The Naspers problem
PART 2: A LARGE POSITION IN ONE STOCK
The media giant’s relative size in the local market has become a challenge for many local fund managers.
Naspers dominates the JSE so much that any fund measured against an index’s performance is almost forced to hold it – meaningfully. Many fund managers wonder how to manage their exposure to Naspers so there’s a balance between risk and reward.
They must grapple with how much of it they’re willing to hold in their portfolios from a risk management perspective. The stock might be 20% of the index, but few managers are willing to put that much into one company – if something goes wrong it’d materially impact the entire fund.
Managers must also consider what a large position in Naspers means for the rest of their holdings. A fund with large exposure to the stock leaves less money for other ideas, and means thinking about how the rest of the portfolio performs versus that dominant counter.
Uncorrelated performance
Old Mutual Industrial Fund’s Brian Pyle says they constantly think about how to strike this balance. At end September, it had a 28.6% weighting in Naspers.
To manage the risk of this large exposure, Pyle looks to include more assets in the portfolio that show uncorrelated performance to Naspers.
“A lot of ‘SA Inc’ shares, such as Italtile, are not correlated with Naspers.” Cash is also completely uncorrelated. “So I’m running the fund with a little more cash than I would if I had a lower position in Naspers.”
While this is prudent portfolio management, it creates distortions.
Benchmark-cognisant
Morningstar says the Aluwani Top 25 Fund has the largest Naspers exposure of any active general equity fund, at 27.5%.
The fund’s benchmarked against the Top 40; the Top 40 itself is the managers’ starting point when building the portfolio. They then overweight or underweight stocks to generate outperformance.
Some analysts would argue this takes far too much risk in a single stock.
In a recent client note, Aluwani recognised this:
“… we are not completely oblivious to the absolute weight of Naspers in our portfolios, largely because, as investors, despite our best efforts and rigorous investment process, we can not know all there is to know on any investment we have in our portfolios, hence the need for risk management.”
It uses derivatives to hedge against a material pull-back in Naspers. This allows it to have the conviction to have such a large exposure, but still give its clients comfort that they’re protected.
Growth exposure
The First Avenue SCI Equity Fund has 21.47% of its portfolio in the stock, while the First Avenue SCI Focused Quality Equity Fund gives it a weighting of 22.13%.
First Avenue’s Hlelo Giyose says this isn’t just based on a positive view of Naspers, but also a desire for growth exposure.