AngloGold’s acquisition of Centamin gets the green light from Egyptian regulators (JSE: ANG)
It’s always good to get the regulatory approval out of the way
In September, AngloGold announced the acquisition of Centamin, a gold producer that owns the Sukari gold mine in Egypt as its flagship asset. This acquisition is being paid for with a combination of shares and cash, with Centamin shareholders being rewarded with a juicy premium along the way.
It’s a really important deal for AngloGold, so the parties involved must be thrilled to announce that the Egyptian Competition Authority has given its blessing for the deal.
There are a bunch of other conditions that still need to be satisfied of course, with the deal still running in line with the timetable that was included in the circular.
British American Tobacco gears up for a capital markets day (JSE: BTI)
An army of ESG consultants has no doubt been creative with new terms
British American Tobacco has historically made a living by selling people a product that is extremely bad for them. In an effort to wash away this inconvenient back-story, they come up with ESG-friendly terms like Building a Smokeless World, which I find hysterical when I think of what vaping looks like. If you visit the British American Tobacco website, you would think that they are a renewable energy company that dabbles in unicorns and butterflies. I’m quite sure that this approach will only be reinforced at the capital markets day being hosted on 16 October.
They are on track to deliver low-single digit organic revenue and adjusted profit from operations growth in FY24. Currency translation is expected to be a 5% headwind if spot rates continue. They reckon that by 2026, they will be at 3% to 5% organic revenue growth and mid-single figure adjusted profit from operations growth.
Essentially, they achieve this through pricing increases on a product that people are addicted to. Nonetheless, because the ESG industry is largely a tick-box exercise rather than an attempt at genuine impact (and ESG investment indices are especially guilty of this), British American Tobacco features strongly in ESG-friendly funds.
Bytes is growing strongly but it remains a highly competitive sector (JSE: BYI)
You can see this coming through in some of the margin pressures
Bytes Technology has released results for the six months to August and HEPS growth of 19.5% in hard currency is something to be proud of. The interim dividend is up 14.8%, so the payout ratio is lower but there’s still great mid-teens growth on the table for investors.
One of the worries around Bytes is the level of competition in the IT sector and how this impacts margins. You have to read the results very carefully, as Gross Invoiced Income (GII) was up 13.7% but Bytes’ revenue fell by 2.9%. This suggests a shocking move in margins, yet the real reason is that hardware sales are booked directly into revenue whereas software sales go into GII first, so a period of lower hardware sales relative to software will have that impact. It doesn’t necessarily mean that software margins are getting worse, although I certainly wouldn’t bet on them getting better.
Oddly enough, because of the lower sales in hardware, the gross profit line grew 9% and thus gross margin (gross profit as a percentage of revenue) increased from 69.3% to 77.8%. If you worked it out as gross margin as a percentage of GII, it would’ve deteriorated. It’s all about understanding the hardware vs. software dynamic and how it all lands on the income statement, while not being blind to the risks to margin as Bytes does an increasing amount of work in the highly competitive public sector in the UK.
Encouragingly, operating profit grew by 16.3%, so there’s no debate around this line item: Bytes controlled its costs and grew its operating margin.
The stronger rand hasn’t been kind to Bytes as a rand hedge, with the stock down 23% year-to-date.
Record earnings and a stronger outlook at Karooooo (JSE: KRO)
They are delivering on the growth promises that shareholders had to be patient for
Unlike for most technology companies, the pandemic was a major setback for Karooooo. The group had just expanded into Asia and had spent money setting up a sales function, only for the world to remain closed for far longer than anyone expected. This led to some tough results in which growth really faltered, although that’s a distant memory now thanks to record earnings in the latest quarter.
Growth in adjusted earnings per share of 31% year-on-year is why investors enjoy this company, driven by a 17% increase in subscribers. The rate of growth in subscribers has also ticked higher, with the number of net additions up 18%. If you think about it, the number of net additions has to keep growing in order for the growth rate in total subscribers to remain appealing, as the denominator (total number of subscribers) is increasing all the time.
Subscription revenue was up 15%, so there’s a slight dip in average revenue per subscriber but currency impacts are at play here.
Operating profit grew 22%, so the income statement is more efficient than it was a year ago. It’s certainly worth highlighting that Cartrack’s operating profit was only up 16% (admittedly to record levels), so the rest of the growth came from improvements in Karooooo Logistics and the group walking away from the silly distraction of Carzuka.
Perhaps best of all, Karooooo has revised guidance for the 2025 full-year. The number of subscribers should be between 2.3 million and 2.4 million, up by 100k vs. previous guidance. Subscription revenue should be R3.95 billion to R4.15 billion, up R50 million. Operating profit margin is expected to be between 27% and 31% and adjusted earnings per share should be between R27.50 and R31.00.
Despite the stronger rand and the extent of offshore earnings at Karooooo, the share price is up 52%! Although I’m annoyed that I reduced my stake in the company when things got tough, hindsight is always perfect. I held onto a portion of my shares in the hope that things would come right and I’m really glad that I did!
Tsogo Sun buys a further stake in Monte Circle from HCI (JSE: TSG | JSE: HCI)
This removes the final group cross-holding
Tsogo Sun owns Montecasino (and a whole bunch of other assets obviously), along with 25.335% in the Monte Circle property. Mothership Hosken Consolidated Investments (HCI) also has a 25.335% stake in the property, which doesn’t make a lot of sense. They are now sorting that out by Tsogo Sun buying the HCI stake in a related party deal. The reason for it being a related party deal is that HCI holds roughly 50% in Tsogo Sun.
