How to protect and grow wealth

TURN THREATS INTO OPPORTUNITIES Activist investing, shorting, quantitative analysis, global diversification cited.

The past two and a half years have been a tough time for South African investors. Economic growth has been low, the local market has disappointed and the uncertainty around land expropriation without compensation has thrown the cat among the pigeons.

Speaking at the SA Quo Vadis? seminar presented by Brenthurst Wealth and Moneyweb, Jean Pierre Verster, portfolio manager at Fairtree Capital, discussed four strategies investors could consider to turn these threats into opportunities.

With activist investments, someone buys a big chunk of a company’s shares and uses their influence to change the company fortunes by getting involved and adding value along the way, Verster said.

While South Africa is not known for its activist approach, some of the country’s big asset managers have used their muscle to try and force companies to make certain changes. At least two funds are following this approach. One fund is currently active in companies like Altron, Adcorp, African Phoenix, Novus and PPC, so far with a mixed success rate.

A smaller activist investment company has also been busy at Stellar Capital, Santova and Rolfes.

But investors have to be aware of the risk of “shortermism”. Activists may get involved, push the earnings per share higher for a few years in the hope that the share price will rise and once it does, they sell their stake, Verster said.

“That doesn’t create long-term value for the shareholders that are left.”

Another strategy to protect and grow wealth is shorting – making money from falling share prices. “Shorting is a higher risk strategy. It is a specialised strategy. It’s employed these days in a regulated fund in South Africa.”

The best shorts are fads, frauds and failures, he said. Steinhoff was an example.“If you were invested in Steinhoff you lost 98% of the value of your investment. But if you were shorting Steinhoff shares, you could have made that.”

With shorting, the risk is that short-sellers could release false or misleading information about the company into the market – the socalled short and distort strategy. Investors have to be mindful of this, Verster warned.

A third strategy is quantitative analysis. Big data, artificial intelligence and machine learning provides opportunities for the asset management industry. There is already $1 trillion invested in quantitative analysis-type strategies abroad, Verster said. “It is very small in South Africa, but it is starting to gain traction.”

Because quantitative strategies come at a lower cost and fewer analysts can be employed, a lot of people are quite excited about the development, Verster said.

He warned that where quantitative funds used the same signals to trade, it could become crowded. For example: If all quants expect property prices to fall as interest rates rise, they could start selling property, prices would drop and it might actually be a buying opportunity.

The fourth strategy is global diversification. South Africa only represents 1% of the investable universe. “Most of our money is invested here, while a lot of studies have shown that closer to 50% is a better allocation to offshore investing.”

Closer to 50% is a better allocation to offshore.