When ‘defensive’ wasn’t

eter Brooke, who runs the Macrosolutions unit at Old Mutual Investment Group, says investing over the past 12 months has been all about avoiding landmines.

The most fatal was Steinhoff, right at the end of last year.

There were some unforeseen circumstances, but fund managers — both regular and hedge — certainly didn’t come out of it with glory. At the very least they should be recalibrating their risk management models.

I am not sure who came up with the word “defensives” for shares that should provide reliable earnings and dividends. It is certainly preferable to that arrogant term “quality” — a “defensive” fund manager sounds a lot less boastful than a “quality” one.

But over the past 12 months many defensive shares have proved to be anything but. One of the worst-performing large caps was Mediclinic, which was down 37%, much worse than the 12.4% of the Capped Swix benchmark.

My personal experience of Mediclinic was the exact opposite of “quality” when I had an operation at the Morningside clinic in Johannesburg.

Though the company has spent a few million on a lick of paint since then, I would certainly rate my experiences at Netcare’s Rosebank and Linksfield hospitals much higher.

The market pushed Mediclinic onto the Alsi 40 on the back of the acquisition of leading groups in Switzerland and Dubai.

It is now painfully obvious that hospital groups are price takers, not price makers. A change in legislation, even in super-affluent Switzerland, is cutting Mediclinic’s margins. And that is a sorbet course compared with what’s coming from National Health Insurance in SA.

PBritish American Tobacco (BAT) is another share that “quality” fund managers expected they could lock away and receive steady growth and income from. But it is down 44% for the year, having faced a double punch.

First was the rise of vaping and e-cigarettes, with the independent player Juul providing alternatives such as watermelon flavoured e-fags. But more serious is the strong possibility that menthol cigarettes will be banned in the US. BAT is the dominant player through the Newport brand, and menthol accounts for a quarter of group profits.

No sure bet

It is not so easy to justify the 50% fall in Aspen Pharmacare’s price. It suffered from rumours that it would be subject to a report from the dreaded Viceroy short sellers, and the market did not like the sale of its infant nutritional products business to the French Lactalis group. But it is still in great shape, with group earnings up 17% in the year to June. Certainly it looks in much better shape than a group such as EOH (down 62%), which can’t claim the same king-ofmarket domination in the IT sector.

Many of the other poor performers were in the property sector. Property seemed like a sure bet over the past decade. But some fund managers were looking the other way when it came to the Resilient group’s Byzantine structure and poor corporate governance. Part of me would like to free an entrepreneur such as Resilient founder Des de Beer from the restraint of governance rules. But soon after the fall of the equally charismatic Markus Jooste of Steinhoff, De Beer was an easy target and the share has halved.

Resilient at least has the reliableincome Mall of the North in Polokwane and the Galleria Mall in Amanzimtoti. Its sister company Fortress has done even worse, falling 62%, but has a much duller roster of properties.

At the very least fund managers should be recalibrating their risk management models