This consolidates the group’s interests in Monte Circle in a single structure, with Tsogo paying R163 million for the additional 25.335% stake. There’s an additional R2.45 million that needs to change hands due to historical shareholder loans.
As this is a small related party deal, there is no shareholder vote required provided that an independent expert opines that the deal is fair. Valeo Capital has given this opinion and hence the deal will go ahead.
Nibbles:
Director dealings:
Directors and associates of Hammerson (JSE: HMN) bought shares via a dividend reinvestment plan to the value of £8.2k.
Dividend alternatives are all the rage in the property sector, but Fortress Real Estate (JSE: FFB) stands out with a particularly interesting one. This isn’t a cash or Fortress shares election. No, in this case shareholders will choose between cash or NEPI Rockcastle (JSE: NRP) shares as Fortress continues to offload its 16.1% NEPI stake strategically.
Despite all the good stuff achieved at Nampak (JSE: NPK) since new management took over, holders of 11.24% of shares voted against the resolution giving the company specific authority to issue shares to top executives at the share price that was in play before all the restructuring happened, thereby making up for the fact that the full incentive package wasn’t implemented in time. This negative vote wasn’t enough for the resolution to have failed, but I do wonder what the justification would be to vote against what seemed like a reasonable resolution to me.
MTN (JSE: MTN) shareholders have approved the resolutions required to extend the MTN Zakhele Futhi (JSE: MTNZF) scheme. The vote was almost unanimously in favour of the transaction. There are still some conditions to be met, but that’s a big one out of the way.
BHP (JSE: BHG) achieved decent take-up of the dividend reinvestment plan, with holders of roughly 5.5% of shares in issue saying yes to more shares in lieu of cash dividends.
Tiny AH-Vest (JSE: AHL) has released its financials for the year ended June 2024. Revenue was up 12.2% and operating profit nearly doubled, with HEPS up from 1.35 cents to 3.88 cents. These are still very small numbers overall, with operating profit of just R8.2 million. The last traded share price in this illiquid stock was 10 cents, so it’s on a rather modest P/E! With a market cap of R10 million, I have no idea why it remains listed.
aReit (JSE: APO) is still suspended from trading as the annual financial statements for the year ended December 2023 haven’t been released yet. They expect to publish them by the end of November, with the audit process still underway.
The Investec Rand India Accelerator offers geared exposure to growth in the iShares MSCI India ETF over the 3.6-year term. The ETF tracks the large and midcap Indian market, covering 85% of the India equity universe.
Investec Rand India Accelerator is listed on the Johannesburg Stock Exchange and offers 1.5x geared exposure to the ETF capped at 40%, for a maximum return of 60% in Rands. In addition, the Accelerator provides a high degree of capital protection.
To explain the opportunities and risks of this product, Brian McMillan of Investec Structured Products joined me on this podcast.
Applications close on 15 November, so you must move quickly if you are interested in investing. As always, it is recommended that you discuss any such investment with your financial advisor.
You can find all the information you need on the Investec website at this link.
LISTEN TO THE PODCAST:
TRANSCRIPT:
The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It’s another one with the Investec team on one of their excellent structured products. We’ve done quite a few of these now in the past year or so, and it’s a really good opportunity. If you are interested in this stuff, or if you’ve never been exposed to it before, well done for clicking on the podcast and for coming to learn something new – you can find out all about their new products on offer.
And today we are doing one which made me want to travel, Brian, I’ll be honest. When I opened up the brochure, the beautiful “Inspiring India” – I’ve been doing a lot of traveling this year, and when that bug bites, you want to keep doing it! India may be on the list one day, we’ll see.
But of course, the beauty of investing is that even if you aren’t leaving your desk and getting your passport stamped, your money can do that for you, which is a very, very cool feature of the world of markets that we know and love. I thought it was just really interesting that you guys have latched onto this India theme. I’ve been writing about it a little bit recently. We did a Magic Markets podcast on it about a month ago. So, yeah, very excited to talk about India with you today and understand how this product works. So thank you for the time.
Brian McMillan: Yeah, thanks very much, Ghost. You know, that’s one of the beauties of structured products, I think, is that we get the opportunity a lot of the time to do structured products that cover the developed markets. And mainly there we’re saying to people, you’ve got a bit of uncertainty, markets are very high, go in with capital protection. But one of the other features is that we can open these up to new types of markets or thematic type of indices, and there has been quite a lot of hype – we’ve been looking to do something on India for probably over a year now, and we just needed the right timing and to find the right product that we could offer to the market.
It gives that exposure to the South African investor who has heard about this and might want to get involved, but the market has had a run. They don’t know the intricacies of the Indian market. If you go in and you have a level of capital protection, you can do some investing and have that peace of mind.
The Finance Ghost: It’s very much a “going where the ducks are quacking” kind of scenario, because that’s the need for downside protection – in all likelihood, you’re going into a market that has had a good run. And the beauty of the structured product is to say, okay, it can run further, but just in case, here’s some protection. Obviously we’ll get into all of those intricacies in the show as part of understanding the product.
