish they could send them back. But how did we end up in a world where a tyre company’s opinion of your dinner is worth so much?
Picture this, if you will: it’s 1900, and cars are barely a thing. Roads are terrible, gas stations are rare, and people who own cars are a mix of genuine driving enthusiasts and daredevils. Enter the Michelin brothers – André and Édouard. They started their tyre manufacturing business in 1889, and were keen to make more sales. But how could they do that if there were barely any cars on the road? The answer was simple – they would encourage those who had cars to drive them further and more often, thereby wearing down their tyres faster.
In their minds, what drivers needed was a guide – something to tell them where to fill up, where to get their car fixed, and – of course – where they could grab a bite to eat along the way.
So, the Michelin Guide was born, and it was handed out to motorists for free, filled with handy tips, like how to change a tyre, along with restaurant and hotel recommendations. In the marketing agencies that I work with, this is referred to as a classic value add. Little did the Michelin brothers know that their little guidebook would soon take on a life entirely of its own.
From value add to valuable
Fast forward to 1920, and the Michelin brothers felt that it was time to change their tactic and start charging for the guide. This was a direct result of an incident where André Michelin walked into a garage and found one of their free guides being used to prop up a workbench. Talk about disrespect – and André wasn’t having it. He realised that people value what they pay for, and so Michelin began selling its guide, focusing more on the restaurant section (which was by far the most popular) and less on tyre-changing tips.
In 1926, Michelin awarded its first official stars to restaurants offering fine dining. It wasn’t until 1931 that the now-famous three-star system was introduced, and the world of food has never been the same since.
– One star means the restaurant is “a very good restaurant in its category.”
– Two stars signal “excellent cooking, worth a detour.”
– Three stars? That’s the holy grail: “exceptional cuisine, worth a special journey.”
Notice something? It’s all about the food. Michelin doesn’t give stars for the view, the décor, or even the service; it’s all about what’s on the plate. The focus is on the quality of ingredients, the mastery of flavours, technique, consistency, and, of course, creativity.
From France to the world
Although Michelin began in France, it didn’t take long for the guide to spread its culinary influence across Europe. By the 1950s, Michelin was covering countries like Belgium, Switzerland, and Italy. Eventually, the guide made its way to the United States (first stop: New York in 2005), and today, Michelin covers cities all around the world, from Tokyo to Chicago.
The digital age also brought big changes. Michelin’s guide is now available online and through apps, making it easier than ever to track down a Michelin-starred restaurant near you.
Who decides? Meet the inspectors
Michelin’s ratings are decided by anonymous inspectors, who visit restaurants undercover, sample the food and then report their experiences back to head office. They make several visits to ensure consistency before awarding any stars, and they never announce themselves, so chefs don’t get a chance to put on a special show. Since the whole idea is that the restaurant doesn’t know that they are there, they also pay for their meal in full, like any other customer would.
It’s basically the restaurant world’s version of a blind taste test, which is why chefs sweat bullets when they think they’ve spotted an inspector (spoiler: they usually haven’t).
Pascal Rémy, a seasoned Michelin inspector in France, stirred the pot when he published his tell-all book L’Inspecteur se met à table (The Inspector Sits Down at the Table) in 2004. This bombshell of a book claimed to expose the behind-the-scenes workings of the Michelin Guide. Of course, Michelin wasn’t thrilled about the idea. Rémy’s employment was terminated in December 2003 after he informed Michelin about his book plans. What followed was an unsuccessful court battle, where he tried (and failed) to argue his case for unfair dismissal.
In his book, Rémy painted a pretty bleak picture of life as a Michelin inspector in France – describing the job as a lonely, underpaid grind. Imagine driving around the country for weeks, dining alone at various restaurants, then rushing to meet tight deadlines with highly detailed reports. This wasn’t the glamorous, food-filled adventure many might picture.
Rémy also argued that Michelin had grown lazy, letting its once-rigorous standards slide. Officially, Michelin claimed that its inspectors visited all 4,000 restaurants in France every 18 months, with starred establishments being reviewed multiple times each year. But Rémy called that claim a fantasy. At the time of his hiring, he said there were only 11 inspectors covering all of France, nowhere near the “50 or more” Michelin hinted at. By the time he was fired in 2003, he claimed the number had dwindled down to a mere five inspectors. Five people to cover thousands of restaurants? You do the maths on that one.
Of course, Michelin denied all of Rémy’s accusations – but they also refused to disclose exactly how many inspectors they had working in France.
Not everybody wants – or keeps – a star
Unbelievable though it may sound, not every chef wants a Michelin star. In fact, some would rather send it back, like an overcooked steak. Why? Well, for some, the pressure to maintain Michelin’s high standards is just too much. Legendary chefs like Marco Pierre White and Sébastien Bras have famously asked to be removed from the guide. Bras, in particular, said the “immense pressure” of having a star wasn’t worth it anymore. And Marco Pierre White? He walked away from three stars and hasn’t looked back since.
On the flip side, losing a Michelin star can feel like a punch in the gut. For some chefs, it’s not just a matter of pride – it can also impact business and reputation. The loss of a star can sometimes signal the beginning of a restaurant’s decline, both in the eyes of the public and in the minds of chefs themselves. In a few tragic cases, the pressure of maintaining Michelin standards has been linked to mental health struggles in the industry.
The Michelin effect
There’s no denying that Michelin has transformed the culinary world, but it hasn’t come without its challenges. Michelin stars are a badge of honour, sure, but they’re also a source of immense pressure. The chase for stars can push chefs and kitchen staff to the brink, demanding long hours, intense creativity, and near-perfection every single night.
The influence of Michelin doesn’t stop with chefs. It has shaped global food trends, driven culinary tourism, and made fine dining more accessible (well, in theory) to the average foodie. Cities like Paris, Tokyo, and New York have become meccas for gastronomic tourists seeking out Michelin-starred experiences.
But with great power comes great responsibility. Many chefs have raised concerns about the working conditions in high-end kitchens, where the pressure to maintain Michelin standards can lead to long hours, burnout, and sometimes toxic environments. More recently, there’s been a growing movement among chefs and restaurant owners to push back against these extreme pressures, calling for healthier, more sustainable working conditions in the industry.
From a free tyre guide to a global culinary authority, the Michelin Guide’s journey is one of ambition, evolution, and, of course, a bit of drama. It’s a system that can make or break careers, spark controversies, and drive culinary trends. But while the stars might sparkle brightly, the Michelin story is also one of pressure and expectations, both for the chefs striving to earn them and the diners seeking that perfect meal.
About the author: Dominique Olivier
Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.
She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.
Factor investing takes ETFs to the next level. Instead of tracking a stock index (like the JSE Top 40), these ETFs have a set of rules based on investment fundamentals like valuation multiples or even levels of debt. The sky is the limit with the creativity that goes into these factors, but do they actually work?
To unpack these types of ETFs and the thinking behind them, Nico Katzke of Satrix joined me for an insightful discussion.
Satrix Investments Pty Limited and Satrix Managers RF Pty Limited are authorised financial services providers. Nothing you have heard in this podcast should be construed as advice. Please do your own research and visit the Satrix website for more information on all their ETF products.
LISTEN TO THE PODCAST:
TRANSCRIPT:
The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It’s another one with Satrix, with Niko Katzke this time, a voice who is very familiar at this stage to Ghost Mail listeners. He just shared some excellent personal news with me, which I won’t embarrass him with. I’ll let him decide whether to share or not about an upcoming sports event that he’s training hard for. So not just a man of the market…
Nico Katzke: Yeah, let’s not divulge too much. I don’t want to show my hand before we participate.
The Finance Ghost: There we go. Look, at some point when we do a podcast, in a few months’ time, we’re going to need feedback. I’m not going to let you completely get away with this, but for now, I’ll let you off.
Nico Katzke: Maybe with a broken nose and a tooth or two missing, but, yeah, let’s see.
The Finance Ghost: That gives a clue as to what might be happening here! But we’ll move on to investing, which, of course, is why you are here and why our listeners are here, much as I’m sure they’re interested in your potential broken nose and missing tooth. And on this episode, we are talking about factor investing, which is a really, really meaty topic that I don’t think is necessarily widely understood. So, I’m very keen to delve into it. And I guess, let’s just start right at the beginning, Nico, with: what is factor investing?
Nico Katzke: I even want to take a step back and first ask ourselves what type of investment vehicles investors actually have access to, apart from buying single stocks. What can you actually access as a retail investor? Now, we’ve all heard of unit trusts and ETFs, but what do they actually really do? At its most basic level, they represent the collection of funds for stakeholders that are pulled together and then managed by investment professionals according to some set of rules or an internal strategy. That’s the gist of it.
Now, these strategies that the investment managers employ, these can either be transparent, for example, those tracking a simple index like the Satrix top 40 ETF, or the S&P 500, or there can be no clear rules. For example, a fund manager applies a combination of internal research and conviction, and at times some emotion as well, to determine how the fund is constructed. So, in other words, you either have rules that you live by, or you have some set of internal processes that are a bit more vague.
Now, investors may think that for an investment strategy to be successful, it actually needs to be mysterious in its design, but this is not true. In fact, unlike a gripping novel where you want to be left by surprised by twists and turns, the most consistent strategies, investment strategies over time have actually been those that are transparent and consistent in design and very importantly, have a low-cost structure. Where unnecessary and emotional trades are limited, these have proven to be extremely successful.
Now, rules-based strategies are generally referred to as index strategies because they follow a set of index rules and they can be used as useful building blocks in constructing well-diversified, transparent and low-cost strategies. Now, to your question, factor investing is a form of indexation where the set of rules are, call it refined somewhat from the simple vanilla indices that we all know well, like the JSE Top 40 and the S&P 500, and the measure for weighting stocks for those simple indices is actually just the size of a company.
Factor investing instead looks to refine this by considering other features of companies to weight that. So not just size, for example, but using measures of value or balance sheet quality, or soundness of cash flow management etc. and then using these company features to determine how much of each company to hold.
So, if I may use an analogy, and if you’ll forgive me for that, factor strategies are similar to the thinking process involved in buying a house. If I come home tonight and I tell my wife excitedly, I bought a house for a million rand, and it’s a bargain, hooray, I bet you she’s going to want to know more information to be able to share my excitement of whether it’s a good investment or not. So she’d want to know, for example, whether I considered other features like the quality of the furnishings, how many bedrooms the house has, what area it’s in and what similar houses selling for. She doesn’t just want to hear the price that I paid for it and make a conclusion on that. Only when she knows that additional information and considers all these factors together, is she then able to determine whether a house is a bargain or not.
A 1 million rand, four bedroom house in Constantia – that’s a bargain. You can almost make that conclusion just by having that additional information. Now, we’d never only buy a house simply because it’s big or because it is in a popular area. That’s really not a good strategy to buy houses. Some might, but generally speaking, it’s not a good idea. We’d like to refine our strategy for buying houses to get a more holistic view of the appropriate price that we’re paying. Factor investing is actually similar to this in that we are trying to find systematic ways of determining which companies provide the best holistic value to clients, so to speak, where we consider measures of valuation, management quality, cash flow, and many more.
It’s very important to note that the same benefits still apply in that these factor index strategies – they are also low cost, transparent, consistent, attributes that the new generations of investors favour very highly. If you understand those passive investment vehicles that you’re comfortable with and you like it from a low cost perspective, factor investing is also those things, but it has the additional benefit of considering other company features as well.
The Finance Ghost: Nico, I think that house analogy is fantastic. That really does talk to the factors that you would take into account. It’s great when it’s a simple analogy that just makes a lot of sense.
And this obviously brings us back to that age old debate, which is something we’ve talked about before, which is active versus passive. What are ETFs, really? And I know you’ve historically, and I’m sure it is still your view, had this view that passive is a bit of a misnomer. Yes, they might be tracking something, but that’s really about as passive as it gets. When I hear you talk about all these different factors that you can take into account, that is certainly starting to sound a little bit more active than passive. What do these factor strategies mean for this relationship of active versus passive investing in ETFs?
