Both companies offer poorer value than their products
SANLAM PREDICTS its headline earnings for the six months to June this year have fallen by between 20% and 25%. Normalised earnings – that is, all the adjustments required under the IFRS, the current generally accepted international accounting standards – left out of account are between 55% and 60% less, the company warns. Sanlam says the reason for its poor performance is because “the adverse performance of global equity and debt markets had a negative effect on investment returns”. The group also admits its exposure to the resources sector, which performed fairly well over the past year, was too low.
Both statements confirm that Sanlam’s own shares are in fact not worth investing in. In fact, the same probably goes for the shares of all asset managers, from Coronation to Old Mutual, to name just two.
Asset managers’ profitability is directly affected by the fluctuations in the prices of other financial assets. Investors are therefore far better off buying Satrix 40, the index of our Top 40 shares, rather than Sanlam (see graph). And remember the Satrix 40 can’t make a mistake, such as being underexposed to the resources sector. The more the prices of resources shares, or any shares, rise, the more important they become in Satrix 40’s non-human influenced portfolio. Asset managers such as Sanlam make mistakes.
Apart from Sanlam’s acknowledgement that it didn’t read the storms on SA’s and global financial markets completely correctly and faulted with inadequate resources exposure, Sanlam of course still has a large direct investment in Santam.
That short-term insurer has already warned its headline earnings for the same six-month period could perhaps be 95% lower than in the previous year. That’s the reason why Sanlam expects its normalised earnings could be as much as 55% lower for the six months to June 2008.
The same charge about the investment quality of Sanlam’s shares can be levelled against Old Mutual’s shares – in fact, much more so. In the old days, just after its listing, Sanlam’s share price and that of Old Mutual a short while later was just more than half that of its big brother. Now Sanlam is at least trading at 1750c/share.
Old Mutual’s management was much more successful in going backwards and its price of 1350c/share on the JSE is a shocker. It never was or is worthy of investment. Old Mutual decided to list on the London Stock Exchange rather than on the more modest JSE. The performance of its share price against the FTSE 100 shows that over the past two years Old Mutual’s board and management had to work pretty hard to destroy so much relative value. It couldn’t have happened just by itself.
Of course, insurers are quick to point out to investors their profit isn’t the full story. The so-called embedded value, which is just a form of net asset value, apparently says much more. Sanlam recently went one step further and chose now to call it group equity value (GEV; see box). Investors must express the current share price as a percentage of the GEV.
In the case of Sanlam, the GEV at the endDecember 2007 was a healthy 2350c, while it’s currently trading at just 1750c/share. That’s a huge discount of 25%. That says one of three things: Sanlam’s GEV is falling, Sanlam’s shares currently offer excellent value or – the most dangerous and the most likely – investors are just no longer interested in Sanlam’s business model.
There’s very little that Sanlam or Old Mutual can do to unbundle their asset value to their shareholders. Especially not if their traditional paternalistic attitude to ordinary shareholders is taken into consideration. For example, Sanlam didn’t want to unbundle its large interest in Absa to its shareholders. It preferred the unpopular step of selling it to Barclays plc.
Old Mutual has never thought of unbundling its interest in its short-term insurer Mutual & Federal – which, incidentally, is doing as badly as Santam – to its shareholders. Just like Sanlam, it first tried to buy out minority shareholders and now it’s simply trying to sell the short-term insurer.