Peter Brooke  00:00

Good day, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 30 of 2021. 

00:07

I'm going to talk about the carnage taking place in our largest listed company, Naspers. As I record this, Naspers is down 8% today, bringing the two day decline to 16%. If we add in the impact of a subsidiary, Prosus, this brings roughly 275 billion rand decrease in market capitalization. To try and put that number in perspective, because as some people know, saying big numbers is hard to do. This is roughly the same as the entire market capitalization of Discovery, Liberty Holdings, Old Mutual, and Sanlam, all going to zero in two days. 

00:48

So, what happened? The catalyst was a Chinese policy document in the education sector. Essentially, the Chinese government has said that the huge education tutoring business, this is where Chinese students get after school tutoring, can no longer be run for profit. This is the latest in a string of regulations showing a much more interventionist state, which has no real constraints on its power. With the sweep of a pen, this has wiped out some massive companies, as the Chinese Communist Party favours politics over profits.

01:24

Within this document, they also said that foreign investors cannot own shares in the tutoring business via VIE structure, or a variable interest entity. This is exactly the same structure that allows foreign investors to participate in the profits of Tencent. Hence, the fall in Tencent, and as a result, the fall in Naspers and Prosus. The VIE structure has always been the Achilles heel of investing in these companies, and the education example shows how value can be destroyed. This basically leaves one completely reliant on Chinese government policy, and we don't know what will happen next. 

02:06

This risk is not a new risk, and it's exactly the reason why we capped the size of Naspers in our 

solutions at 5% of fund. Just remember when I'm talking about solutions, I'm talking about well diversified portfolios like the Old Mutual Balanced, the Old Mutual Stable Growth, which are investing here and abroad and in different asset classes. While this strategy cost us when Naspers was running, and some of our competitors had positions as high as 10%, we felt it was appropriate risk management. It is also the reason why we use the Capped Swix benchmark instead of some of the other indices, like the All Share Index, which had much higher weights in Naspers. 

More recently, our investment view has been more negative on global tech, on the back of high ratings. So, we have decreased our Naspers/Prosus position further. As an example, the Old Mutual Flexible Fund, which Arthur Karas and I manage, has 3% of fund in Naspers compared to a benchmark of 7%. We are underweight Naspers in all of our solutions, and also in our 100% equity portfolios. 

03:15

It is too early to say how this policy change will impact our decisions going forward. But our sensible risk management means that we can assess the situation calmly without being panicked by the implosion of South Africa's largest blue chipped share. 

I hope you found this perspective useful. Until next week.