Nico Katzke: That’s a very important and a great question. On the surface, a factor or quantitative strategy may seem like an exotic strategy with a lot of risk involved, but actually, at its core, it is really no different from traditional passive strategies that I’m sure your listeners no doubt have heard of, such as the S&P 500 or locally the Satrix Top 40 funds, which are in fact themselves factor or quant strategies. That might seem like a strange statement, but if you think about it, the top 40 index in South Africa is a factor strategy, even though it only uses one factor. That factor is the use of size to weight stocks. It’s a factor strategy, but it’s a very rudimentary and simple strategy at its heart.
A more refined factor strategy, if you like, the Satrix value strategy, for example, instead uses common fundamental measures of value, like a company’s price to earnings or its book value, to identify companies that are systematically undervalued. Now, the difference between the S&P 500, and for example, an S&P value strategy, would just be that one uses size and the other uses a systematic measure of value to build the portfolio. That’s really it. We can dress it up as being this complicated, exotic investment style, but in truth, it is not.
As to your question of whether it is active or passive, this really speaks to the grey area that the simple active-passive dichotomy ignores. Systematic strategies that we manage are simultaneously active and passive in their design. The set of rules used to construct our factor strategies are actively determined, for example, in how we determine whether a company is cheap or has strong momentum. This is a subjective measure, and we actively decide how we are going to determine whether a company is cheap. But thereafter, the implementation of our strategy is passive or rules-based, meaning we don’t deviate from our objective in capturing the factor that we’ve identified.
If we say this is a Satrix value strategy, and we use certain metrics to determine whether a company is cheap or not, well, we’re not going to deviate from that. You’re not going to see us tomorrow change tack and have a different style.
It is really a blend of being both active and passive, where we actively determine the company features we’re interested in, and then we systematically apply those rules without deviating from it. Now, of course, there’s more to simply just identifying the company suggested by the factor. We also utilise advanced optimization techniques to further ensure that portfolio is designed in a way to achieve our objective of, for example, the value factor, capturing that, and also ensuring that we manage risk carefully. If you’re not careful, you might actually end up with concentrated risks. And we can unpack this in a bit as well.
But to answer your question very simply, if you are comfortable holding the Top 40 or the S&P 500, you should actually also be comfortable with holding a well-designed factor strategy. Because in reality, it’s just diversifying the factors that you’re exposed to.
The Finance Ghost: It almost takes out the human emotion piece, right? Because you can have the best fund manager in the world and they’ll tell you, oh, this is the type of strategy I followed, but the human condition is the human condition, right? We are magpies and we like shiny things, and we see something on the market that looks juicy and maybe it’s slightly outside of strategy, and then it’s like, oh, you know, let me have a punt at this thing. That, I guess, is what ETFs don’t do. They have a set of rules, and if something is in, it’s in, and if it’s out, it’s out, and that’s it. There isn’t someone sitting back there saying, hang on, I actually feel like including this and that, that is really the difference between a passive – if I can use that term – ETF and then actively managed ETFs, which are a thing overseas and I think are becoming a thing here. That really is the difference, right?
Nico Katzke: Yeah. I want to stress that factor strategies need not be housed in ETFs. In fact, our multi-factor strategy, SmartCore, is in a unit trust form. It’s not that the structure of the fund determines whether it is effective strategy or not. It’s rather what is behind the strategy. In other words, what it is that we’re trying to achieve that determines whether it’s a factor strategy or nothing.
A lot of our factor strategies are in ETF form, our value momentum quality strategies, they are in ETFs. But in fact, our multi-factor strategy is in a unit trust. That should be neither here nor there for investors. In reality, what you can take comfort from is that all our strategies are index strategies. In other words, we follow a set of rules, and we are consistent in applying those rules. And it’s that consistency, really, over time, that makes a big difference.
If you think about it very much like beauty, a measure like value or company quality is absolutely in the eye of the beholder. My definition of value might differ completely from yours. We might walk by a car and you might say, oh, that’s a bargain. I might say, oh, that’s super expensive for this little two door car – it’s all about value as very much a subject of needs.
There are actually two very important determinants when it comes to how well a factor strategy performs. The same two important components that you consider when you bake a cake – I want to use another analogy, maybe, to just get this across for how factor strategies can actually differ.
The first thing that you need to get right when you bake a cake is to consider the ingredients that you use. What you put into your cake matters massively. Having fresh eggs, fresh milk, that’s going to be a determining factor in whether your cake is good or not. Now, similarly, you need to ensure that the measures you use to determine your value score are valid for the stocks you consider and the sectors and markets that you’re trading in. For example, think of price-to-book. This may not be relevant for tech companies, where book value is not a fair reflection of the value of the IP that they control.
But even if there is agreement on the correct measures to use for, say, determining value scores, how the measure is used to put together an investment portfolio can and does differ massively. This gets to the second important thing to consider when baking a cake. It’s not just about the ingredients, it’s also about the recipe, right? So having the best, freshest ingredients, but you have a bad recipe, well, that’s going to lead to a flop.
In other words, think of it as two managers use the same measure for value, and the one only picks 20 stocks and then equally weights them. You know, you can easily get to a point where you have undesirable sector or stock specific concentration. In other words, you just hold 20 financial companies. And so that concentration, the risk that that has and the impact on your portfolio, might actually dwarf whatever performance the factors would have had delivered had you designed a better portfolio. Bad recipe, bad outcome.
Our approach has always been to balance capturing factor signals while managing absolute risk, as well as relative risk to an appropriate benchmark. And you might ask, well, why do we care about managing relative risk? It is to ensure that our factor strategies are investible and that they act as tilts within the markets that we serve. In other words, if an investor wants to earn the local equity premium, but wants to do so with having a value tilt, then we offer that as a building block, you see. This takes a lot of the risk off the table and makes it an investible portfolio that we offer. It means our value strategy will never hold only banking stocks or only resource stocks. Instead, we focus on balancing factor capture and risk management. That’s always a key outcome for us.
In summary, factor investing, if you really think about it, is a piece of cake – but getting your ingredients and recipe right will determine whether it’s a good cake or not.
The Finance Ghost: Yes, absolutely. I love that. It really is a great way to explain what’s going on, and it shows how people can use the different ETFs and unit trusts, to your point, to actually get their portfolio to do what they wanted to do. You want to give it a bit of a value tilt? Well, here’s a low-cost way to do it where you don’t have to rebalance it yourself, you don’t have to go and trawl through the financials of 100 companies. That’s the thing – these are also massive time savers, right? If you kind of know what you’re looking for in your portfolio, then something like this, yes, you obviously need to do the research to go and have a look at what’s in it and what are the factors and how do they work and all that stuff, but once you’re comfortable with that, the rest is going to happen for you. These funds will be rebalanced as required, I guess like any other fund, ultimately. And away it goes.
Nico Katzke: Yeah. And you know, the funny thing is, I’ve heard many skeptics saying that factor investing is a fad and it doesn’t deliver value to investors, which is really an odd statement for a few reasons. One is it has a proven track record and it has shown to deliver value over time. But secondly, it’s also an odd statement because the factors that we consider are measures that are also used by active managers in their own research. So, terms like price/earnings, return on equity, EV to EBITDA, these are all commonly accepted measures and can either be used as part of an investment strategy or can be used systematically.
We, with the design of our factor indices, use them systematically. We effectively say to active managers that are following these well-accepted measures and their research, that we can do so unemotionally and do so very consistently. And I think that is the key that we bring to the market, is just the consistency with which we harvest these factor premiums, if you like. A very important thing to keep in mind when it comes to factor investing in really any fundamental measure, I want to stress this, is that it works on the whole, not necessarily on the individual. And I know this is a concept that you very well understand in your writing. I’ve picked this up, but very many, call it inexperienced, analysts often fall into this trap.
These fundamental measures of value work on the whole, but really never on the individual. In other words, what I mean by this is looking at a company and making conclusions based on accounting measures is oftentimes misleading as it ignores company level specifics that may make such measures completely irrelevant. Take, for example, a company like Microsoft. They might have a very high price/earnings ratio. And if you only look at that, you’ll conclude, oh, this thing is expensive, I’m not touching it. But that’s not necessarily because the market is irrationally pricing the stock. In fact, it may very simply, and in the case of Microsoft, probably be the case that the market is believing that future earnings will be so much higher than what current accounting measures suggest, making the current price actually very low relative to future potential. So that means when we look at these accounting measures, any measure of value, quality, etc. doesn’t work on picking individual stocks. These measures actually work remarkably well over time when we aggregate them and apply them on many companies. This is because the company-level specifics start to matter less, as you’re diversifying across a range of companies now. And this is where the factor premiums actually start to come to the fore.
Now, this is similar to, again, if I can just go back to my analogy, when buying a single home as an investment, if you wanted to know whether a four bedroom house, let’s say, in a good area on the Western Cape, priced at R5 million, if you want to know whether that is a good purchase or not, you definitely need to know a lot more about the home’s specifics, like whether the roof leaks, whether the kitchen is modern or not, etc. You’d probably be better off in that scenario, buying this R5 million house, just hedging your bets and holding a R5 million share in a fund that owns one hundred 4 bedroom houses at an average cost of R5 million in the same area in the Western Cape. So, in doing so, you hope to have the possible lemon house with a leaking roof offset by another house that has redone wooden floors and three fireplaces and travertine tiles. You’d hope that your lemons are being offset by the surprises in your portfolio.
Then ultimately, if you aggregate them, those good features, the fact that it’s a good price and a good area, actually starts to come to the fore. Now, this principle also applies to casinos as well, because they don’t want you to spin the roulette wheel just once. They actually want you to spin it a thousand times. Increasing the spins mean they increase their own odds of winning relative to whoever is walking through their doors. They never want you to just spin once.
The same applies with factor investing. When the principles are applied to a larger universe, but more so than just a handful of stocks, that’s when it really works its magic.
Of course, it goes without saying, another key ingredient to ensuring factor investing works is to give it time to let the factor premiums deliver. Now, what do I mean by factor premiums? It’s been well established in the finance literature that over time, markets reward investors for taking on certain types of risk. A well-known risk premium that I believe a lot of your listeners will be comfortable with is the premium that you earn for holding stocks over time. We all know that long term you expect to earn more from holding stocks than, for example, just putting your money under the mattress or holding bonds, as you are rewarded for taking that additional risk.
Now, holding certain types of companies has actually been shown to offer similar premiums. Notably cheaper companies, for example, is a premium that’s been shown to deliver over time as opposed to buying expensive companies. And I’m sure that resonates with a lot of your listeners. But this comes with a problem that some companies might actually be cheap for a reason, so we always like to consider cheapness with other attributes, like balance sheet quality, strong price momentum, where the sentiment changes, which is a multi-factor approach and one that we certainly subscribe to and definitely recommend to our clients, especially if they’re new to factor investing.
Consider having a multi-factor strategy, which means if we supplement our measures of value with other measures of, say, management and cash flow quality, and then find the companies that have positive price sentiment momentum, improving analyst recommendations, what happens is then you are buying good companies that are cheap companies and where the markets are realising their potential. That’s a good combination.
That actually gets us back closer to Benjamin Graham’s simple summary of what investing is all about. Benjamin Graham said it very simply. He said, oh, investing, that’s very simple. All you need to do, you just need to buy good companies at a good price. It’s as simple as that. But we try to systematically identify what is good and what is cheap, and then we blend that into multi-factor. And I think that, for investors, should be quite an attractive investment proposition.
The Finance Ghost: Yeah, and some of these factors, if you just use one, to your point, can be really, really dangerous. Trailing dividend yield, that is a good way to hurt yourself honestly, because often the dividend yield goes up because the expectation is that the dividend itself is going to drop drastically going forward. There is a very big difference between a trailing and a forward dividend yield. Anyone who bought commodity stocks in the past few years has learned that the hard way.
You go and look and say, oh my goodness, the stock is paying a 20% dividend. No, the stock paid a dividend, which, if you divide it by today’s share price, is 20%. That is not the same thing. Next year’s dividend, when it is a quarter of what it was last year, is suddenly a 5% dividend yield. And so the lessons get learned. You know, that’s a tough one.
And then the other one that’s really interesting I think, especially in the US market we see this a lot on some of the old school stuff, is they often have negative equity on the balance sheet because they’ve done so many share buybacks over the years. You know, it’s just the way it’s worked out in terms of their accounting. You get to this very weird situation, if they’ve gone and borrowed money to do share buybacks, then they’ve actually ramped up liabilities and brought down equity. This thing looks insolvent using accounting rules! But then you go and look and it has a gigantic market cap because the market is not that stupid. They understand that shares were bought back. You can just really break the formulas if you’re not careful. Return on equity then looks super weird, or it’ll have a very, very low equity balance and the return on equity is then gigantic because they’ve done so many share buybacks over the years. So that kind of thing is obviously something to be careful of.
