Shady dealings hurt industry

FUND MANAGEMENT NOT IN GOOD LIGHT Managers putting their eggs in one basket leaves investors vulnerable to destructive events.

A band of fund managers repeatedly questioned why Resilient companies traded at sky-high premiums to their NAVs (between 35% and 80%) despite the quality and growth of earnings and property portfolio not justifying it.

Regrettably, other fund managers displayed a herd mentality, opting to heavily back Resilient companies, which guaranteed them inflation plus 5% returns or annualised returns north of 15% for many years.

A fund manager once told me if you wanted to outperform the benchmark FTSE/SA Listed Property Index (20 of the JSE’s biggest real estate stocks), all it took was backing Resilient companies, which comprise over 40% of the index.

Some investment houses – including Absa, Metope and even the Public Investment Corporation – took it a step further, taking overweight positions in Resilient, Nepi Rockcastle, Fortress, and Greenbay.

Each had a combined weighting of about 40% and 50% in Resilient companies, resulting in bruising loses for investors, given the more than R150 billion that has been wiped off the four companies’ market capitalisation so far this year.

So much for relying on past performance to replicate future returns.

Essentially, fund managers put their eggs in one related property group basket – the antithesis of risk management and diversification. It leaves investors vulnerable to destructive events, as seen in the disastrous performance in 2018’s first quarter.

Investors must ask fund managers tough questions about how their money is allocated. Their (sole) reliance on interviews with management to make investment decisions is clumsy. It’s time to revert to the old way of conducting research and having a degree of scepticism.

I bet some fund managers are now going through financial statements with a finetoothed comb, something that should have happened before shareholders were burnt.