I think before we even get there, let’s just take it up a level. We’re recording this podcast at a time when Chinese stimulus has now been all over the headlines pretty much the whole week, right? I mean, emerging markets are exciting things. They can be quite volatile. A lot of it relies on what China is doing. But the Indian economy is quite different to China. We’ve seen more of a services focus, I think, in India than some of the manufacturing focus. And so many people have talked about China for years and it almost felt like not enough people were talking about India, where this emerging market giant that it is has been growing and growing. There have been one or two South African companies that have gone and invested in India, but not a lot of them. It just didn’t seem to get the same amount of attention, certainly in South Africa, as China would, for example. And there are various reasons for that.
What is working so well in India specifically? We see all these challenges in China around demographics, etc. and now all the stimulus they need to do, yet India just seems to be ticking along very nicely?
Brian McMillan: It certainly has. And when we started looking into it, obviously it came on the radar screen when they became the number one in the world at GDP growth for the next ten years. That’s forecast to be the highest growth area. And it is a story of demographics, but it’s also a little bit deeper than that. It’s the largest democracy in the world, very different from the Chinese model. Certainly it’s going to be driven by a lot of different things.
It’s high tech for sure, but more on the actual people side. The education system is very good. They produce excellent graduates, certainly for the tech space. We’ve seen a lot of that in people moving to the United States but there is a huge market in India for that.
Then the next thing is when you have an economy growing at 8% per annum, the change that can happen over a ten year period is absolutely massive. You’re doubling your economy every nine years, which is a huge amount. And in fact in the two, three weeks ago you were talking about the China market, India actually overtook China at one point as the third largest economy in the world, briefly, and then fell back as the Chinese stimulus came through. So we think it’s going to grow from here and then the question becomes: how do we invest in that and how do we take part in that exciting growth?
The Finance Ghost: Yeah, absolutely, it’s an exciting growth story. And this is the sort of thing you need to do: keep abreast of these opportunities. I’m a big emerging markets enthusiast. You know, I love living in South Africa. I love being South African. Every time I travel overseas, I’m even happier to come home, to be honest. I really enjoy it here.
Of course India is part of that, they are the “I” in BRICS, we are the “s” and China is the “C”. These countries are all linked and they’re all in the Global South at the end of the day. It’s been very much about developed markets in the past couple of years with the Fed interest rate policy and everything else. They’ve driven just a huge amount of activity in developed markets. They’ve hurt some emerging market currencies in a big way. The extent of stimulus in the US over the past few years has really led to huge valuations on some of those assets. And now as we get to a point where maybe there’s some interest rate easing and that gives a bit of a chance to emerging market currencies, if China does go ahead with a stimulus plan etc. then is there starting to be a bit more interest in emerging markets in general? Markets that got a bit walloped during the pandemic versus developed markets?
Brian McMillan: Yes, certainly we’ve looked at the China market as well, very much from a different perspective, where the Chinese market has significantly underperformed over the post-Covid period where the India story is more a momentum story and growth going forward. We would also look at putting structured products over the Chinese market where there’s been significant underperformance. For investors, we have over the last 10 – 15 years driven very much a diversification policy through our structured products. I think a lot of our investors have exposure to developed markets, the S&P 500, the euro, stocks in Japan etc. We did one earlier this year. The take up was great for that. But I think, we’re not saying put all of your money into India, it’s a slam dunk. We’re saying, here is a way you can actually invest in this market with capital protection and get a little slice of that and gain some diversification as well.
The Finance Ghost: Yeah, absolutely. And let’s talk about liquidity, because that’s also a major consideration for emerging markets generally. The emerging markets are not too bad. Frontier markets become a real issue with this. But I don’t think there are too many structured products running around on frontier markets. Certainly on emerging markets, it’s something that you do have to think about. How does India stack up in terms of liquidity by global standards on their market?
Brian McMillan: So that was one of the surprises when we actually delved into this market, was how much liquidity there is. It’s currently ranked as the fourth largest market in terms of liquidity. So very deep. There’s been a lot of internal trading. So unlike China, I think India has much more of an equity-type culture, whereas China is very much a property- and cash-type of savings platform. India, in the last few years, their markets have become very deep. The top 20 companies there have massive pools of liquidity.
When we did some further investigation, we looked at the Nifty 50 as the index that we’d heard the most about. What we didn’t realise is that Nifty 50 is made up of shares of two different exchanges. There’s the Mumbai Stock Exchange and Indian Stock Exchange, so it was difficult to write options on them. And that’s why we’ve actually gone for an ETF in this case. We’re writing the product over an ETF, which is the MSCI India, the largest ETF that trades in the US. In fact, you would see that even the ETFs that are available in South Africa, there is an Indian ETF available in South Africa that uses the same index. So when we’re doing structured products, we are able to buy options over those ETFs and we’re comfortable that on a daily basis we could write as much or unwind as much in options as we needed to.
The Finance Ghost: Yeah, I was wondering about the choice of ETF. You’ve done a great job there of answering that, so thank you. And of course, an ETF is really just, as you say, an index tracker. There are a whole lot of underlying companies. There’s a great thematic trend to it. And here the theme is clearly India. But I think it does help to go one level down and just understand what some of the sectors are that are sitting in that market. Because even in the US, you go and you buy an ETF, but actually you go and look at the constituents and it’s a very heavy tech focus and you can see that there are just a few companies that make up the top piece, even somewhere like the US. In these ETFs, it’s always good to go down and understand what’s actually inside the box.
So in the Indian market, what are those major sector exposures? And do they have a scenario where there are one or two names that are very heavily weighted in that market, or is it quite a spread?