But that’s why it’s important when you design these things to obviously know about these pitfalls and to be careful of them, as you’ve mentioned. And I guess that if you get it right, then outperformance is possible.
So, what does that look like? What is the outperformance track record of factor investing? It must be strong enough to justify all this effort. But what does it really look like?
Nico Katzke: I think you’re right. Factor investing has been fertile ground for research. It’s produced an absolute explosion of new factors over time. It feels like every month you’ll find a new, best, shiny factor that promises to deliver.
In fact, some have termed it a factor zoo that’s emerged, that looks to identify the next big strategy to follow to beat the market. You can really keep yourself busy by just following the literature on the latest greatest craze. Strategies that look to chase the next best factor, or even strategies that continuously try to time their factor exposures through time, have seldomly succeeded.
Globally, the most consistent performing factor strategies have actually been those that stick to core principles of finding good companies that are cheap and consistently applying their methodology unemotionally through time. There have certainly been factor strategies that have done exceptionally well over time. In fact, in our stable, we have a global multifactor strategy that’s managed by a team in Boston in the US. They’ve done remarkably well over a 20-year period. They’ve outperformed the MSCI ACWI, which very, very few active managers have been able to do. So, they have exceptional performance, and it’s all based on a systematic factor strategy applied on the global scale, which is an incredibly efficient market.
The question is whether factor strategies can deliver even if markets become more efficient. It absolutely can. But you have to keep your wits about you, and you have to try to unemotionally stick to the principles that deliver over time. And that’s also, incidentally, exactly what we do with our multi-factor strategy, which we call SmartCore. It’s a systematic approach where we look to identify good companies that have sound balance sheet characteristics and positive pricing and sentiment momentum, but also happen to be attractively valued.
Then we apply advanced optimization algorithms, like I mentioned earlier, to arrive at an optimal blend of factor capture. And we also ensure that risk is well managed in the portfolio to create ultimately, for investors, an investable alternative to the broadly used and simple market cap weighted benchmark that most of your listeners, I’m sure, are quite comfortable with. You know, the passive alternative, if you like.
We then go about finding the factors that make up these definitions, like I mentioned, quality, good momentum, measures of value. And we do so by looking at our own history and local specifics. Because this fund, SmartCore, is a local multi-factor fund, global best practices might not apply in South Africa. We very carefully consider our own local specifics or local idiosyncrasies when we decide which factors to use.
And then the last thing I’ll say on how to identify it is really for us there need to be three things or three boxes that have to be ticked.
First is, do the factors make sense? For example, price/earnings. Is there a reason why the market is paying you a premium? Because take, for example, the quality factor. If you just say, oh, my investment philosophy is to buy good companies, well, that might not be a good investment. It might be that you hold good companies, yes, but is the price going to go up, or has the market already priced the fact that they are good? You have to be very careful in terms of how you define that there must be a premium that you earn, or at least stand to earn, or at least likely will earn over time. So that’s the first thing. Do the factors make sense? Will there be a premium to be paid?
The second thing is, has it delivered in the past? Because it’s cold comfort if we say, oh, this factor should work, but then it has never worked. We need to also understand the performance dynamics.
And then thirdly, and like I said, these three you can’t separate, is will it likely continue delivering? It’s, again, cold comfort if it delivered over the past 20 years, but you can actually make an argument to say, well, this factor has been arbitraged and so it won’t deliver in the future. That is not an attractive factor for us because we can’t retroactively give you the premium that it’s paid.
So what we want is factors that make sense, factors that have worked in the past, and there’s a reason why it worked. And then factors that will continue delivering. And only if it ticks all these boxes will we actually consider it as part of our factor mix. And we believe in SmartCore, we’ve identified those factors and we do a good job of balancing factor capture with managing risk as well.
The Finance Ghost: And in this “factor zoo” (I love that term as well), I would imagine some of the factors are very objective to calculate. Are they all like that? Or do you get some softer ones where we’re really starting to strain, like eyeballing whether or not the ESG looks good or whatever else might be in there? Just an example. Do you get to that point where some of these factors are starting to look – I bet you the subjective ones, if they exist, come with a beautiful marketing pack, and then please pay us to use this factor because we’re very clever and we’ve come up with something excellent…
Nico Katzke: It’s interesting, every now and then you see a factor emerge and you go: that doesn’t make sense. I recall in 2014, Fama & French, big names in the factor space, canonical papers that came out of their pens, they introduced a new factor called the investment factor. They basically made the case that companies with high capital expenditure tend to be companies that underperform their market peers. So in other words, all things equal, if companies spend more on capex, they will likely underperform. When you read that initially, it doesn’t really make sense because surely it’s a good thing when companies spend, right? They improve their activities, or at least potential to expand.
Once you read that a bit more carefully and you see the reasoning behind it, it becomes an interesting factor because, well, and you and I have actually mentioned this in past conversations, when you see management just build a big castle just to own it and manage it and run it, that’s generally not a good thing. So unbridled capital expenditure, or at least unproductive capital expenditures, never a good thing. You’re probably better off waiting for good opportunities as opposed to just caving into spending. And so that, for example, is an interesting factor. There are other factors that, again, to your point, absolutely reside in the eye of the beholder, but they are also very subjective. Again, stuff like value. Value for one is not value for the other. But there are some industry accepted definitions that can be used to classify stocks broadly and that the market accepts as relevant.
When it comes to measuring, for example, quality, that’s a very interesting one. It can be quite difficult to actually get it right. And I’ve seen different definitions get it completely wrong, especially for local companies. Now, for us, quality, a company’s quality has two legs that we try to balance. The first is how profitable a company is, and the second is the quality of a company’s balance sheet of, and effectively its ability to turn activities into cash flow.
It might sound like the same thing, but it really is not. Companies can actually be quite profitable, but very easily run into cash flow problems. Similarly, very well managed companies can become unproductive for a variety of reasons and oftentimes unrelated to management’s own efforts. Think of it. If industry dynamics change or competition materially increases, it might make very good companies less profitable. It’s as simple as that. I’ve seen you cover many company examples like that. You can bore us with a ton of detail on where it happens at great companies, just from bad luck or for whatever reason they just happen to be in a cycle where they become unproductive. So for us, a good quality company is one that’s both profitable, but also that is able to turn their potential into cash flow.
The take home really for me, and we can take every factor and sort of unpack it. But really, the take home for me is that factor investing is as much an art as it is a science. And to my earlier point, of the ingredients and the recipe mattering, and you can’t split the two. One cannot simply apply a cookie cutter approach when it comes to factor investing. And you’ve seen global asset managers that bring to our market globally applied factor strategies, and oftentimes these are the ones that end up not working well, because there’s no such thing as a cookie cutter approach. You actually have to tailor your factor strategy to the local market specifics that we experience.
Our experience in managing local factor strategies dates back almost 15 years, so we’ve certainly cut our teeth in this space. And we believe we now currently have a suite of interesting factor building blocks for our investors to consider.
The Finance Ghost: I enjoy the reference to the capex because what that would imply, of course, is filling a portfolio with tech companies. But then what it misses is that the tech companies’ capex is sitting on the income statement, whereas for old school businesses, it’s sitting on their balance sheet, because the tech companies can’t go and properly capitalise the fortune they spend on R&D. I’ve read some interesting research on that topic as well. You know, people are quick to say: oh, look at the crazy R&D in tech companies, but then they’re completely fine that this big old lumbering thing that has factories has spent a fortune on capex.
It’s about understanding, and it’s something you said earlier in the show, how the specifics work for that business. I have no problem with “low capex” in a great tech company and then a high R&D bill, because that’s their business. Their business is not to sell you factory type stuff. Their business is to sell you a tech platform. It’s pretty interesting stuff.
And obviously these are all of the challenges that you face in managing these portfolios, choosing the factors, I mean, you’ve touched on quite a few of the challenges already, I think. But are there any others that come to mind that you think are worth highlighting?
Nico Katzke: Different factor strategies often face different challenges. Take, for example, momentum. What you’re trying to do is when you have a momentum style, you’re trying to look for companies that have experienced recent tailwinds and where market sentiment is improving, and you hope and you expect that sentiment will continue in the future. But think of it this way – momentum is a signal that changes very quickly as the whim of the market changes. In essence, for a momentum strategy to be successful, you need to rebalance your portfolio far more often in order to refresh the information to keep it relevant, because momentum measures of six months ago are almost completely stale. You need to trade far more often if you have a momentum strategy.
Now, if you’re not careful, this can actually lead to very high and costly turnover. There have been strategies in our local industry that have experienced this in the past where it’s a momentum strategy that has very, very high turnover costs. You might end up chasing your tail.
I’d say the main challenge in factor investing in addition to identifying good ingredients and having a good recipe, is balancing how often you trade refreshed information versus allowing time to pass for factors to deliver. And so certain factors like value, I mean, or let’s say quality – a good quality company today is likely going to be a good quality company in six months’ time. You don’t need to refresh that information as often. It’s understanding these dynamics and heuristics for different factors and understanding how to blend them in a portfolio optimally really makes the differentiating factor.
I’ve seen some skeptics point out that point to certain type of factor strategies and say, look, factor strategies haven’t delivered because x, y and z has underperformed. But then you go and look how x, y and z is constructed, and you see they fell into the obvious traps. It’s a value strategy that holds 20 stocks.
I mean, what do you expect, right? You’ve decimated your breadth. You only hold 20 stocks, and of those 20, there’s a significant proportion that are cheap for a reason. So you’ve not diversified, you’ve only picked cheap stocks. The same with the dividend yield strategy that you mentioned. You might end up, if it simply picks the 20 most attractive from a dividend yield perspective, you might end up with extreme risk concentration.
In other words, you just obey the whim of the market in buying the companies that have been sold off because the price has gone down, the dividend yield has gone up. You have to be careful and really understand those dynamics. And each factor actually has its own challenges. And just having experience in this field and building the portfolios to capture the premiums, but also be safe and investable, that’s the trick.
The Finance Ghost: Yeah, absolutely. I think let’s bring it home with what investors can get from Satrix in this space. I mean, you’ve mentioned a little bit of that as well, but I think let’s do a nice wrap up of the Satrix product suite in the factor investing space.
Nico Katzke: Sure. So we’ve used the recent acquisition of ABSA investment management really as an opportunity to consolidate our factor offering, which means we now actually have a consistent and coherent set of style building blocks that investors can use to reflect their style views. Or oftentimes, a lot of our clients add these building blocks or single factor building blocks as a means to diversify their style exposures, where they might, for example, feel lighter.
So they might look at their holdings and say, we’re a bit light on momentum. As an example, they can then use our momentum strategy to supplement it. Now, I’ve mentioned SmartCore. So SmartCore is our multi-factor strategy, and since inception it has delivered 1.5% outperformance compared to the Capped SWIX since inception five years ago. This is nothing to scoff at. The Capped SWIX has been over time – the local benchmarks have actually done very well relative to active managers – so it’s pleasing to see that a well-designed systematic strategy can actually add value above and beyond quite an efficient benchmark as well. For SmartCore, we blend company quality, price and sentiment momentum as well as value in order to arrive at a multi-factor score. And then we use that multi-factor score to construct the portfolio using optimisation considerations as well.
In addition to SmartCore, we also offer single factor strategies. These include Satrix Momentum, which is in both a unit trust and an ETF form. We also have Satrix Quality that looks to identify good quality companies, also in ETF and unit trust form. Then we have a value single strategy, where we listed in March our Satrix Value ETF. We’ve been managing it internally, but we’ve actually brought it to market as a single style factor now as well. So that’s an ETF form, Satrix Value.
Then we have other, call it more “traditional” factor strategies that we’ve been running for a long time, the Satrix Divi Plus that a lot of your listeners might know, as well as a RAFI fundamental value index. But those two are not indices that we design, so they’re not bespoke to us. They are kind of off-the-shelf indices that we’ve historically offered investors.
I think those are the three key pillars from a single style perspective: the momentum, the value, and the quality indices, and then the multi-factor strategy as well. And then we also have a low volume strategy, which we developed and launched as well in March.
