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As a multi-manager, I have seen the effect of the rising Naspers* share price on fund managers’ investment returns.
Some managers were early in and early out, especially when the share price hit a high and managers took profits.
Those same managers subsequently bought back into the stock at even higher levels.
Many managers look for what they deem to be “value” in the share. Value shares are those that can be bought cheaper than what a manager thinks its true value can grow to.
Many would consider Naspers expensive because it trades at around 140 times its historic earnings.
To compare, the JSE’s Share-Weighted Index (Swix) trades at about 21 times.
Naspers now accounts for 24% of the Swix and the question on many managers’ minds is what happens if the share price continues to go up.
When Naspers’s share goes up by 70%, which it has done over the past year, a portfolio with zero exposure lags in performance by almost 16.8%.
What this means is that the fund manager is starting with a 16.8% handicap versus the benchmark. Even a brilliant fund manager would find it difficult to offset that disadvantage.
As investors have become more aware of how the market is performing, they are comparing managers to market benchmarks like the Swix.
Even contrarian managers or “unconstrained” managers are being influenced by Naspers’s dominance. A material number of contrarian managers who weren’t invested in Naspers before now have exposure to the stock.
They call this managing “benchmark risk”. In other words, increasing exposure to a stock because of its dominance in a benchmark, not necessarily because of the stock’s business case.
As fund performance surveys have become more widely available, investors now also compare managers to their peers.
Given the dominance of Naspers in South African equities, regardless of what you think of the stock, if you don’t own Naspers today you could significantly underperform your peers.
Unfortunately, sometimes the comparisons require complex analysis and can be misleading for uninformed investors.
But even fund managers who love the stock have had their nerves tested. Would you like to have 24% of your portfolio exposed to just one share?
As one manager said to me a couple of years ago: “If I hid the name of the share and showed you that much exposure to one company, would you consider it prudent portfolio construction for your clients?”
Stock concentration is not something new. The Swix was introduced in 2003 because of a dominance of dual-listed shares on the JSE All Share Index (Alsi).
A similar scenario played out where managers were “underperforming” the benchmark due to the dominance of shares such as BHP and Anglo American that were primarily listed on an international exchange, with only a small percentage of shares available in the local market.
To address Naspers’s dominance in the Swix, a number of managers are now shifting their benchmark to the Capped Swix, which was introduced in November 2016.
It rebalances every quarter to cap stocks at 10% of the index, creating less single-stock concentration.
Naspers is an interesting investment case because it reminds us why it’s important to follow your own investment objectives. If your objective is to beat the market, then you should be cognisant of the weight of Naspers in the benchmark.
A healthy allocation to Naspers is needed otherwise you are taking the view that Naspers is likely to underperform the index.
But it is prudent to remind investors that while Naspers has delivered excellent returns, it is subject to market sentiment like any other share. It can go down!
Investors who set their investment objectives against a goal such as beating inflation by a certain margin to achieve their income, or growth expectations, often don’t need exposure to Naspers, or any other specific share, to achieve their desired outcome.
Naspers as an investment case on its own brings other dimensions to a portfolio. Through its investment in Tencent, it allows South African investors to gain exposure to the vibrant global technology sector.
Its offshore businesses, which are largely based in Eastern Europe and Australasia, mean that its earnings are better off when the rand weakens.
Today it is Naspers dominating South African equities, tomorrow it may be another company. The underlying principle is to understand your own investment requirements and set appropriate objectives.
That should be where investors focus.
Jennifer Henry is a portfolio manager at Stanlib Multi-Manager.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article is part of the December 2017 FundFocus survey, which appeared in the 30 November edition of finweek. Buy and download the magazine here.