Brian McMillan: It is. It’s a nice spread. You know, that’s one of the issues that we found in particularly the S&P of late, that those magnificent seven are making up a larger and larger proportion of the S&P 500. And again, when we looked at India, the spread of counters, this particular MSCI India index covers about 85% of the large and medium stocks that trade in India. There are quite a few banking, financials, but that makes up about 13% of the index. The consumer discretionary, which is really the one that we’re looking to for the growth, where they’ve actually got companies in India that sell to the Indian market, makes up a large portion. And then there’s also quite a big spread on things like pharmaceuticals. They make a lot of generic pharmaceuticals. And there are quite a few names that people in South Africa would have heard of in there as well. From an IT point of view, Infosys, obviously, one or two of the big banks, Tata Consultancy Services, which is a large conglomerate that’s across diversified industrials. Cars, you’ve got things like Mahindra. So it’s a nice spread and probably more than a lot of the other markets, it’s quite focused on India itself. There’s a lot to do with the Indian consumer. It’s not necessarily something like the FTSE, which has got very little exposure to the UK market because it’s oil companies and stuff. This one specifically looks more at India from an Indian consumer point of view, which is something we quite like.
The Finance Ghost: Yeah, absolutely, because if you want the theme to be the Indian growth story, then you need to go and buy equities that can do that. So that is a very, very cool feature of that market, for sure.
I think let’s move on now from the macroeconomic “why is India interesting” piece, I think it is interesting, I think that’s clear. Let’s get into the details of what you guys have put together here with this new product, which is called the Investec Rand India Accelerator. Another nice, interesting name and we’ll definitely get to the accelerator part just now, and it talks to some of the structures we’ve seen from you before.
Before we get to that, though, let’s just talk about the structure of this thing. It is a flexible investment note. I’m going to hand over to you to just give us an idea of how the reset dates work, some of the liquidity in this thing. What does that flexible investment note really mean? What are people buying when they buy this product?
Brian McMillan: We’ve done structured products for a number of years off of what we call our balance sheet. In other words, we issue as Investec a note that’s listed on the JSE, and it would last for three and a half years or 3.7 years. That note at the end of the period would then expire. The investors would get their money paid back to them, and then we would request or we would say, would you like to invest in our new structured product?
And of course, during that time, you have leakage. People want to, some of them do want the money back, but most people we find in structured products specifically, if they’ve had a good outcome, would like to continue investing in structured products. So with the 20 year note, what we’ve done is we’ve just said we’re going to issue a note on the JSE, it’ll be 20 years long, but each time we do a structured product that is three and a half years, for example, that will be the first investment in this 20 year note. Come three and a half years’ time, we will come back to you and say, this is your return that you’re going to receive on this particular product. Would you like to continue, remain invested? And for the next three and a half years or five years, we will now be doing a structured product on, for example, China.
So we have the ability to change the underlying index, we have ability to change the term. But for an investor who’s looking specifically at India, it’s just the listed instruments on the JSE. You can sell it at any time. We make a market on a daily basis, and at the end of the term, if you want to receive your money back, we can pay that back to you at that time as well. So it’s just a part of the structure that will help us roll people within the actual structured products into the next one without having that issue of paying people back and then requesting the money back from them again.
The Finance Ghost: I was smiling when you said three and a half years, because this one’s got this weird intricacy right where it’s not quite three and a half years, it’s 3.6 years. So you got to get the calculator out for that one. And I was laughing because when we talked about it before the show, I thought, is that supposed to say 3 – 6 years? And then I thought, no, Investec doesn’t have typos, that can’t be right. So it’s 3.6 years, not 3.5 years, a bit of a funny story there around familiarity bias and how we read something were not used to seeing. It kind of jumps out as, oh, that might be wrong. What was the reason for 3.6 years on this one rather than 3.5?
Brian McMillan: Yeah, so a lot of our products are done one year, three year, three and a half year, five years. But sometimes we have issues around the expiry. So if we have an expiry that comes up in the middle of December, if it’s three and a half years, we sometimes extend that out for another month or another two months. This particular one will be, if you wanted to put it in months terms, it’s three years and seven months, which equates to 3.6 years. But the reason for that is we were matching it to where options actually expire in the market. It makes it more efficient from a pricing point of view as well as a credit point of view. So just slightly longer than three and a half years.
The Finance Ghost: And in terms of liquidity, I mean, life does happen. Unfortunately, it happens to all of us. It comes at you fast. Things can go wrong. Is there some wriggle room if you need to get the money out, for example, if something happens?
Brian McMillan: Absolutely. So, you know, during the life of the product, because it’s listed on the JSE, we actually have to make a market on a daily basis. And by making a market, what we mean is that we will actually buy back any of the investors’ notes that they want to sell on a daily basis. So if you go and look at any of our previous ones on a daily basis, we have a bid in the market. We bid for, you know, for R100,000’s worth. If somebody wanted to do more than that, normally their broker phones us up and says, you know, I want to sell R400,000, can you make me a price on that? And we will do that on a daily basis.
Sometimes we have a slight mismatch. We might say to them, we’ll give you a price at 4pm once the US market opens, or something like that. But on a daily basis, we will make a market for these and so somebody can sell them at any time during the life of the product. They’re not necessarily locked in to expiry.
I should note, though, that things like the capital protection, when we say you have capital protection, that means that during the life of the product, it may trade below your initial price, but as long as the market hasn’t fallen more than 30% on the last day, you will have your capital protection at that point.