So these offer you a range of styles that you can capture. But look, I think I’ll be remiss if I don’t mention it, I’m at pains to stress that we full well know that these factor strategies will never replace active managers in the same way that, for example, a computer algorithm effectively cornered the chess world. I just want to make that clear because I’m always scared that a casual listener or even an industry professional might listen to this podcast and go: he’s harping on about factor investing and people might think that this replaces active management. It can’t ever do that. Instead, and think about how interesting the emergence of systematic investment strategies are – it instead offers active managers the opportunity to be truly active in finding unique opportunities that may not be obvious using well known accounting measures. So active strategies that simply use well established truisms as the investment strategies that think value, think quality, they should perhaps fear being replaced one day because it leaves managers that are able to find the opportunities that are not obvious in the data and that we cannot systematically identify. But where let’s say the manager has an inkling and a feeling that it might deliver, or based on experience, say, you know what, this company, I know all the metrics suggest we shouldn’t buy it, but I like this company, it offers those managers that have the ability to differentiate themselves the opportunity to come to the fore.
But one thing is it certainly does raise the bar for active managers if they are being compared to a benchmark that’s not only determined by the size factor like the Capped SWIX or the S&P 500, but instead also compared to an index that considers other company features that are systematically harvested. Ultimately, look, I believe ultimately, as the industry becomes more systematic, as it is happening in the US, incidentally, where currently more than half of the assets in their market are being managed either according to a vanilla index strategy like the S&P 500, or a non-vanilla like the factor strategies we discussed today, more than half of their assets are invested using some form of rules.
So if our market is heading that way, I honestly believe that this will put investors… or be to the benefit of investors, because you can harvest the premiums on offer, but you also then have the good managers that remain that can offer something else that’s not easily identified. And so a combination of consistent, low cost, transparent strategies and good active managers that can offer you something different. I think the combination of that is, that’s absolutely the future of investing.
The Finance Ghost: Nico, that’s been fantastic. Thank you so much for sharing not just the excitement of this “factor cake” but all the stuff that goes into it, all the recipes, some great analogies in there, just some really sensible stuff. It almost feels like marrying the sort of active and passive side of ETFs and unit trusts really, really well.
It’s a lot to take in I think for our listeners, but I’ve no doubt they’ve enjoyed this. Maybe go and listen to it again, or go and read the transcript and just make sure you’ve absorbed everything that was available to you in the show. It really is a wonderful opportunity to have someone like Nico sharing his insights with us.
So Nico, thank you so very much. I look forward to doing another one with you. As always, I feel like we’re going to have to do another show on factor investing. I think you were only just warming up for the past 40 minutes, and I think we can really dive into trends in factor investing, maybe more on the ones that work and the ones that don’t, and some of the research in this space, I think for people who have more of an interest in this stuff.
Thank you very, very much Nico, and to our listeners, thank you as well for your time on this podcast. I look forward to welcoming you back to another ghost stories with the Satrix team in the next month or so.
Nico Katzke: Thank you Ghost. And it’s always, the pleasure is mine.
Satrix Investments Pty Limited and Satrix managers RF Pty Limited are authorized financial services providers. Nothing you have heard in this podcast should be construed as advice. Please do your own research and visit the Satrix website for more information on all their ETF products.
Lighthouse Properties, through its wholly-owned Spanish subsidiary, Girona Retail Property, will acquire a mall known as Espai Gironès located on the outskirts of the provincial capital Gironès from Commerz Real Investment. The purchase consideration of €168,2 million represents an annualised net initial yield of 7.2% post transaction costs. Following the acquisition, the company’s Iberian exposure stands at 76% of the value of Lighthouse’s directly held properties.
Mondi plc is to acquire the German, Benelux and UK corrugated converting and solid board operations of Schumacher Packaging in a deal with an enterprise value of €634 million. Mondi expects the deal to be earnings per share accretive in the first full financial year following completion and will increase capacity in Europe by over 1 billion square meters.
Mantengu is to acquire Blue Ridge Platinum following an agreement with Ridge Mining (Sibanye-Stillwater) and Imbani Platinum SPV for a nominal amount. Blue Ridge was placed on care and maintenance in 2011 by Aquarius Platinum (Sibanye acquired Aquarius in 2016) on the back of depressed PGM prices and has remained ever since. Blue Ridge has a sizeable tailings dump of 1 million tonnes which contains significant quantities of chrome and PGMs. Mantengu’s investment will be in a phased approach – initially in plant and equipment to process the tailing dump and then investment in a bankable feasibility study into the underground UG2 mining operations.
Sizwe Africa IT Group, in which AYO Technology Solutions holds a 55% indirect interest, will sell its 70% stake in Cyberantrix to Mustek for R20 million of which R8 million is in respect of the shares and R12 million in respect of Sizwe claims.
Metair Investments, the JSE-listed group with an international portfolio of companies that manufacture, distribute and retail products for energy storage and automotive components, is to acquire financially distressed AutoZone out of business rescue. AutoZone, a distributor of auto parts, spares and car accessories, entered into business rescue in July this year impacted by the sizeable debt on the group’s balance sheet dating back to the 2014 leveraged buyout of the business. Metair will pay a maximum of R290 million in cash of which R200 million is payable to Absa, R15 million to settle pre-commencement unsecured creditors and R75 million to fund the working capital requirements of AutoZone providing it with the ability to trade as normal. At this point, there is no equity value in the shares.
Richemont has signed an agreement with MYT Netherlands Parent to dispose of YOOX NET-A- PORTER (YNAP) in a share swap for a 33% stake in Mytheresa. Richemont failed in 2022 to dispose of the lossmaking online retailer to FARFETCH and Symphony Global. The deal aims to create a leading global multi-brand digital luxury group offering highly curated and strongly differentiated but complementary products. Mytheresa has a cash position of €555 million and no financial debt. Richemont will make available a six-year revolving credit facility of €100 million to finance YNAP’s general corporate needs, including working capital.
Accelerate Property Fund will be hoping it’s third time lucky for the sale of its Cherry Lane Shopping Centre. Bellerose Investments and Scarlet Sky Investments will each take a 50% stake in the property for a cash consideration of R54 million – down from the R60 million price tag in March this year.
The period of fulfilment of the condition precedent in sale of SS-Construções (Moçambique) by Stefanutti Stocks to CCG-Compass Consulting Group announced in Q3 2022 have once again extended from 30 September to 30 November 2024.
Unlisted Companies
BSE-listed WPIL, through its South African subsidiary APE Pumps, has acquired Eigenbau, a local contracting company providing turnkey solutions in the water and wastewater sector. The cash purchase consideration was undisclosed.
OSC Marine, a subsea engineering company, has acquired the vessels and services of Servest Marine in a strategic acquisition which will scale its operational capabilities as it seeks to capitalise on international growth initiatives. Financial details of the transaction were not disclosed.
Afrirent, a 100% black-owned and managed mobility, energy, leisure and gaming group, has acquired a 51% stake in High Street Auctions for an undisclosed sum.
Two Western Cape companies, DAMREV and Codenatics have entered into an agreement which will see DAMREV, a real-world asset tokenisation and digital transformation company acquire a controlling interest in Codenatics, a software development agency specialising in advanced technology solutions. The acquisition will strengthen DAMREV’s technology stack and will enhance its ability to deliver best-in-class software solutions across industries. DAMREV has the option within the next 12 months to acquire the remaining equity in Codenatics.
Meitier, though its Capital Growth Fund III, has partnered with the van den Berg family in an investment into Blinkwater Meule, a local vertically integrated maize meal producer and retailer.
Juta and Company has acquired Contractzone and Litigator effective 1 July 2024. Contractzone is a legal document automation solution and Litigator is an advanced cloud-based legal workflow solution combined with a legal correspondent network to manage cost-effective legal proceedings. Financial details were undisclosed.
Global pharmaceutical group Lupin has, via its local subsidiary Pharma Dynamics, acquired nine brands along with their associated trademarks, from the Medical Nutritional Institute SA. The deal, through a partnership with ImpiloVest, a South African Investment firm, include the brands AntaGolin, RyChol, NeuroVance, SkinVance, FlamLeve, Rheumalin, SleepVance, ImmunoVance, and OviVance. These products address a range of health concerns including metabolic syndrome, cognitive function, joint care, immune support, and women’s hormonal health. The acquisition is a major step for the Mumbai-based Lupin in the expansion of its footprint in the Complementary and Alternative Medicines sector.
DRA Global, the JSE- and ASX-listed multi-disciplinary consulting and engineering group focused on the mining and minerals resources sector, plans to delist following an off-market share buy-back. Shareholders will vote on this in November. In the meantime, due to the low level of trading in the share the company will offer shareholders holding up to 11,088,080 DRA shares (20% of the current issued capital) to buy back shares at R24.55 per share for an aggregate R271,45 million. Those still holding shares after the 20% take-up will, if the company delists, remain shareholders of an unlisted entity.
Following the results of the scrip dividend election, NEPI Rockcastle will issue 9,806,671 new ordinary shares in the company in lieu of an interim dividend, resulting in a capitalisation of the distributable retained profits in the company of R1,38 billion.
Visual International has advised it will be entering into share subscription agreements with related and non-related parties to raise funds to strengthen the balance sheet to better position the company to engage with funders and banks to develop its other property development projects. The shares will be issued at 4 cents per share – a premium of 9.53%.
Chrometco has received shareholder approval to change the name of the company to Sail Mining Group.
This week the following companies repurchased shares:
South32 announced in its annual financial statements released in August that it would increase its capital management programme by US$200 million, to be returned via an on-market share buy-back. This week 786,070 shares were repurchased at an aggregate cost of A$2,84 million.
In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 429,070 shares at an average price of £26.86 per share for an aggregate £11,52 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 30 September – 4 October 2024, a further 4,823,628 Prosus shares were repurchased for an aggregate €195 million and a further 486,028 Naspers shares for a total consideration of R2,1 billion.
Three companies issued profit warnings this week: EOH, Insimbi Industrial and Afrimat.
During the week, four companies issued cautionary notices: Barloworld, Salungano, Chrometco and Vunani.
Morocco’s Agenz, a data-driven platform that provides real-time property and market insights, has secured an undisclosed investment from early-stage investment firm, Renew Capital.
US-based Newmont Corporation, announced the sale of its Akyem operation in Ghana to China’s Zijin Mining Group for up to US$1 billion. $900 million is payable upon closing and a further $100 million upon satisfaction of certain conditions. Newmont is currently undergoing a process of divestment of non-core assets.GCB Cocoa Singapre PTE Ltd, a subsidiary of Guan Chong Berhad, has entered into a MOU with Counseil du Cafè-Cacao and its subsidiary, Transcao Negoce, to acquire a 25% stake in Transcao Côte d’Ivoire, a local cocoa processor.
Australia’s Patriot Lithium has entered into an option agreement with Array Metals and Natural Resources to acquire an 80% stake in the Katwaro Cooper Project in Zambia.
Renew Capital and other investors have invested in ChipChip, an Ethiopian e-commerce platform that brings together customers and suppliers through collective purchasing of fresh produce and fast-moving consumer goods.
International Finance Corporation (IFC), Fipar Holding and CDG Invest Growth have acquired a 21.5% stake in Moroccan-based Retail Holding, a food and consumer goods retailer. The funding will allow Retail Holding to expand its operations in Morocco and Côte d’Ivoire.
Nigeria’s Starlink Global & Ideal has secured a USD$20,8 million financing facility from African Export-Import Bank (Afreximbank) to construct and operate a 30,000-metric tonne per annum cashew processing factory in Lagos.
British International Investment has announced a US$25 million risk sharing facility with Ecobank Sierra Leone to boost private sector growth in high-impact sectors of the economy.
Zambian renewable energy aggregator and trader, Africa GreenCo, has received a commitment from the U.S. International Development Finance Corporation (DFC) for a US$40 million facility to help mobilise climate sector finance for critical renewable energy infrastructure in countries including Zambia, South Africa and Namibia.
MeCure Industries, a Nigerian pharmaceutical company listed on the NGX, has announced that Zrosk Investment Management has taken a 10% stake in the company for an undisclosed sum. The transaction took place off-market.
