Be hands-on and diversify in shadow of Viceroy’s sword
Mainstream investors have been battered since the end of 2017, with supposedly blue-chip investments turning sour
Seasoned investors could be at risk from further fallout affecting blue-chip investments as the market awaits a report from research outfit Viceroy.
But if they diversify risk and learn more about their investments, they will be able to weather any storms.
"Investors should be more hands-on regarding their own portfolios," Herenya Capital Advisors analyst Petri Redelinghuys says.
Losing 5% to obtain better future results "is not too high a price to pay", Redelinghuys says. Investors must be prepared to take a hit at times. Investing in stock markets carries risk because the aim is to obtain a bigger return than through a fixed deposit, for example, he says.
Mainstream investors have been battered since the end of 2017, with supposedly blue-chip investments turning sour.
This began with Steinhoff in December when the global retailer’s share price went into free fall, losing 91% as the group announced accounting irregularities. Viceroy had released an extensive report on Steinhoff’s activities.
In early January, Aspen Pharmacare’s share price lost 10% in a single day before recovering.
This followed speculation that it would be Viceroy’s next target.
Then came the turn of property companies, with the share price of highly rated Resilient falling more than 7% on Wednesday. The shares of Nepi Rockcastle, in which Resilient has a 13.3% interest, also tumbled. Viceroy confirmed in a tweet dated December 29 that it would release a report on a "South African name".
Viceroy has said it shorts the shares of the companies on which it reports.
Index investors could suffer most if another blue chip is fingered, as index funds have to track the top 40, which until December included Steinhoff. But changing to an actively managed fund may also hold dangers, Redelinghuys says. "Therefore, it is important to understand what funds invest in and the risks involved."
After the Steinhoff debacle, Sygnia Asset Management CEO Magda Wierzycka had harsh words for asset managers, saying Steinhoff was close to being "a corporate-structured Ponzi scheme".
Redelinghuys says she may be right, but spotting the onions early is easier said than done. Reputable asset manager Momentum Securities rated Steinhoff a buy at R64 in July 2017, for example.
Momentum cited Steinhoff’s €3.1bn cash balance as one of its advantages, describing its share price as attractive.
Steinhoff has subsequently indicated that its results since 2015, including the stated cash balances, are unreliable and will be restated.
An average investor could not have known that.
Redelinghuys says investors can mitigate a potential fallout in one stock by ensuring they diversify across a number of counters to improve returns.
The same applies to property heavyweight Nepi Rockcastle, which fell last week on rumours that it is heavily indebted and is set to be targeted by Viceroy. Combing through financials would have been difficult as the group recently merged, but the average investor could have looked no further than ratings agency Fitch’s first-time ratings for the group in November. Nepi Rockcastle was awarded a BBB rating, a solid investment grade and two notches above sub-investment, or junk.
"The company has a conservative financial structure, which centres on a loan-to-value of 35%," Fitch said.
That should have brought some comfort to investors, whose investment in Nepi Rockcastle rebounded 4% on Friday. A new investment reality allows institutions such as Viceroy to flourish.
And it is set to become more difficult to separate the wheat from the chaff.
As veteran investor David Shapiro recently lamented in a tweet: "Now all the smart kids at the top of the class are in the market with their algorithms and fancy trading programs. They’ve brought chaos. Go back to being geniuses and leave the market to us."