The Finance Ghost: Yeah, fantastic. So let’s talk about the word accelerator, which is now in the name of the product. As I said, it’s the Investec Rand India Accelerator. So that’s a key part of what’s going on here. And that means there is some kind of enhanced return, as we’ve seen in some of the products that we’ve dealt with on these podcasts before. So, please walk us through what is the opportunity there? And of course, this is some of the great upside on this product and the way it’s structured.
Brian McMillan: Yeah, so the word accelerator we use sometimes when we’re referring to gearing or getting more than what the market returns. When we looked at this, we obviously have to price it. The options on the Indian market aren’t cheap. We had a look at it and we said, what do we think it can grow in the next 3.6 years? And then we said, okay, if the market grows 40%, and we can give you one and a half times that 40%, is that attractive? So, what it means is we’re giving you one and a half times more growth than what the index does. Unfortunately, we can’t give it indefinitely, so we have to cap it. We’ve capped it at 40%, but we’ve said we’ll give you one and a half times the growth. If the index is up 10%, you will get a 15% return.
And because it’s all rand, everything is related to rand. We take the index level on day one, we take the index level at the end, and we say, what percentage has that moved? And then we say, okay, if it’s moved 20%, you will get one and a half times that. You will get a 30% return, but in rand. So if you put in R100,000, you will get back R130,000 at the end of that term.
The Finance Ghost: So basically, there’s an enhanced return on the upside. On the downside, there’s capital protection as long as the ETF doesn’t go below 70% of where it started. So if it drops by between zero and 30%, you are protected. Yes, you’ve lost money versus inflation, but at least you get your capital back. On the way up, you get a nice enhanced return.
So the “catch” basically is that you are sitting with capped upside. There is a maximum return here. If the Indian market does go absolutely bonkers over this period, as the investor, you wouldn’t lock in that full benefit, right?
Brian McMillan: That’s exactly it. If we had to look at this against investing in a rand ETF, there is one in the market, what we’re doing is we’re saying we’re giving you some capital protection, but in order to get that capital protection, we’re taking away the potential for some of the upside. Now, the ETF would have to go up more than 60% over that period to outperform our product. Anything less than 60% up in the ETF, we would actually outperform in our product. Anything more than 60% up, then the ETF would have been the way to go. But of course, with an ETF, you have full downside exposure all the time. So that’s really what we’re trying to do, we’re trying to say, here’s a market that investors don’t necessarily know a whole lot about. They’ve heard about it, they want it, they’re excited about the growth potential in it. Let’s put a small amount of money in here but have the capital protection. And then, because it has run as hard as it has in the last two years – and it’s only really the last two years post-Covid that it’s run. In fact, when you look at it against the S&P or the Nikkei, actually over the last ten years, it hasn’t run as much as those markets. We’re saying, here’s some good exposure to the upside, get some exposure to that market and get some exposure to the growth potential.
The Finance Ghost: And I think what’s lovely here is most people just don’t have exposure to the Indian market. They really don’t. It’s a big gaping hole in their portfolios. If they own a lot of JSE-listed stocks, they have a lot of look-through to China, whether they like it or not, they really do. If they own a lot of US stocks, they have actually also got a lot of look-through to China if they’re on the consumer side. Then obviously they’ve got all the tech stuff as well. Yeah, Europe has been a bit of a slow one, let’s be honest. They’ve been hurt by some of the ground they’ve lost in industrial players against China etc. especially on the car side. But India is just this very, very interesting emerging market where South Africans for some reason are just not very exposed. Very few of our corporates give that exposure. They are one or two, but it’s limited.
This is a very cool way to actually go and say, hey, you know, if this thing keeps going, I’m going to get a nice enhanced return. If it goes completely mad, I’ve missed out a bit, but I’m still going to be smiling because I would have still gotten a great return, objectively. And if it goes down a bit, I’ve got some protection, you know, because it has had a strong run so if it does correct over the next few years and end up lower than it is now, you know, that’s a concern and that’s something that can be addressed by this product. So it does seem like a really great offering.
Obviously, the next question has got to be around fees. So for investors, what fees do they need to be aware of? You know, what’s involved here?
Brian McMillan: I think one of the nice things that we do with our structured products is there are fees in it, fees are paid to the financial advisor, but the fees are all worked into the product. So let’s say the market does run nicely and the index is up 40%, you will get the maximum return of 60%. If you put R100,000 in, you will receive back R160,000. There’s no fee that comes off of your return, as such.
We do pay the advisors a fee to, you know, to give advice to the clients, but that would actually be worked in. So, you know, for example, instead of one and a half times gearing, we might be able to give 1.53% if there was no fee paid in it. But for the product itself, all the fees are worked in and there’s no additional fees that the investor would have to pay.
The Finance Ghost: Okay, fantastic. Let’s talk practicalities, what is the minimum investment amount, what are the closing dates and how do people go about doing this? Do they contact you directly? Is it through a financial advisor? How do they actually get their money in here?
Brian McMillan: We’re closing on the 15th November. We then collate all the money that comes in from various different IFAs, stockbrokers, wealth managers. And then we do the trade on the 21st November. So there is a bit of time left. There’s still another good nearly six weeks.
People should contact their financial advisors. We as Investec Structured Products can’t give advice to people, you know, we don’t have their full details, we don’t know what their tax situation is, so all of our products have to be bought through a financial advisor or stockbroker.