The full group is now profitable, not just the continuing operations
Altron has released an updated trading statement for the six months to August. This is after an initial trading statement was released at the end of July. The July release was the bare minimum in terms of earnings guidance, noting that earnings would improve by at least 20%. We now know that they were underplaying their hand in a big way, as earnings are multiple times higher than in the comparable period.
The comparable results have been restated to reclassify Altron Document Solutions as a continuing operation. Altron Nexus seems to be the only discontinued operation now. Focusing on continuing operations, HEPS has jumped from 28 cents in the comparable period to between 76 and 81 cents in this period, an improvement of between 171% and 189%!
When companies throw out the “at least 20%” wording in an initial trading statement, it’s because this is the minimum required disclosure under JSE rules. It can be much, much more than that, with Altron as a perfect example.
Looking at total group operations (i.e. including Altron Nexus), they’ve swung from a headline loss of 65 cents per share in the comparable period to HEPS of 71 to 76 cents in this period.
Detailed interim results are due for release on 4 November.
Property valuations are starting to move higher at Equites (JSE: EQU)
Growth is hard to come by though, including in the dividend
Although it is true that decreasing interest rates will be the tide that lifts all boats in the property sector, it’s also true that those boats won’t rise by the same amount. Equites has been struggling with its UK exposure, delivering a disappointing flat share price return this year. This excludes dividends, of course.
In results for the six months to August, Equites sold R0.6 billion worth of assets and combined this with a dividend reinvestment programme to fund R0.9 billion in development expenditure. This helped keep the loan-to-value ratio stable at 41.0%. Just remember that those dividend programmes are dilutive to shareholders, as they are basically miniature rights issues. The market seems to gloss over this fact.
Based on disposals currently being implemented, they expect the loan-to-value to drop to 38% by February 2025.
Although like-for-like rental growth was 5.6% in South Africa and 7.4% in the UK, the uplift in property values was modest, particularly in the UK. Things do seem to have bottomed out in developed markets, as I’ve written about in Sirius Real Estate and Schroder European Real Estate elsewhere this week.
The interim distribution per share of 66.50 cents at Equites is just 1.7% higher than 65.37 cents in the comparable period. This is despite distributable earnings being up 5.4%. This is because of the additional shares in issue, which is the point I made about how these dividend reinvestment programmes are little more than annual rights issues.
Notably, despite the slight valuation uplift, net asset value (NAV) per share fell by 2.4% to R16.32. The share price is trading at roughly R14.00 per share, so the discount to NAV is minimal. This is because the market believes strongly in logistics properties, seeing them as dependable cash cows.
The group is targeting the upper end of its guidance for the full-year distribution per share of 130 to 135 cents. At the current price, that’s a forward yield of 9.5%. At a premium valuation and with no obvious reasons why logistics should outperform retail and office properties over the next 12 months, Equites wouldn’t be one of my picks in the sector. The total return is likely to be decent but not spectacular, so I wouldn’t own it instead of just holding a property ETF.
Lighthouse is pushing its Iberian strategy (JSE: LTE)
For South African property funds, Spain and Portugal are the new Poland
The flavour of the month for South African property funds is peri-peri chicken, with churros to end off. They’ve clearly been having Nando’s for lunch, inspiring this capital allocation strategy.
The Iberian Peninsula is all the rage right now, seemingly offering similar opportunities to those unlocked in Eastern Europe in recent years. The idea is to invest in stable European regions with high growth rates (at least relative to the countries where the sun doesn’t shine and the food isn’t nearly as good).
Lighthouse Properties is acquiring Espai Girones for EUR 168.2 million, a mall adjacent to the motorway that connects France to the Barcelona area in Spain. It is the only major mall offering in the provincial capital, Girona. This is the entire point in Europe and I’ve seen it on my travels: they simply don’t have many modern malls. The way we understand shopping centres in South Africa is completely different to how it works in Europe, which is why they can be great assets over there.
Lighthouse’s exposure to the Iberian Peninsula is now 76% of the value of Lighthouse’s directly held properties.
The property is expected to achieve distributable profit of €12.45 million for the year ending December 2025. Based on the purchase price, that’s a yield of 7.4%. That might sound expensive to you, but remember that this return is in euros, not rands.
This is a Category 2 transaction, so shareholders won’t be asked to vote on it.
Mantengu Mining invests in chrome and PGM tailings at Blue Ridge Platinum (JSE: MTU)
They are paying only nominal value for the equity here
Mantengu Mining is taking a punt with a deal to acquire Blue Ridge Mining. One of the sellers is Sibanye-Stillwater, which holds 50% in Blue Ridge. The price for the equity? R2. There are no zeroes missing there. Two bucks.
This should immediately tell you two things. Firstly, the thing is clearly broken. Secondly, whatever value there is in the assets must be must be less than or equal to the debt in the business, as the equity value is nominal.
The mine was placed on care and maintenance all the way back in 2011, so it is certainly broken. The opportunity here for Mantengu is the tailings dump of 1 million tonnes that includes chrome and PGMs. Mantengu reckons they could get up to 375,000 tonnes of chrome and 35,000 ounces of PGMs, with an ability to operate as an extremely low-cost producer. Over and above this, Mantengu thinks that there’s a chance of getting underground mining operations underway again. They will invest in a bankable feasibility study in this regard that will take 18 months to complete.
As for whether or not there is debt, the answer is a resounding yes. R39.1 million is payable to DBSA on a deferred basis and R25.5 million is payable to the IDC on a similar basis. Each of those amounts will only be paid from gross profit achieved by Blue Ridge over time. Although it sounds like Mantengu is getting a free ride here, remember that they will be exposed to the operating costs and all those risks.
To show how desperate the situation is, Sibanye is walking away from loan account claims held by various entities worth over R1 billion and the other shareholder (Imbani) is losing over R100 million in claims. The DBSA and IDC are also taking a huge bath, with claims of R418 million and R272 million respectively.
This is a risky deal for Mantengu. If it was a lucrative operation, the parties involved here wouldn’t have been so willing to walk away with massive losses. But if things do improve in the PGM sector, Mantengu could look very clever here.
Newpark extended the JSE lease but still has work to do (JSE: NRL)
Key discussions with lenders are underway
Newpark REIT is one of the smaller property funds on the market. Ironically it owns the JSE building, so it is listed on its tenant’s product! The JSE building is one of only four buildings in the portfolio, with the others being 24 Central adjacent to the JSE building (I have many fond memories there) and properties in Linbro Business Park and Crown Mines.
If that sounds like a rather random and far-too-concentrated portfolio, then you’re on the right track. One of the major risks has been the lease with the JSE, which has thankfully been extended. Although it’s hard to imagine the JSE moving from where it currently is, anything is possible. Thanks to that extension, the portfolio’s weighted average lease expiry is up to 5.8 years.
The next problem to solve is the debt. The loan-to-value ratio of 41.7% looks only slightly high on paper, but it exceeds one of the debt covenant measures from the fund’s lenders. The lender has condoned the breach, pending the outcome of current negotiations to extend the term of R150 million in debt that matures in May 2025. Management sounds confident regarding the outcome there, but it’s still a risk for now.
Against this backdrop, the dividend per share for the six months to August 2024 fell by 14.3%. Funds from operations per share fell 11.7%. None of this is good, driven by a revenue increase of just 0.1% due to a negative rental reversion with a major tenant. When you only own four buildings, every tenant is a major tenant! With revenue growth so far below inflation, operating profit never stood a chance.
Newpark has close to zero liquidity, so I’ve used this result as an opportunity to walk you through some of the risks faced by smaller funds. It’s very unlikely that you can meaningfully trade this stock.
Bad news for Sibanye-Stillwater, with an hilarious twist (JSE: SSW)
Mr Justice Butcher has spoken
This is an iconic SENS announcement, even though there’s a very serious undertone to it. I kid you not, Mr Justice Butcher (!!) has ruled against Sibanye-Stillwater in the High Court of England and Wales. This sounds like the script to a Monty Python skit!
Sadly for Sibanye-Stillwater shareholders, John Cleese isn’t involved here. These proceedings were brought against Sibanye-Stillwater by Appian, the counterparty to the acquisition of the Santa Rita and Serrote mines in Brazil in 2021/2022. Sibanye walked away from that deal after a geotechnical event that Sibanye determined to be a material adverse change.
The proceedings relate to whether that event could indeed be reasonably considered to be a material adverse event. Mr Justice Butcher (I’m sorry, I can’t stop laughing) has ruled that it was not in fact material and adverse, which means that Sibanye wasn’t entitled to terminate the deal. On the plus side (for Sibanye at least), the same judge ruled that the management of Sibanye believed they were terminating in the best interests of Sibanye, so there’s no wilful misconduct here.
This is actually a serious matter, as the next proceedings relate to the potential damages claim that Appian would have against Sibanye. It feels like the world just refuses to throw Sibanye a bone right now, with everything going wrong.
Sibanye’s argument is that Appian could’ve sold to another purchaser for a similar purchase price after the deal fell through, with the judgement noting that Appian did indeed receive multiple offers for the mine after Sibanye walked away. This implies that (1) it probably wasn’t a material adverse change after all and (2) surely Appian can’t claim to have suffered a loss if the chose not to sell to someone else for the same price. I don’t think justice has been butchered just yet, unless Appian somehow manages to justify a quantifiable claim.
Stay tuned for the next episode of Monty Python: That’s Not My Deal!
Sibanye fell over 8% on the day, with the market not seeing the funny side.
Chrome is shining brightest at Tharisa (JSE: THA)
The group is taking advantage of chrome prices
Tharisa has released its production report for the fourth quarter and thus the full year ended September 2024. This is firmly a story of two metals, with chrome doing well at the moment and the PGM market in disarray.
Thankfully, the best production news at Tharisa is exactly where it needs to be: chrome. Production came in 7.8% higher, marking an annual record in chrome production at a time when average prices in dollars were up 13.7% for the year. PGM production was flat for the year and the average price was down 28%.
So, despite all the horrors in the PGM sector, Tharisa managed to increase its net cash position over three months from $92.2 million to $108.7 million.
Production guidance for FY25 doesn’t tell you much. For PGMs, they’ve set it at between 140 and 160 koz vs. 145.1 koz achieved this year, so the mid-point is a bit higher than FY24. For chrome, the range is wide at 1.65 to 1.80 Mt vs. 1.7 Mt in FY24.
Tharisa has done a great job of trying to navigate the PGM cycle by controlling its controllables. The chrome focus is helping tremendously and they’ve been busy on several other projects as well, ranging from renewable energy to process improvements in chrome production.
Of course, what they really need is for PGM prices to move higher. It also helps that a significant portion of chrome demand is driven by China, so the recently announced stimulus measures in that country won’t hurt.
Nibbles:
Director dealings:
As a reminder of what the big leagues look like, Dr Christo Wiese shuffled some Shoprite (JSE: SHP) exposure around his entities in scrip lending and total return swap transactions. The value? A cool R1.1 billion.
After the news of DRA Global (JSE: DRA) intending to delist, Apex Partners (an associate of the CEO of the group) bought another R43 million worth of shares.
A prescribed officer of Standard Bank (JSE: SBK) has sold shares worth R4.4 million.
A prescribed officer of Nedbank (JSE: NED) sold shares worth nearly R1.5 million.
Following the lead of the group’s top executive, a director of a major subsidiary of AVI (JSE: AVI) has sold all the shares received under the performance scheme. The value of the sale was R60.5k.
The CEO of Choppies (JSE: CHP) bought shares in the company worth roughly R10k.
The NEPI Rockcastle (JSE: NRP) scrip dividend election was well supported by shareholders, with holders of 39% of shares electing to receive shares in lieu of a cash dividend. This is exactly what I referenced further up in the Equites sector about miniature rights issues each year by these property companies as they look to conserve cash on the balance sheet by issuing shares instead of paying dividends.
Attacq (JSE: ATT) hosted an investor day focused on Waterfall City and the Lynnwood Bridge precinct. If you would like to see the development plans for the area (and laugh at a slide that basically argues that the rest of Joburg is a dump and Waterfall City is an oasis), then check out the presentation here.
AH-Vest (JSE: AHL), one of the smallest listed companies on the JSE with a market cap of just R10 million, released a trading statement for the year ended June 2024. The percentage move in HEPS is huge, up by between 182.4% and 192.4%. In reality, profits at the food group are so marginal that the percentage move doesn’t tell you much. HEPS will be between 3.81 cents and 3.95 cents. The stock is highly illiquid, with the last trade at 10 cents.
