Has Johann Rupert lost his mojo?

Johann Rupert, the tycoon whose prediction of a global crash shortly before the 2008 financial crisis earned him the moniker "Rupert the Bear", is now paying the price for a long-held vice at specialist investment company Reinet.

Reinet was formed in 2008 and is listed on the Luxembourg Stock Exchange, Euronext in Amsterdam and the JSE. But its share price has plunged nearly 30% since touching R285 in mid-September last year.

Sure, this performance is not as devastating as that of the JSE’s other large internationally inclined investment fund, Brait.

But still, this is not the kind of performance you would usually associate with a vehicle which Rupert set up specifically to protect capital.

The problem, of course, is that Reinet’s key investment remains British American Tobacco (BAT). And partly thanks to plans by regulators in the US to outlaw menthol cigarettes, BAT’s share price has halved within a year.

It’s a blow to Rupert who, as the de facto asset manager of Reinet, is perceived in many quarters as a visionary investor. Rupert, often billed as a member of the "Stellenbosch mafia" though he actually lives in Somerset West, is ranked as the 240th-richest person in the world, according to the Bloomberg billionaires index, with a fortune of R86bn ($6.43bn).

As the scion of Anton Rupert, who founded tobacco company Rembrandt in 1948, Johann Rupert spent his formative years as an investment banker in New York in the late 1970s. Back in SA, Rupert created the Swiss-based Richemont in 1988. Today Richemont is the second-largest luxury goods company, worth R480bn, owning brands like Montblanc and jewellery brand Cartier. Rembrandt’s industrial interests were later grouped under Remgro, which is now worth R107bn and owns assets including 44% of Mediclinic, 28% of Rand Merchant Bank (RMB), and 23% of Grindrod.

Rembrandt’s tobacco interests, which had built the family’s fortune, formed the core of what is now BAT.

For years, the Rupert family leant heavily on tobacco as a core investment. So it was no surprise when, in October 2008, Rupert announced he would be forming a new company called Reinet (his father was born in Graaff-Reinet), as a specialist investment anchored around a large minority stake in BAT and €350m in cash. Essentially Reinet was "inheriting" that part of BAT unbundled by Richemont and Remgro.

Until 2016, it all went according to plan.

Rupert — who earns an annual fee of 1% of Reinet’s portfolio, plus a 10% performance fee if it hits high hurdles — scored richly from a giddying run in BAT’s stock. But after BAT’s stock was suddenly and unceremoniously stubbed out, Reinet’s shares slumped dismally.

It’s an unlikely development, considering BAT’s well-publicised defensive qualities, and the speed of BAT’s collapse has taken many by surprise — presumably Rupert too.

But the question is, if Rupert is earning a large fee every year for managing Reinet, why has it not been able to meaningfully break its reliance on its tobacco habit, given that he’s had more than a decade to do it?

Of course, one cannot single out Rupert for that, even though Reinet is one of the biggest single shareholders in BAT. After all, numerous fund managers, locally and abroad, have been fixated by BAT’s pricing power prowess, its brand strength and emerging-market reach as well as superb cash flows and generous dividends.

Then again, many punters regard Rupert as an "ahead-of-the-curve investor" – someone able to anticipate game-changing shifts in business. They will recall his role in building Richemont, RMB and cellular provider Vodacom, as well as hugely successful investments in unheralded financial services firm Fundamo (bought by Visa in 2011) and more recently fibreoptic specialist Dark Fibre Africa. He also shifted Remgro out of its mining investments and made a timely exit from the packaging sector when it bailed out of Nampak.

It is decisions such as these that made Rupert, rather like recently retired PSG founder Jannie Mouton, an investment oracle for wide-eyed ordinary investors.

This is nowhere more evident than at Remgro’s AGM, where investors gather to tap into Rupert’s views on investment. It is like a more low-key version of Berkshire Hathaway’s AGM in Omaha.

As one asset manager, who asked not to be named, put it: "Rupert has been keen to voice his investment views, and also to remind us that he called the market crash of 2008. But the ‘buy and hold, nothing can go wrong’ strategy on BAT is not looking so visionary at this point."

This is unfortunate timing for Reinet, which will post its 10th financial report at the end of March. At last count (end-December 2018) Reinet’s NAV of €3.9bn (or roughly R60bn) reflected a compound return of just 8% a year in euro terms since March 2009, if the rather paltry dividends paid are factored in.

This performance is by no means spectacular. But it does suggest, at least, that Reinet’s wealth-preservation objectives have been attained.

However, perspective is needed. At the end of March 2018 — when the BAT share price was already showing signs of weakness — Reinet’s NAV of €5.1bn reflected a compound return of 12% a year (with dividend) in euro terms since March 2009. At the end of March 2017, Reinet’s NAV of more than €6bn reflected a much sprightlier compound return of 16% a year in euro terms since end-March 2009.

In hindsight, an obvious observation would be that Reinet should perhaps have offloaded more BAT shares when sentiment for the cigarette giant was still smoking hot.

Allan Gray portfolio manager Ruan Stander says Reinet’s management had been urged to sell off some of its BAT holding and repurchase its own heavily discounted stock. Eventually it got the message, and a sizeable share repurchase exercise finally got under way this year. But it was too little, too late.

Still, Stander welcomed the share buy-back exercise, which has already caused the discount between Reinet’s share price and its NAV to narrow to 35%, from 40%.

"Taking advantage of the discount means Reinet can buy back 3% of its NAV for the cost of 2% ... ultimately it helps offset the management fee of 1% [of NAV]."

