Naspers and the problem of size
The rise of Naspers poses problems for pension funds and financial advisers alike
Naspers is by far the largest listing on the JSE, making up more than 17% of the all-share index and more than 21% of the SWIX thanks to the performance of Chinese internet conglomerate Tencent, in which it holds a 34% stake.
It has been a great success story for ordinary South Africans who have held the share over many years. When they bought it, few would have thought they would one day benefit from internet growth in China.
I’ve come across ordinary employees of divisions of Naspers who received what was then a token amount of shares in the company but which are now worth hundreds of thousands of rand – even millions in some cases. I’ve even met an individual whose father left him a Naspers share certificate that he buried in a safe for 10 years. Those shares are now worth R10-million and he didn’t even know it!
The rise of Naspers has, however, posed some problems for asset managers and financial advisers alike. Having a benchmark that is heavily exposed to one share is a phenomenon that investors need to understand. Asset managers are custodians of client capital, and managing risk is a major part of the job description. As such, would it be prudent to have 20% exposure to one share for the sake of a benchmark?
Looking at the table below, it’s easy to see how portfolio managers who did not hold 20% of their portfolios in Naspers may have underperformed their benchmarks over the past year, considering the performance of the share.
As at May 19 2017
# Stocks: 164
Largest stock (NPN): 17.35%
# Stocks: 164
Largest stock (NPN): 21.03%
# Stocks: 164
Largest stock (NPN): 12.29%
* Capped SWIX reweights to 10% at end of each month. Source: Investec Wealth & Investment, Bloomberg
The problem for portfolio managers is that even if they were prepared to expose clients to such large single-equity risk, mandates that are governed by Regulation 28 of the Pension Fund Act would still be underweight the benchmark even if they invested to the maximum of 15% in a single stock allowed.
Enter the Capped SWIX
As the name suggests, this index, introduced by the JSE in the last quarter of 2016, caps the exposure to a single stock at 10%. Its introduction is likely to result in a number of asset managers adopting it as their benchmark for equity mandates, which makes sense because it means they can better align their responsibilities to risk and client expectations.
The active management bashers may say this is simply a way for asset managers to move the goalposts, but an index of this nature would benefit the investor. Consider a scenario where a fund is limited to a 10% holding in a stock, the benchmark is the SWIX and Naspers falls by 10% in the year under review. Has the manager really outperformed? The answer is no, and a correctly weighted index would ensure that did not happen.
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Ewan Naude is an investment manager at Investec Wealth & Investment.
This article was paid for by Investec.