Investment trust discounts at historic highs

By Amelia Morgenrood Time of article published Dec 10, 2018

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JOHANNESBURG - Investment trusts used to be very popular for investors on the JSE. It was convenient placing your investment money in the hands of some expert businessmen, knowing where to invest and then mostly playing a role in the future of the company.

A decent investment trust usually traded at around 10-15percent discount of the sum of its underlying value. There were certain periods when the market became so excited with the prospects of investments made, placing massive trust in the hands of the investment managers, that certain investment trusts traded at premiums to their underlying value.

A perfect example is Brait which, with Christo Wiese at the helm, at one stage traded as much as 50percent above the sum of the underlying parts of the investment trust. Investment trusts making offshore investments were especially popular (remember Remgro with its Mediclinic holding).

It is simple to calculate the underlying asset value if the underlying assets are listed on a stock exchange, but it becomes trickier if the investments are made in unlisted companies. Usually, these values are only made public at the time of the publication of the results of the investment trust.

Often these unlisted investments are the reason why investors are interested in investment trusts as it is difficult for a small investor to invest in an unlisted and sometimes unknown company.

In the past year, investment trusts have become very unpopular and they are trading at the most significant discounts to their underlying asset value in history.

African Rainbow Capital (ARC) published results in September for the year ending June 30, 2018. The sum of the parts (SOTP) was then 912c, and with the share price now at a record low 515c, the discount widened to 43percent.

At the time of listing 15 months ago, analysts and investors criticised the management fee (1.75percent a year management fee plus 16percent performance participation), probably the main reason for the substantial discount.

ARC was created in 2015 with Johan van der Merwe and Dr Johan van Zyl as co-chief executives. It was 100percent owned by Ubuntu-Botho Investments, led by well-known businessman Patrice Motsepe.

The vision of the company is to build a proper and leading black-controlled financial services and investment group.

Ubuntu-Botho Investments was founded in 2003 as a BEE partner for Sanlam, which turned out to be one of the most successful regarding the value that was created for the beneficiaries. Today they own 13.5percent of Sanlam. These shares were used as collateral in other deals, and they managed to build a portfolio of more than R6bn (at the time of listing ARC).

Their biggest holding is in data-only mobile network Rain, comprising around one-quarter of the fund's total value; financial services comprise 20percent. Their investments are in the third new stock exchange A2X, BKB, EOH, Metrofibre Networx, Val de Vie, Afrimat, Autoboys, to name a few.

ARC has no debt, and due to their BEE credentials they have the opportunity to deploy large cash balances into attractive new investments at below fair market values.

Management is active, and they can extract synergies, which should result in strong net asset value growth over time.

ARC has been very busy, they doubled their investment portfolio since listing, and in November they obtained approval from the Reserve Bank to acquire 90percent of TymeDigital, which will change its name to TymeBank when it officially launches to the South African public.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. She does not own African Rainbow Capital shares and also not on behalf of clients.


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