Risk in investing is a feature, not a bug. It is, in fact, the reason we expect to earn higher long-term returns than those provided by risk-free assets. When thinking about risk, investors should think equally about investment term too. The longer we remain invested, the lower the risk generally becomes – a principle that the most successful investors have well understood.
There are many sources of risk that might concern investors currently – making the case for diversification as strong today as it ever was. Below we highlight some of these risks and the opportunities they present.
When Rates Abate
Investors have been anticipating rate cuts from central banks as inflation has subsided.
While inflation has been challenging to tame, central banks believe it is now starting to come under control, and have recently made decisive moves to reduce interest rates. These cuts are expected to positively impact fixed income bonds and equities, reducing borrowing costs for leveraged companies and lowering the risk-free rate used to value companies.
Impact of Middle Eastern Conflict on Equities
Oil is a crucial commodity, influenced by many factors, including OPEC’s coordinated supply, which represents almost 80% of the world’s proven oil reserves and about 40% of its production. The oil price significantly affects transportation costs and overall inflation, given its widespread use and role as a base ingredient in many products. However, new oil discoveries, such as those off the coast of Namibia, diversify supply and make the market more resilient to regional or geopolitical disruptions.
Global Diversification: Africa and India
Global diversification is crucial for South Africans as our market represents a small portion of global investment opportunities. Emerging markets generally offer higher economic growth potential, often reflected in their equity markets and offset by typically higher interest rates. The US has benefited from low interest rates for over a decade, with its market led primarily by the innovative technology sector.
India, the fastest-growing large economy, has a substantial technology services industry and is priced at a significantly higher Price/Earnings multiple compared to the broad MSCI Emerging Markets Index. It is even marginally higher than the MSCI USA Index as it prices in future growth prospects. It’s an exciting investment market, but it should be part of a broader portfolio that also includes undervalued segments offering potential upside.
The Tech Bubble Question
Nico Katzke, Head of Portfolio Solutions at Satrix* believes that valuations across the global tech sector, although seemingly stretched at present, are largely on the back of more solid fundamentals and real opportunities than was the case in previous tech rallies. Tech index proxies, like the Nasdaq, are dominated by large corporations with strong cash-flows investing in their capacity to service tomorrow’s applications in AI. Growth opportunities remain in this sector, and it is unlikely to wane in its importance in the economy of tomorrow. Building diversified exposure to global tech through time, and not timing entry, seems the best approach at present.
Benefits of Offshore Diversification
At Satrix, we advocate investing primarily through well-diversified asset class exposures, tracking broad market indices. We review asset classes for medium- to long-term performance to inform a strategically diversified asset allocation for our multi-asset balanced funds. We also target long-term drivers of excess returns within equities by tilting our portfolios towards well-recognised performance drivers, avoiding the temptation to profit from short-term market movements and noise.
Local Investments in South Africa
South Africa stands at a critical point 30 years after democracy. The new Government of National Unity, led by President Ramaphosa, aims to revive economic growth through policy reforms and restructuring. As these efforts take hold, investor confidence could lead to a re-rating in our equity market, currently trading at a discount (13.3x) to its long-term average (15.4x). Against this backdrop, the rand is likely to re-rate, posing a headwind to offshore investments as they devalue in rand terms. A stronger currency would give the South African Reserve Bank more freedom to cut interest rates, supporting local bonds.
While uncertainties remain, excluding the home market from investments may not be wise. Balancing global and local investments offers a robust strategy to achieve financial goals amidst uncertainty.
Approaches to Robust Diversification
Investors can ensure a diversified portfolio through several approaches:
Outsourcing to a Financial Adviser: A financial adviser can construct an appropriately diversified portfolio.
Investing in Multi-Asset Funds: Investment managers can diversify optimally across different asset classes and geographies.
Constructing a Multi-Asset Portfolio: Building a diversified portfolio by investing in different specialist asset class funds yourself.
Each option should be weighed against one’s life stage, investment expertise, and the time and information available to make informed decisions.
A version of this article was first published here.
*Satrix is a division of Sanlam Investment Management
Disclaimer Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs, the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document.
Accelerate Property Fund tries to sell Cherrylane – again (JSE: APF)
Will they finally get it right?
By now, Accelerate executives must feel sick at the thought of even driving past Cherrylane Shopping Centre. They have tried to sell this thing numerous times. If at first you don’t succeed, keep signing sales agreements.
The latest attempted buyers are Bellerose Investments and Scarlet Sky Investments, private companies that sound like characters from a Marvel movie. They are not related parties to Accelerate.
The property was valued at R60 million as at March 2024 and is being sold for R54 million. Accelerate will use the money, if it ever comes, to reduce debt.
With a vacancy rate of 52.3%, this centre seems to be cursed. Hopefully, the conditions for this deal will be met and the transaction will close.
Separately, the group announced that they are experiencing delays in the finalisation of its category 1 related party circular, as the underlying terms are complex and require input from a number of advisory teams, as well as the JSE as regulator. They expect to distribute the circular by no later than 4 December.
Even Afrimat isn’t immune from market cycles (JSE: AFT)
Earnings have plummeted
Afrimat is well regarded in the market for having a diversified business and a great track record in acquisitions. Whilst all of that is true, the reality is that the business isn’t immune from cyclical moves in commodities like iron ore, as well as dependencies on major customers like ArcelorMittal.
Even then, it’s going to come as a shock to many to see HEPS down by between 75% and 85% for the six months to August. The move in EPS (earnings per share) is a drop of between 4% and 14%, with the vast difference attributed to the bargain purchase gain on the Lafarge acquisition that is a boost to EPS but is excluded from HEPS.
The way to interpret this is that the highlight for the period was that deal, with the rest of the business facing challenges.
One such challenge was a furnace freeze at a major customer (I think ArcelorMittal but the announcement isn’t explicit). Another problem was a decrease in international iron ore prices in dollar terms, combined with a stronger rand – and thus a significantly lower iron ore price once converted to rands. Along with a 31% increase in shipping costs and the ongoing problems at Transnet, that’s not a great situation for the iron ore business.
Lafarge made losses for all four months since being incorporated into Afrimat on 1 May 2024. This is due to the problems that Afrimat knew they would be buying at the cement factory. On the plus side, the turnaround is described as showing very good progress.
The Construction Materials segment has a better story to tell, with volumes up and the integration of the Lafarge quarries and other operations into the Afrmiat business. The Industrial Minerals business is also a positive story, with significant improvement thanks to market developers and the magical disappearance of load shedding.
These numbers are a strong reminder that even with all the efforts to diversify, Afrimat remains significantly exposed to iron ore. There has been improvement in domestic demand after the reporting period (a great read-through for ArcelorMittal) and the international iron ore price has also improved.
Given the underlying challenges, much of the GNU-inspired rally has washed away at Afrimat. The share price initially fell more than 4% in response to this news, yet it somehow staged a comeback in the afternoon to close flat for the day!
Illiquid stock DRA Global is headed for the exit (JSE: DRA)
The company will delist from the JSE and the Australian Stock Exchange
DRA Global has little in the way of liquidity in the stock, despite having a market cap of nearly R1.3 billion. It’s therefore not worth the cost and hassle of being listed, an assessment that many small- and mid-caps made in the past few years.
The delisting trend seems to have slowed down at least, following a flurry of activity that saw many companies leave our market. Even then, there will always be delistings on the table as smaller companies look for more efficient ways to operate.
DRA Global is taking the route of a share buyback. The nuance is that the share buyback isn’t conditional upon the delisting being approved by shareholders, so those who want to turn their shares into cash will be able to do so. The reverse isn’t true though, as the delistings are conditional on the buyback being approved.
As the primary listing is in Australia, the disclosure is far more detailed than normal in this announcement. It’s full of information for shareholders about the route forward and what happens in an unlisted environment.
Now here’s the trick: the buyback only covers around 20% of current issued share capital, so holders of 80% of shares will end up in unlisted territory if the delisting goes ahead. If they receive applications for more shares than this to be repurchased, then it will be a pro-rata situation. Notably, directors do not intend to participate in the buyback, so this is effectively a take-private by the company insiders using the company’s balance sheet.
The buyback price is R24.55, which is a modest premium of 11.13% to the 30-day volume-weighted average price (VWAP) on the JSE.
Another nuance is that if for some reason the delisting is allowed in Australia but not South Africa, the company will engage with the JSE on a potential continued listing.
A shareholder meeting is scheduled for early November. This is going to be an interesting one to follow.
Hammerson’s recent balance sheet initiatives have paid off (JSE: HMN)
The group has reduced its cost of debt and improved its debt maturity
Hammerson has been very busy with debt issuances and repurchases. This is typical of larger funds that have bonds with different maturity dates in issue in the markets. There are a number of different ways to get funding, with the major REITs able to tap institutional bond markets for debt capital. Over time, they have to manage the maturities carefully and take advantage of market conditions that allow for tweaks to the structure and resultant savings.
After issuing a 12-year £400 million bond that was over 7x oversubscribed, as well as repurchasing bonds of £411.6 million with maturities in 2026 and 2028, Hammerson has unlocked a decrease in its weighted average cost of funding from 3.8% to 3.6%. This equates to £3.6 million per year, with £0.8 million in savings expected for the 2024 financial year.
The weighted average debt maturity has increased from 2.9 years to 5.2 years, a significant improvement in financial risk.
Due to the repurchase of bonds being almost entirely financed by the issuance of new bonds, the loan-to-value ratio is steady at 25.5% and net debt to EBITDA remains at 5.4x. The South African funds never really report net debt to EBITDA, as this metric is usually for operating companies rather than property funds, but clearly things are different in the UK.
Mondi acquires Schumacher Packaging – a deal that looks set to close quickly (JSE: MNP)
Dad jokes aside, this is a substantial transaction
Mondi has announced a deal to acquire the Western Europe packaging assets of Schumacher Packaging. I Googled and couldn’t find an obvious link to the famous family. I did find a guy named Michael Schumacher who works in logistics in Germany at an unrelated company, but I’ve used up my dad joke allowance and won’t make references to fast deliveries.
Moving on, this company has an enterprise value of €634 million and owns two “mega-box” plants in Germany focused on sustainable packaging, along with a bunch of other facilities. This is therefore a deal to acquire complementary assets in the Corrugated Packaging business at Mondi that add substantially to Mondi’s capacity and footprint.
Mondi is also using this to gain access to an eCommerce customer base in Germany and wider Europe, with the goal of putting more Mondi products in front of existing customers of Schumacher Packaging.
With adjusted EBITDA of €66 million in 2023, this deal is priced at a trailing EV/EBITDA multiple of 9.6x. That’s arguably on the high side, with Mondi expecting a significant increase in EBITDA at this asset going forward. There are also cost synergies, as you’ll see in any major deal rationale.
To help deliver these benefits, the co-CEOs of Schumacher Packaging (Bjoern and Hendrik Schumacher) will be sticking around in key roles. The announcement was light on details, but I hope that there’s some kind of earn-out or delayed payment structure in place to incentivise the sellers to help drive a successful transition.
They expect the deal to close in the first half of 2025.
More good news in property – this time from Schroder European Real Estate (JSE: SCD)
Property values are on the up
As we saw just the other day at European real estate peer Sirius Real Estate, property values in the region are starting to head the right way again. Schroder European Real Estate has added to that narrative and they are making it very clear, by noting in the heading of the latest announcement that “stabilisation of portfolio values continues as global interest rate hiking cycle comes to an end” – couldn’t have put it any better myself, really.
In truth, their portfolio was down -0.1% this quarter after a +0.1% move in the previous quarter, so things aren’t exciting yet. The point is that the bleeding has stopped, with hopefully only strong momentum from here.
The portfolio has an solid occupancy rate of 96%. As I said earlier in the week in the Sirius update, you can’t rely purely on the macroeconomics to drive values higher. The properties also need to be of sufficient quality to see the upswing.
The fund’s loan-to-value is 33% based on gross asset value and 25% net of cash. This means that the balance sheet is in decent shape.