A number of the stockbrokers have access to this. You would need to have a stockbroking account because it is a listed instrument on the JSE. And if you don’t have one of those, you know, most of the big banks have got their own stockbrokers. You could open one with them or your financial advisor would tell you, you know, which one they prefer. You fund that account, so you put the money in there and the financial advisor will then advise us how much they wish to invest on your behalf. You would then see another benefit of having it listed is previously these structured products were very opaque because you couldn’t see price discovery, you didn’t know what the value was – but because this is listed on the exchange, you’re going to receive a monthly statement from your stockbroker showing you what price you paid for it, what the value of it is at the moment, and you can keep track of it that way.
The Finance Ghost: Yeah, fantastic. Look, I think it’s a really, really cool opportunity, so thank you for that information. I will include in the show notes, more links on the product and obviously if people want to go through the Investec website and find out more about it as well. Brian, thank you so very much for your time on the show, as always. I know you’re traveling at the moment, so hopefully that all goes well for you and good luck with this product. No doubt it’ll be another great success.
Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.
In the 43rd edition of Unlock the Stock, Lesaka Holdings gave excellent insights into both the financial performance and their strategy in building a fintech group. The Finance Ghost co-hosted this event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions.
Calgro’s revenue is down, but profits are up (JSE: CGR)
The shift into higher margin units has changed the shape of things
Calgro M3 has released results for the six months to August. Revenue is down by 26.4%, which hardly sounds like the start of a love story with a happy ending. Despite this, HEPS jumped from 78.88 cents to 101.40 cents. You won’t see that every day!
The magic happened in the gross profit margin, up from 22.2% to 29.69%. A jump like that is unheard of, with Calgro now well above the target range of 20% to 25%. They expect this positive trend to continue throughout this financial year, driven by more sales of open market and non-public sector units.
So although revenue is down and Calgro was more exposed to general consumer health than would normally be the case, the substantial jump in gross margin has more than made up for it.
One area to keep an eye on is cash generated from operating activities, which fell from R89.9 million to R28.6 million. It sounds like some of this was due to timing delays, with R200 million in cash collected in the first two weeks of the new period.
To learn more about Calgro M3 and to ask your questions directly to management, register for Unlock the Stock this Thursday at this link.
Mantengu Mining releases a simpler update on the Blue Ridge deal (JSE: MTU)
It seems that many got it wrong in the market
The first announcement released by Mantengu Mining in relation to the Blue Ridge Platinum deal was complicated. I’ve read many deal terms in my life and so I think I had it figured out correctly overall, but they really didn’t make it easy for the market to understand what was going on there.
The company has released a clarification announcement, noting many inaccuracies in the media. Perhaps they should learn from this and write clearer announcements next time that are designed for public consumption rather than lawyers. I’m afraid that many companies on the local market are guilty of this and I wish announcements would include better summaries. On the plus side, it gives you a reason to keep reading Ghost Bites!
As I understood correctly the first time, the losers here are the existing lenders to Blue Ridge. Mantengu is buying the equity for R100 and the only debt coming with the group is R65 million in total, split across the Development Bank of South Africa and the Industrial Development Corporation.
The debt will only be repaid from gross profits at Blue Ridge. Mantengu reckons that they can unlock between R1.8 billion and R2.5 billion in revenue across the chrome and PGM opportunity. It’s also worth noting that Blue Ridge has an assessed loss of R3.1 billion.
Mantengu has confirmed that they will be undertaking a bankable feasibility study into the underground mining operations. This is expected to take 18 months to complete.
For what it’s worth, some of the information in this announcement is new.
Merafe’s production heads the right way (JSE: MRF)
The winter months were better this year
To manage production costs (particularly the cost of electricity), Merafe isn’t shy to curtail production in the months when electricity is more expensive. They obviously balance this against ferrochrome prices in the market, as they are trying keep gross margins at an appropriate level.
Things were clearly better this winter, as all operating smelters were in production throughout the winter months. This led to a 2% increase in production for the nine months to September vs. the comparable period.
Novus gets an important contract extension (JSE: NVS)
The Department of Basic Education has renewed for another two years
The printing and distribution of workbooks is part of a broader education strategy at Novus. It’s a smart approach, as it feels like the magazine and newspaper market is headed in one direction only. School workbooks are here to stay and the contract is with government, so it can be lucrative provided things are structured and priced correctly.
Novus is part of the Lebone Litho Consortium and has already been working with the Department of Basic Education under the current workbook contract since 2023. What was originally a two-year contract has now been extended for a further two years to June 2027.
Boardroom battles aside, Quantum Foods is profitable again (JSE: QFH)
Things are much better in the poultry industry
Quantum Foods has been a regular feature of recent headlines thanks to all the boardroom drama and shareholder activist strategies. Of course, the chickens in the business are still laying eggs, so things continue in the operations as usual.
The poultry industry is looking much better these days, with Quantum reporting HEPS of at least 70 cents per share for the year ended September 2024. This is a vast improvement from a headline loss per share of 17.4 cents in the comparable period.
There are a number of factors at play here, not least of all the magical disappearance of load shedding and the resultant drop in diesel generator costs. Raw material costs are down, so the chickens are cheaper to feed. Avian influenza was a feature of the comparable period, contributing to all the previous pain. Egg selling prices have moved higher so this helps margins. Finally, the businesses in Uganda and Mozambique have improved.
