Investors fear Novus has not yet hit bottom

Investors seem to instinctively mark the Novus Holdings share price down when they see it has issued a Sens statement. As Novus’s statements go, the one issued on Monday was almost upbeat.

It’s all relative of course. The latest news is that the decline in basic earnings per share for the year ended March 31 will only be between 70.1% and 75.1%. At the end of April Novus issued a trading statement warning shareholders basic earnings per share would be down at least 75%.

The slight improvement is due to marginally improved cash flows included in the impairment testing models applied by the group.

Without the massive impairments forced on the company by the loss of a big chunk of the Media24 printing contract, Novus’s financial 2018 results would have been reasonable.

But it wasn’t just Media24related impairments that knocked the results. The tissue division, which was expected to be a useful contributor to earnings, has proved to be a disappointment. This is certainly a knock to the shareholders who were hoping tissue would compensate for some of the losses at the printing division. No doubt they will be bracing themselves for financial 2019, which is when the effect of the lost Media24 business hits earnings.

Given these grim events it is hard to know whether shareholders have been comforted or spooked by recent executive departures. The chief financial officer departed in March and has not yet been replaced. The company secretary left a few days later and there is still no permanent replacement. Most recently came news the CEO is on the way out.

Given the share price moves, shareholders don’t yet believe things can’t get worse.

For all the hype around index-tracking products in SA, only a handful of the country’s savings are invested in them. Figures from the industry suggest that index-tracking products command less than 5% of assets in the R2.2-trillion unit trust market. Active managers are sitting on all the rest.

Contrast this with the US, where about 23% of assets are passively managed, with expectations that this will exceed 50% in the next four to six years.

Evidently, South Africans remain enamoured with active managers, despite research suggesting that only a handful of them consistently manage to outperform the market after fees. Until the real money — institutional money locked up in pension funds — is directed towards index trackers they will stay small.

Pension funds are not known for their alacrity in making decisions that involve change. Ask Coronation, which reopened its SA equity and multiasset portfolios to new institutional investors more than a year ago and has yet to see meaningful flows.

Pension fund trustees draw comfort in sticking with what they know, even if it means paying higher fees. Gatekeepers — the asset consultants who advise pension fund trustees on where and how to invest the savings of ordinary South Africans – are a further handbrake.

But considering that index funds have now been around for more than 40 years (at least in the US) and are getting smarter all the time, it is high time that fund trustees seriously consider their merits.