Nibbles:
Director dealings:
The CEO of Woolworths (JSE: WHL) sold shares worth R26 million. The announcement notes that a portion is to cover taxes and the rest is for a “portfolio rebalancing” – but doesn’t indicate in which proportion. Either way, the CEO selling rather than buying shares after a 9.6% year-to-date decrease isn’t a bullish signal at all.
The CEO of AVI (JSE: AVI) received share awards and sold the whole lot to the value of R11.1 million. AVI is up 32% year-to-date and has had a hard run, so this is an indication that the rally might have been too strong.
NEPI Rockcastle (JSE: NRP) has closed the disposal of Promenada Novi Sad in Serbia. The deal was first announced in July 2024. Cash proceeds of €177 million have been received by the fund.
Vunani (JSE: VUN) has renewed the cautionary announcement related to a potential disposal of a minority shareholding in a subsidiary. As always, there’s no deal until there’s a deal!
Old Mutual (JSE: OMU) announced that CFO Casper Troskie has agreed to remain in the role until April 2027. This is to ensure continuity during major strategic projects.
In Episode 8 of The Trader’s Handbook, we dive into the world of stock index trading, offering insights from Shaun Murison of IG Markets.
Learn why indices are an attractive option for traders, providing broad market exposure, lower risk compared to single stocks, and significant cost advantages. We discuss key concepts like leverage, liquidity, and how index trading can be more efficient for active traders due to lower barriers and 24-hour market access.
Beyond trading, Shaun highlights the use of indices for hedging strategies, helping long-term investors protect their portfolios in volatile markets. With practical tips on technical indicators such as RSI and stochastic oscillators, this episode provides a well-rounded look at trading strategies that can enhance your trading toolkit.
Listen to the episode below and enjoy the full transcript for reference purposes:
Transcript:
The Finance Ghost: Welcome to episode eight of The Trader’s Handbook, a really great series of podcasts that, as you probably guessed, are all about trading. If you’re only joining us now at episode eight, don’t worry, you’ll still learn some cool stuff today, but I certainly recommend that you go back and listen to the other seven episodes. There’s some really good stuff in there. And if you’ve been with us since the beginning, thank you and welcome to the latest show.
As you know, if you’ve been listening, we’ve spent quite a lot of time with Shaun Murison from IG Markets South Africa, just talking about the opportunities and risks that lie in trading stocks in particular. Stocks are very much my background, more investing in them than trading in them. and I’ve learnt some really fun stuff by playing around in my demo account, something that is highly, highly recommended.
I’m not really a forex or commodity person, but I know we’re going to cover them in shows to come and I certainly look forward to learning more about that. But something I am, is a stock index person, although historically I’ve done it through just buying exchange traded funds and getting broad market exposure, it’s very much that investment approach. But of course, these indices are also really helpful for trading. We felt it’s a pretty natural progression now to move from having talked about stocks for the past few shows into doing one on stock indices.
Essentially what an index is, is just a basket of stocks that follows a set of rules. Now, the rules may vary and there are a lot of different indices out there, but some of the big ones, some of the ones that you’ll certainly know offhand are things like the JSE All-Share index for local traders, that is the go-to that is obviously an index. The clue is in the name there. Things like the S&P 500, the Nasdaq 100, the Nikkei 225, all of these names that you see as tickers along the screen if you watch any of the financial media, TV shows or anything of the sort, those are stock indices. And these are a huge part of the market, Shaun. For traders, I would imagine this is probably even more of a focus than single stocks, isn’t it?
Shaun Murison: Indices, as you correctly mentioned, are a nice way of trading the market. It’s simply instead of picking one stock, which obviously has inherent risk, corporate risk etc. you group them together and you trade them as an index. I think there’s a natural progression for traders. A lot of people are introduced into the market, they start trading shares, they learn the mechanics of trading shares and then they start to progress to things like indices that can be a little bit more fast moving, but certainly holds a whole host of opportunities. Essentially what you’re doing is you’re taking a view on the success or failure of a group of shares rather than just one share. You’re diluting your risk, essentially.
The Finance Ghost: Absolutely, and that’s the reason why people like it from an investment perspective as well, right? You’re buying an ETF, you’re tracking an index, you’re getting a whole lot of exposure in one shot, which is quite nice. Obviously for traders it’s not that different. You’re getting that broad exposure. You’re not sitting with one stock that can go and release an announcement out of nowhere and suddenly move 20% or 30% or 40%. We’ve dealt with some of that in our risk management discussions on previous shows, how stocks can gap down, potentially gap past a stop loss if you don’t have a guaranteed stop loss in place, of course they can gap up as well and deliver you wonderful returns, but you can’t assume that that’s the direction of travel. Unfortunately, the shocks to the market are often on the way down. So in an index, you’re just not going to see those crazy moves unless there’s a cataclysmic global event. And even then, a huge correction will still take, you know, a few days. It’s not going to gap down 30% in a day, right?
Shaun Murison: I don’t want to say it’s never going to gap down 30% in a day because we haven’t seen that…
The Finance Ghost: Yeah, we won’t, we won’t tempt fate, right?
Shaun Murison: Very unlikely – I think the biggest moves we’ve seen on major indices, range between – actually recently we saw Asian markets really jumping higher on stimulus efforts there and we saw things like the Shanghai Composite, obviously representation of the Asian markets up 7% in a day or the Hang Seng index up 7% in a day. So outsized moves can happen, but they definitely seem less probable than if you’re looking at an individual equity. I just want to say, when you look at those groups of shares, quite often when you look at those indices, they are concentrated. So it might be, you know, if we’re trading in South Africa, we’d look at something like the top 40 index, the top 40 most liquid stocks on the JSE. But quite often you find that the top ten companies have the highest weighting and account for even more than 50%, which is the case on the JSE Top 40 index. You’ve got 10 shares there, I think with a cumulative weighting on that index sitting at about 53%.
The Finance Ghost: It is a fascinating thing to sort of add to your toolkit, right, is trading the index, not just trading the stocks. So let’s talk about some of the differences between the index versus the stocks. I mean, I would imagine it’s still a CFD, so nothing changes there. You’re still buying and selling to. Are there any other major differences that we should highlight here in terms of the actual mechanics of how the trading works versus shares?
Shaun Murison: Just to reiterate, a contract for difference could be on anything. It could be on a pencil! Obviously, here we’re looking at financial markets, so when you’re trading a share in CFD form, you’re trading a difference in price between your buy and your sell. You’re trading the index, you’re still trading it as a CFD with IG. It is the difference between the price that you buy for and then the price that you sell for. I think the difference there you’d look at when you’re trading a share, shares are priced in cents, and so it’s the difference in cents value when an index is priced in points. It’s a difference in points value. You just need to pick a contract size.
What does one point mean? Well, one point is in the value associated with it. So, you know, I just keep referencing our local market, the top 40 index, which is obviously a very popular product that we offer, and you could trade that contract at R2 a point or R10 a point or R50 a point per contract. If the index moves ten points in your favor and you’re trading at R10 a point, then you’ve made R100. Other things to consider is that generally with indices, like products like forex and commodities, they carry a higher degree of leverage. So again, just in the simplest of forms, leverage just how much your profits or losses are magnified in the market. To take a trade, you require a smaller deposit relative to the exposure or the value of your transaction within the market.
The Finance Ghost: Okay, that makes sense. It just makes it more efficient for traders, right? I mean, that’s the whole idea there.
Shaun Murison: Exactly. Easier to get it now and to magnify short term moves.
The Finance Ghost: And I think in some of our discussions historically, you mentioned to me that it is cheaper to trade the index than the underlying shares. Is that the case? And then what are the costs for a local index versus a global index? Is there any difference there?
Shaun Murison: When you’re looking at trading a share, you are looking at paying a commission in and a commission out. You’re going to pay a commission fee when you buy and when you sell. Now, shares will have an underlying market spread, which is another cost to consider in your trading, right? When you’re looking at shares, that’s not a cost that IG refers to their client or passes on to their client. It’s just something that’s naturally inherent in the market. When you’re trading indices with IG, the difference is you don’t pay a commission charge for your transactions. What you do is add points to the spread and those points are significantly cheaper than what you would pay when you’re trading a share. For example, if you’re trading a local share on the JSE, that commission fee would be 0.2% when you buy and then 0.2% when you sell. Then of course there’s that underlying market spread as well. If you’re trading the South Africa 40 index, it’s how we label it on our platform. IG’s cost on that to the client would be about six points either side. So twelve points, if you look at that as a percentage of what your total cost is, it’s like 0.015% as opposed to 0.2%. So, it’s considerably cheaper.
And when you start looking at global indices, the popular ones like the DAX (the Germany 40 index), or things like the Nasdaq, it’s all relative. And actually as a percentage of your exposure, those costs are actually even less because those are very, very highly liquid markets on an international front.
The Finance Ghost: Okay, that makes sense, I can see why traders like it. They get the benefit of lots of diversification. The costs are better and it’s more efficient in terms of leverage. All of this is actually good stuff. And I guess one of the other pros must surely be liquidity. I feel like there’s always someone on the other side of a trade on a broad market index. That’s not always the case on the smaller stocks. You can confirm that that’s the case, if possible? And then what other advantages are there here that we haven’t actually already touched on that would make people consider trading the index?
Shaun Murison: Extremely liquid, like you correctly said, a lot of volume going through on that, which makes it easier to get in and out of trades. Sometimes with a share, liquidity can dry up and so the price that you want to get out at might be a little bit less favourable. Also obviously fix things like your stop loss, reducing the sort of amount of slippage you might get if things did go unfavourably against you.
If you look at things like the higher leverage and reduced costs, it becomes more suitable if you’re an active day trader, obviously, because cost would be a barrier to making a profit.
IG also offers 24-hour markets on a lot of these indices, including the South African Top 40 Index. Underlying market hours based off the futures exchange for that Top 40 Index would be 08:30 to 05:30 but we offer a 24-hours market. Once it moves outside of that, it correlates to what’s happening in international markets. You can trade that pretty much 24 hours a day, five days a week.
Just to add to that as well, we keep talking about the speculative side of trading, looking to make short-term profit. But there are other uses for things like an index. So, for example, if you had a long-term investment portfolio and a number of different shares in there, and you’re worried about the market starting to come off, it could be quite costly for you to exit your position in the market. All those positions, you think, okay, well the market might come down, I might close all those shares, you’re going to incur all those commission charges and all those costs. Another way to view it is you could do something like take a short position on the Top 40 index because it’s a representation of a number of those shares, those liquid shares on an underlying market.
You could take a short position. Remember, a short position, taking a trade with a view expecting the market to fall, maybe in the short-term. And so if the market was to fall, you would generate a profit on your index position, which would offset the losses on your equity position. It can be used as a hedging tool as well, not just as a speculative tool.
The Finance Ghost: Yeah, very nice. Many, many ways to do things in the markets. That’s of course, what makes it so fascinating and why we all love it so much. Of course, nothing can be all good, surely. There’s got to be some cons to trading an index. Obviously, the one that jumps out at me just comes from my background as a more fundamental investor, I want to go and read a management narrative and go and look at a balance sheet and go and look at their margins. And of course, when you’re doing an index, you’re doing that for 40 stocks, you’re not actually looking at those details at all. You’re really looking at a macro view.
I guess you’ve got to be careful with some of the underlying constituents. The South African index would be quite mining heavy, for example, whereas in the US it’s very tech heavy. You still need to know what’s in there. There’s still research required, but it’s definitely a different kind of research. I don’t think you’re going and reading an earnings transcript too often to make a decision about an index. So that would be the one thing that jumps out at me. But I don’t even know if that’s a con, really. It’s just the nature of the beast. Are there any genuine cons around trading indices?
Shaun Murison: When you’re trading an index, I think it comes back to leverage. I think I’ve said it before on the earlier podcast, with great leverage comes great responsibility. Because your losses can be magnified more and because the index is leveraged more, it is something to consider. But I think if a person’s responsible about and fully understands that side of things, I think they can mitigate that risk. Now, coming to what you’re saying about the companies, they still have an effect on the index, so you can still do your deep research on those top ten companies. It’s actually quite a strong banking weighting after the elections this year, we saw quite a strong move on the banking side. When you start looking, you could do some sort of sectorial analysis as well on that, at the moment you’re looking at, I think it’s about 25% weighting of banks in the index, and then basic resources probably sitting about 20% weighting there. There is a case to be made that you can use some of the conventional deep dive stuff that you do from your fundamental background, but yeah, going back to the risk question, I think the leveraged traders need to understand leverage, but I think that applies across the board, whether you’re trading forex commodities, shares or indices, because high risk, high reward leverage is really something to consider and to be aware of if you want to manage your trading risk.
