The worst loss in equity and multi-asset unit trust funds as a result of African Bank’s recent trading update and the suspension of the share this week was a 10-percent reduction in value, but most investors lost less than one percent, because their investments are diversified across a number of securities.
Many funds have reduced the value of African Bank’s shares in their portfolios to zero.
Two value funds appear to have taken the worst hit among the equity funds, with the Momentum Value Fund writing down more than 10 percent of its portfolio.
The Stanlib Value Fund was also a big loser, with the manager reporting that the fund had a 6.11-percent exposure to the share when the market closed last Friday.
In the multi-asset sub-categories, the Element Balanced Fund showed a loss of 5.97 percent over the six days to the end of Wednesday this week, data from Morningstar reveals, while its Flexible Fund had a loss of 6.23 percent. Not all of the losses can be attributed to African Bank, but it is likely to have been the most significant contributor to these bad returns.
The Momentum Balanced Fund was also a big loser, shedding 5.76 percent over the six days to the end of Wednesday.
The Momentum Value Fund had 10.61 percent of its holding in African Bank at the end of June, according to the fund’s fact sheet.
Coronation Fund Managers was widely reported to be the biggest shareholder in African Bank, but this is a function of the size of its funds, and the exposure to African Bank shares in its different funds is a relatively small proportion of each fund.
Coronation reported that its highest exposures to African Bank shares were in its Top 20 Fund and its Financial Fund: 1.41 percent and 1.34 percent respectively. Its other funds had less than one percent, and some, including the Strategic Income Fund and the Balanced Defensive Fund, had no exposure.
Sam Houlie, the co-manager of the Momentum Value Fund, says although there was evidence that African Bank had challenges, Momentum had reason to believe that the bank’s management was addressing these.
As a deep value manager, Momentum looks for stocks that it believes are mispriced by the market – “and one seldom finds mispriced stocks that are surrounded only by good news”, Houlie says.
“However, we were wrong in this instance and we do apologise for that,” he says.
Karl Leinberger, the chief investment officer at Coronation, and Neville Chester, a senior portfolio manager, apologised to investors for the losses on Coronation’s equity portfolios, saying the management of African Bank had convinced them that the bank had learnt its lessons about making bad loans and had made appropriate write-offs of the bad debt.
“In the fullness of time, we were proved wrong,” Leinberger and Chester say.
Terence Craig, the chief investment officer at Element Investment Managers, says Element’s view was that African Bank understood their loan book and management had the experience to deal with a bad cycle.
Craig doesn’t believe the losses will be permanent for those who remain invested. He says shareholders are likely to be able to participate in the “good bank” that the Reserve Bank has indicated will be funded and continue to trade on the JSE.
Craig says the Flexible Fund has achieved a return of about 17 percent a year and the Balanced Fund 12 percent a year and both should recover the losses in six to 12 months.
Robin Eagar, the manager of the Stanlib Value Fund, says when Stanlib invested in African Bank, it believed the bank was experiencing cyclical, as opposed to structural, bad debt. He, however, believed that the market had priced in the bad news and that the management team had a good track record of pricing unsecured credit. This changed with the August 6 announcement, he says.
Eagar says value investing is for investors with an aggressive risk profile and they may have to endure short-term losses to achieve good long-term performance. However, that doesn’t mean that humility is not an important part of being a fund manager, and it’s important to take lessons on board.
Satrix says that African Bank shares were this week removed from the indices that three of its exchange traded funds track. The Dividend Plus Fund lost 1.19 percent, the Rafi 40 Fund lost 0.47 percent, and the All Share Fund lost 0.12 percent.