So even though corporate office costs were higher thanks to professional fees related to the shareholder and director disputes, the overall story is a positive one. It’s even better when you consider that the impact of the explosion at the Malmesbury Feed Mill in June is in these numbers, but any recoveries from insurance will only be in the following period.
An improvement in the numbers will certainly give the existing management team an advantage in further discussions around their performance.
A horrible period for Sasfin (JSE: SFN)
The administrative sanctions provision didn’t help either
Sasfin has been a consistent underperformer in the local banking industry. They have some good businesses, like Wealth and Asset Finance, but they also have some real weak spots that have been a disappointment for investors.
They also earned themselves a nasty administrative sanction of R160 million from the Prudential Authority for alleged non-compliance in the foreign exchange operations. For context, the entire group only managed to achieve headline earnings of R112.7 million in the 2023 financial year!
Although the sanction was announced in August, Sasfin has made provision for it in the year ended June 2024. This is why the group is expecting to report a headline loss per share of 181.41 cents to 200.50 cents, a hideous outcome vs. HEPS of 366.18 cents in the comparative period.
It’s not just the sanctions to blame, with Sasfin noting an increase in expected credit losses and negative fair value adjustments.
Wesizwe Platinum: going concern or ongoing concern? (JSE: WEZ)
The auditors are sitting on the fence here
Wesizwe Platinum has released its financials for the six months to June. They’ve swung into the green, with HEPS of 7.36 cents vs. a headline loss of 59.63 cents per share.
The challenge is that Wesizwe’s ability to continue as a going concern is dependent on the ongoing support of the majority shareholder. If that shareholder calls on the loans, then the show is over. For the auditors to get comfortable around this, they asked for a letter of support from the shareholder. There is a delay in getting a letter over and above the current funding cap of $1.5 billion, as such a letter requires approval from the China National Development and Reform Committee.
To get that process concluded, the controlling shareholder needs to establish the excess funding required for the Bakubung Project. The directors of Wesizwe believe that it is unlikely that the majority shareholder will simply walk away from the Bakubung Project given the level of historical investment.
Although these are sound arguments, they weren’t strong enough to get the auditors across the line completely. Instead, they took the approach of disclaiming their opinion, as they can neither confirm nor dispel the going concern basis of accounting for this group.
Nibbles:
Director dealings:
A director of a major subsidiary of AVI (JSE: AVI) received share awards and sold the whole lot (not just the taxable portion) for R3.76 million.
Not that it helps the market two years later, but Octodec (JSE: OCT) announced that a mistake was made in a dealing by an associate of a director back in November 2022. There was an additional purchase of shares worth R206k by an entity in the Wapnick family that was not disclosed properly.
Trustco (JSE: TTO) is in the process of increasing its stake in Legal Shield Holdings to 91.35%. The deal was first announced in April 2024 and there have been addendums to the terms since that date. The circular is currently with the JSE for review and will hopefully be posted to shareholders soon, although the announcement doesn’t commit to a particular date.
Anglo American (JSE: AGL) saw limited uptake of its dividend reinvestment plan. Holders of 1.83% of shares on the UK register and 1.17% of shares on the SA register elected to receive shares in lieu of cash dividends.
Property funds normally achieve strong take-up of dividend reinvestment plans, but not so at Hammerson (JSE: HMN). The market wasn’t all that interested, with holders of 1.46% on the UK register and 0.94% on the SA register saying yes to shares in lieu of a dividend. That’s even lower than what Anglo American achieved in the mining sector!
Obscure group Numeral (JSE: XII) released results for the six months to August 2024. Currently, they have a business that is a Google Partner in South Africa. Much as they try to talk this up, there are over 210 such partners just in South Africa. They are also looking at acquisitions in the biotechnology space. If you can figure out how this fits with a Google marketing business, do let me know. At least they made a profit of $122k for the six months, tiny as that is in a listed context.
Will shareholders regret not accepting the take-private offer?
Bell Equipment has released a trading statement for the year ending December 2024. Yes, they are way ahead of time here, which tells you how bad it is. Even with a couple of months to go in this period, they are confident that earnings will be at least 25% lower than the previous year.
The scariest thing is that they didn’t take the “at least 20%” disclosure route that the JSE allows. They went with 25% instead. My suspicion is that the percentage drop for the full-year numbers is going to be frightening, especially since interim HEPS was down just 6.5%.
The second half of the year has clearly been a nightmare, with weaker conditions in the markets that Bell is active in. The share price reacted sharply to this news, down 7% within 30 minutes of it coming out. It eventually closed 4.5% lower.
Coronation uses an old school B-BBEE structure (JSE: CML)
I’m surprised at how little creativity went into this
If you’ve ever wondered how B-BBEE deals were structured in the early days of the legislation, then Coronation has turned back the clock with a notionally funded structure related to the listed shares. It has a defined end date, much like MTN Zakhele Futhi which is now being restructured because the share price is in serious trouble at the time of the deal being unwound. Referencing listed shares in a B-BBEE deal is a risky thing.
At the very least, Coronation could’ve done something at subsidiary level referencing the value of unlisted shares, leaving themselves more flexible at group level. Refer to MultiChoice’s Phuthuma Nathi to see how well a deal like this can actually be structured.
The goal here is to move from 31% Black Ownership to 51% Black Ownership through a combination of an Employee Share Ownership Plan (ESOP) and broad-based ownership scheme (BBOS). The deal will be funded by a notional funding arrangement for 10 years, priced at 85% of prime. Coronation is a cash generative business, so there’s a decent chance of the debt actually being serviced by dividends over that period, at least to a large extent.