The Finance Ghost: So one last question, just around the indices, in terms of the strategies that people might use with them, I would imagine that day traders, this is probably their jam, right? Doing the index trading because of the liquidity, because of the costs and the efficiency and that kind of thing. I don’t think you can day trade stocks very easily. Maybe the very liquid stuff, sure. But would it be a fair assumption that this is where your day traders, your scalpers will kind of play?
Shaun Murison: Yeah, because that barrier towards making a profit is reduced from your cost, this is definitely a product that is suitable. People do still day trade shares. It’s not something that’s not done because sometimes you’ll get a huge movement on a share. You’re balancing off leverage. So shares might not be leveraged as much, but you know, obviously sometimes you can get bigger movements on shares, so they can actually be a little bit more volatile. When we talk about volatility, we talk about that range of price movement. But indices are quite interesting if you’re looking at just broad macro news. The scalpers might look at general news during the course of the day, they look for big news events, whether it’s around interest rates, growth, inflation, things like that. Look at when those news items are coming out, looking at what the expectation is, when that news is coming out, expecting a movement on the index because it’s a representation of the economy, essentially.
Nice product to trade when you’re trading news, which does obviously lend itself to day trading, but not exclusively to day trading. Obviously, we have uses like the hedging which we talked about as well, and you can take a longer-term view on that as well, but certainly a lot of appetite for the very short-term trading using indices.
The Finance Ghost: Perfect. I think let’s move on to that part of the show now where we deal with some technical indicators. This is the approach we’ve taken in the past few shows where right at the end we deal with some techs, just because it’s a lot to kind of take in and try to deal with as an entire show.
As always, I’ll include a chart in the show notes. I’ll go and have a look at the IG Markets Academy to go and see what great stuff you’ve got on this topic and maybe pull something from there to refer our listeners to.
We’ve covered trend lines in the past couple of shows. We’ve done support and resistance lines, and this is really important stuff. This really helps you see points on the chart where things might change direction or continue where they were headed, for that matter. And both of those things are really useful pieces of information. Now, something else that is very helpful is trying to understand whether a chart is overbought or oversold. That, I suppose, indicates whether or not things might change direction. Given if it’s overbought, then it may well start to turn lower. And if it’s oversold, it may start to turn higher. Who knows? But, you know, you try and use all these indicators to form a view. I think if you could just give us an overview of this approach and the value of doing it, and then, of course, some of the mechanisms that you actually use in making this assessment of whether something is overbought or oversold.
Shaun Murison: Okay, great. I think let’s just define overbought and oversold first. When you talk about oversold conditions, suggesting that a market, a share or whatever financial assets it is, has fallen and maybe it’s fallen a little bit too much – maybe that decline is reaching a short-term end and we could see a rebound in price. Then that’s oversold. Overbought would be the opposite. Maybe we’ve seen quite a strong rally and the price is looking a little bit overextended, I think that rally could be coming to an end and possibly changing direction.
Now, there are a number of technical indicators that you can use that are available, obviously, on the IG platform. They can assist with assessing overbought and oversold conditions, seen as a short-term indicator. And those are indicators which include, I think the popular ones are stochastic and the RSR, referred to as the Relative Strength index, or RSI for short. All the traders out there and the guys that are new to technical analysis, I think you can combine this type of indicator with some of the stuff we’ve talked about before.
We’ve talked about trends in the market. Markets don’t generally move in a straight line. If the market’s in an uptrend, you might wait for a bit of a pullback, you don’t want to buy at the top, you want to wait for the first little bit of weakness to join that longer term trend and oversold signal marks give us an indication maybe now that that short-term dip is over and we can continue to rally. Likewise, in a downtrend, if we see markets trending lower, it’s looking a little bit oversold and we might expect a bit of a bounce. And then when it gets to overbought conditions, we might say, okay, well, that bounce has ended. Maybe that’s an opportunity to sell into the market or to take a short position. It’s a nice indication that you can add other forms of technical analysis.
The Finance Ghost: And again, this is stuff that you can just draw on a chart on the IG platform. This is an option available to you as a technical indicator?
Shaun Murison: Yeah. All these indicators are available to you on the chart on the mobile device, on the online platform.
Source: IG Markets South Africa Academy
The Finance Ghost: Fantastic. There is a really good article on the IG website around the stochastics and the RSI and all this kind of thing. I’ll obviously make sure that I include that in the show notes. And I really do encourage people to just go and read up about it and also go check out the stuff we’ve talked about previously, the trend lines, the support and resistance lines. The stuff really does make a significant difference.
Shaun, last question from my side, maybe just taking us back to indices and to close there, is it the case that most South African traders, or at least that the most popular among South African traders would be the All-Share index? Do you kind of see that familiarity bias coming through where people want to focus on that, rather than stuff very far away? S&P, Nasdaq, Nikkei, whatever the case may be, do our local traders tend to lift their gaze to all of the international opportunities available to them?
Shaun Murison: I think, like I was saying earlier on, there’s a bit of a journey. We have traders come in, they usually start with shares and then they progress to indices. That appetite seems to be quite strong. From the local account where you can trade that Top 40 index, a vast majority of trades go through on the index rather than shares. I think it’s more than 60%. I don’t have the exact figure for you. And then we do have a split. The range of products that guys trade offshore is generally currencies, indices, and some commodities, popular commodities, things like gold and oil.
The Finance Ghost: Shaun, thank you so very much for your time again this week, and lots and lots of good stuff still to come in the series. We will, as you’ve talked to that, get to some of the other asset classes like forex, like commodities, etc. There’s still lots of technical stuff to talk about and to the listeners, I think send through ideas of what you want us to talk about. We would love to respond to the burning questions you have. You can reach out to us on the socials or whatever the case may be, and we’ll certainly make sure that we try and cover some of that. And Shaun, to you, thanks for your time. I’m sure the Chinese stimulus has caused lots and lots of activity among the trading community in the IG Markets community, so they must be keeping you pretty busy out there in China.
Thanks for your time and I look forward to doing the next one with you.
Sizwe Africa IT Group is a 55% subsidiary of AYO Technology. This subsidiary has agreed to sell its 70% stake in Cyberantix to Mustek for a total consideration of R20 million. If you therefore apply the different shareholding levels, you’ll see that AYO only has a 38.5% look-through interest in Cyberantix.
In case you’re wondering, the other 30% shareholder in Cyberantix is NIL Data Africa, a party that isn’t related to AYO.
Cyberantix is a cybersecurity group. This is a good space to be in but is obviously hypercompetitive as well. The group needs more investment to reach its full potential and this doesn’t suit Sizwe Africa’s priorities right now. Instead, Sizwe Africa will take the proceeds from this deal and use them for other purposes, with a plan to put in place a strategic partnership with an already-scaled cybersecurity provider.
It’s a pity that Mustek didn’t release an announcement related to the deal, as they had an opportunity here to tell their story in terms of their plans here.
Cyberantix made profit of R4 million in the year ended June 2024. Sizwe Africa is selling a 70% stake for R20 million, which implies a value for the full group of R28.6 million and therefore a price/earnings multiple being paid by Mustek of 7.2x. It’s more complicated than that however, as the R20 million is split across claims (i.e. shareholder loans) of R12 million and shares of R8 million.
Although this technically brings the Price/Earnings multiple down to far better levels, these claims tend to be soft loans in nature and the reality is that Mustek is parting with R20 million for a 70% stake, regardless of how we cut it. That feels like a very good price for Sizwe Africa and a worryingly high multiple for Mustek.
Insimbi has given a tighter range for its earnings – or losses, I should say (JSE: ISB)
Thankfully, there are some non-recurring expenses in here
Insimbi Industrial Holdings has released yet another trading statement, this time giving a much more accurate range for the earnings for the six months to August. They are in the red, not just in terms of trajectory, but overall.
The headline loss per share is expected to be between -1.1 cents and -1.3 cents, a nasty swing from positive HEPS in the comparable period of 15.46 cents.
Although lower economic activity in South Africa over the period is one of the factors, they highlight various others as well: foreign exchange losses, once-off transaction costs for the rather elegant reverse asset-for-share transaction and other once-offs like retrenchment costs and legal fees. Interest rates aren’t helping either.
Detailed results are expected to be announced on 18 October.
Sanlam is the proud owner of Assupol (JSE: SLM)
The deal has now closed
Sanlam isn’t shy of doing deals, that’s for sure. The financial services giant operates across various emerging and frontier markets and always seems to be involved in some kind of transaction.
The Assupol deal was first announced in February 2024 and has now closed, so that’s a pretty quick transaction by usual corporate standards. The deal gives Sanlam additional reach into the Retail Mass market, which is a priority area for the group.
In life, you can either build it or buy it. Building it takes a long time, which is why many listing companies choose to buy instead.
Visual International looks to capitalise debt (JSE: VIS)
This means settling creditors through the issue of shares
A company is funded by either debt or equity. Technically, they are interchangeable, although only one of them can lead to bankruptcy. If you can convince a debt holder to become an equity investor instead, then it does a wonderful job of “plugging a hole” in a balance sheet.
Imagine if your bank offered to become a co-investor in your house instead, with no further interest payable. Lovely, right?
Capitalising debt (i.e. turning it into equity) is rare, as it requires debt holders to give up their preferential status in return for potentially more upside. In practice, it’s even more unusual to see it happen in a positive context. Usually, it’s to save a company. You also won’t find banks agreeing to this too often, so it only really works for debt in the form of shareholder loans or private equity investors with mezzanine structures (a mix of debt and equity invested in a company).
Visual International has announced that it will “restore the strength of the balance sheet” through extinguishing liabilities in the company through the issuance of shares. They will issue shares at a price of 4 cents per share, despite the current market price being 3 cents per share.
This should immediately tell you that the people agreeing to this have more to lose than just their loans. Indeed, the majority of the creditors are related parties. By issuing shares at a premium rather than a discount, the company doesn’t need to get a fairness opinion for the related party deal.
They will, however, need to issue a circular and get shareholder approval.
Nibbles:
Director dealings:
The CEO of AVI (JSE: AVI) received a share award and sold the whole lot to the value of R8.2 million. Remember, executives can choose to only sell the portion needed to cover taxes, so a decision to sell everything is a decision not to retain any shares over and above tax. In other words, it’s like any other sale of shares.
A senior executive of Anglo American (JSE: AGL) sold shares worth a meaty £725k.
A director of Heriot REIT (JSE: HET) bought shares worth R225k.
Salungano (JSE: SLG) has renewed the cautionary announcement regarding business rescue proceedings at Keaton Energy. The next key milestone is a liquidation hearing scheduled on 11 October.
Absa (JSE: ABG) has received regulatory approval for the appointment of Charles Russon as Interim CEO to replace Arrie Rautenbach. They also needed approval for Yasmin Masithela as Interim CEO of the Corporate Executive and Investment Bank.
Southern Palladium (JSE: SDL) has appointed Roger Baxter as Executive Chairman of the company. He will focus on investor and government relations, while Managing Director Johan Odendaal will focus on the Bengwenyama Project itself. Speaking of that project, they expect to release the results of the pre-feasibility study before the end of October.
Astral Foods (JSE: ARL) announced that Frans van Heerden, Executive Director and Managing Director: Poultry Commercial will be leaving the group. He’s accepted a career outside of the poultry industry. For the sake of his wellbeing, I hope it’s in an industry with higher margins! Poultry is tough.
Greg Heron, previously of Leaf Property Fund and currently the CEO of Infinitus Holdings, is joining the board of Heriot REIT (JSE: HET) as a non-executive director. Although I generally ignore non-executive director appointments, a director with extensive experience in the same industry joining the board is worth a mention in my books, particularly at smaller listed companies.
Another thing I look out for is changes to the lead independent director, with Thabo Leeuw resigning from that role at RFG Holdings (JSE: RFG) after being on the board for 11 years.
Even though Chrometco (JSE: CMO) is suspended from trading, they still have to release things like cautionary announcements as they are technically still a listed company. Thy have renewed the cautionary announcements related to discussions around a major subsidiary.
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