The business case is that an improved B-BBEE rating could help them win more asset management mandates, thereby improving dividends over the long term and the deal effectively paying for itself. Sounds great on paper but isn’t so easy in real life.
A “trickle dividend” allowance is used for some of the dividends to go through to the participants rather than servicing the debt. If there’s any meaningful value transfer though, it will be 10 years from now when the shares are sold to settle the notional debt. If that sounds to you like a poor way to incentivise employees, then you’re on the right track in my view. All this does is create expectations of wealth creation that inevitably lead to near-term disappointment. I spent a lot of time in a previous life helping companies restructure deals that didn’t work or didn’t create the desired outcome and Coronation seems to have ignored all the learnings in the market of the past two decades of deals.
As for the BBOS, the beneficiaries have been described broadly. It will be structured as a Public Benefit Organisation (PBO). In my view, they would’ve had far more impact here if they had used this as an opportunity to create a foundation dedicated to developing more Black asset managers in South Africa. They can technically still do that based on how broad the trust deed is, but why not be specific and take the win for the brand?
The IFRS 2 expense related to the deal is R270 million to R330 million. This is a non-cash charge that will hit the income statement. The dilutionary effect on dividends per share is around 1% excluding transaction costs.
At least they used notional funding rather than a bank loan guaranteed by the group. That’s about the only “innovation” that I can really see in this structure.
Zeder flags a worrying outlook (JSE: ZED)
At least they’ve had a busy year of asset disposals though
Zeder Investments operates in the agriculture sector. Over time, they’ve been selling down assets and returning capital to shareholders in an effort to reduce the substantial traded discount to net asset value (NAV) per share. This is nothing unusual among investment groups on the JSE.
For the six months to August 2024, the NAV fell by 17.9% to R2.15. The drop was R0.47 per share, of which R0.40 was due to a special dividend paid to shareholders. In other words, the true performance is a modest decrease in the NAV per share, driven by the valuation of unlisted investments.
In terms of deals, the disposals of the TWK and Applethwaite farming production units, as well as the Novo fruit packhouse operation, are still underway. Competition Commission approval has been obtained for all three disposals, but other conditions are still outstanding. Zeder subsidiary Capespan Agri has also agreed to sell Misty Cliffs (a primary farming production unit) for R45 million, taking the total value of disposals to R713 million. The amount attributable to Zeder is R621 million.
Once the deals close, Zeder intends to pay special dividends to shareholders in line with the recent strategic approach of returning capital to investors.
They are still looking to disposal of the assets in the Zaad portfolio. It doesn’t help that confidence levels in the South African agriculture industry are currently below neutral levels, despite an uptick after the GNU was formed. Aside from the obvious sources of irritation like poor road infrastructure and worsening municipal service delivery, the weather hasn’t played ball recently with droughts.
For context, Zaad is carried on the balance sheet at over R2.2 billion, so there is still a long way to go in Zeder unlocking all the value for shareholders.
Nibbles:
Director dealings:
Dr Christo Wiese has continued with the shuffling of chairs within his group, with a scrip lending transaction in Shoprite (JSE: SHP) shares to the value of R1.1 billion.
An associate of a prescribed officer of Discovery (JSE: DSY) sold shares worth R12.9 million.
A director of Motus (JSE: MTH) sold shares on the market worth R3.3 million.
Unsurprisingly, a large number of NEPI Rockcastle (JSE: NRP) directors have elected the scrip dividend alternative.
I don’t usually focus on director sales to cover taxes on share awards, but there were several examples in one Cashbuild (JSE: CSB) announcement of company insiders selling only enough to pay their tax. The transaction sizes are also modest, so these don’t seem to be zillionaire directors who have endless other cash and don’t need to sell the shares. These are amounts that could’ve been spent on a new car or a family holiday overseas. Given where we are in the cycle and my long position based on Cashbuild looking interesting, I was pleased to see this.
A prescribed officer of Mpact (JSE: MPT) sold shares worth R215k.
Mondi (JSE: MNP) announced the results of its dividend reinvestment plan, with only modest support from the market. Holders of 1.05% of shares on the UK register and 3.37% on the South African register elected to participate.
For property funds, access to capital is critical. The JSE has a deep pool of institutional debt investors, so it’s an important step that Attacq’s (JSE: ATT) Domestic Medium Term Note Programme Memorandum has been approved by the JSE. In case you want to flick through the terms of such a thing, you’ll find them here (all 103 pages of them).
Mantengu Mining (JSE: MTU) has managed to convert creditors of subsidiary Langpan Mining into shareholders by settling R23.4 million worth of debt through the issuance of listed shares. The issue price is R0.84 per share, a discount of just 3% to the 30-day VWAP. That’s a pretty big show of faith from those creditors, although I’m guessing they have some concerns about the recoverability of their debt and this was part of the decision.
A major shareholder in DRA Global (JSE: DRA) (Gency Support Limited) clearly wanted to reduce exposure before the potential delisting, with its ownership percentage falling from 12.25% to 8.79%.
Kibo Energy (JSE: KBO) achieved nearly unanimous approval to sell Kibo Mining to Aria Capital, turning the company into a cash shell and preparing it for the reverse listing of a much more interesting portfolio of assets.
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.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