Will this step defuse concerns that Reinet missed a chance to cash in on BAT at markedly higher prices? Probably not. But it is also true that Reinet has, over the years, sold fairly large tranches of BAT shares.

Shortly after Reinet’s listing, Rupert, when quizzed about his management fee, said the venture was never intended as a public vehicle. Only after being inundated with requests from investors to participate in Reinet did Rupert agree to take public what was initially envisaged as a wealth-protection fortress for the Rupert family.

It was initially understood that the BAT shares — which attract strong dividend flows — would serve as currency to allow Reinet to diversify its investment portfolio.

But some of Reinet’s BAT sales seem odd. For example, the most recent transaction in the three months to December involved selling 44,000 BAT shares to raise the princely sum of €1m. For the record, Reinet, at the end of December, held 68-million shares in BAT, which represents a stake of 2.96% in the cigarette giant.

The most recent large sale took place in 2016 when Reinet sold 6.25-million BAT shares for €307m. Before that, Reinet sold 5-million BAT shares in 2013 to raise €201m.

This is a purely academic observation, but if Reinet had sold just 10% of its 68-million shares in BAT during 2017 it would have comfortably raised more than £300m (R5.2bn). Selling a quarter of its BAT holding would have raised £850m (close to R15bn) — which is nearly 40% of the current Reinet market capitalisation. Of course, that seems like crying over spilt milk.

Officially, Reinet looks set to hang in at BAT. In his commentary in the third-quarter management statement, Rupert said Reinet’s position in BAT was kept under constant review — "considering the company’s performance, the industry outlook, cash flows from dividends, stock market performance, volatility and liquidity".

A point in his favour is that BAT supplied Reinet with dividend income of €70m in the third quarter.

Actually, the more pertinent issue here is that the fall in BAT’s stock has, perhaps for the first time, opened up the rest of Reinet’s portfolio for intense scrutiny.

In the early years BAT made up more than 80% of Reinet’s portfolio, when the initial tilt at diversification was through buying into the old Lehman Brothers investment banking business (subsequently renamed Trilantic Capital Partners) and other specialised investment vehicles. Intriguing investments were also made into diamond recovery operations in SA and subprime mortgages and land in certain US states.

But since Reinet was largely seen as nothing more than a proxy for BAT, these diversification efforts were merely glanced at by the market. Even until March last year, BAT represented around 71% of the value of Reinet’s investment portfolio.

Then it all changed. By the end of December last year, the portfolio balance had altered dramatically as the BAT holding now represented only 48.6% of the NAV.

The dynamics shifted and Reinet’s promising investment in UK-based pension insurer specialist Pension Insurance Corp (PensCorp) — despite being marked down to €1.2bn from €1.4bn — represented a more meaningful 30% of Reinet’s NAV.

There is a hint of the old Rupert magic in PensCorp. Reinet’s timing of its initial investment of £400m has proved inspirational, yielding a handsome return.

But if the PensCorp investment is easy on the eye, the remaining parts of Reinet’s portfolio make for more prickly perusing.

Officially Reinet seeks, through a range of investment structures, to build partnerships with other investors, specialised fund managers and entrepreneurs to find and develop opportunities for long-term value creation for its shareholders.

Since it was formed in 2008, Reinet has invested more than €2.4bn and has committed to provide further funding of €432m to its current investments. New commitments during the third quarter to end-December alone topped €108m.

Reinet has always stressed its long-term view of investment opportunities — and that its scope is a wide range of asset classes with the emphasis on the protection of shareholders’ capital.

However, the parts of the portfolio outside BAT and PensCorp have, at best, put in a pedestrian performance. Some might argue that Reinet’s strenuous efforts to hedge against a cataclysmic market event verge on overkill. Arguably the biggest disappointment would be the market volatility funds, which have done poorly, despite a market conducive to that investment theme.

Reinet’s ongoing investment commitments make it difficult to assess the exact returns (or lack thereof) by its specialist fund and private equity investments.

Officially Reinet seeks to build partnerships with other investors

—  What it means

But Stander reckons this might, at best, be 2% or 3% a year. "This part of the portfolio has been disappointing," he says.

Whether the strategy to diversify by buying into other funds is being reconsidered is not clear. Though the FM forwarded questions to Reinet last week, it had not responded by the time of going to press. However, it stands to reason that the private equity funds will have a limited life span (traditionally between five and seven years).

Still, it seems there are signs that he is planning to clean up the portfolio. An investment in Fountainhead, a fund benchmarked to global inflation, was sold in the three months to December.

There were also sales of €33m at the highly specialised NanoDimension fund, and in the previous year the exposure to Palm Lane and GAM real estate funds was also cut.

While the focus for the foreseeable future will be on PensCorp and the prospect of BAT reigniting, there has also been a subtle change in Reinet’s investment style.

The group — sometimes by default — now holds a handful of relatively small listed investments collectively worth €83m, which includes Chinese real estate, Chinese sportswear, bioscience and the gold sector. It also owns Grab Holdings, the Chinese version of Uber, which looks like an interesting unlisted company with a value of €44m. Reinet investors will be hoping one of these seeds blossoms into something bigger.

Lentus Asset Management chief investment officer Nic Norman-Smith says Rupert’s recent penchant for strategic holdings in listed and unlisted companies raises questions about Reinet’s investment strategy.

"These are really ‘rats and mice’ in relation to the overall portfolio size," he says. "Will these strategic holdings ever move the needle? Would Reinet look to build on these investments, hopefully piggybacking on a unique opportunity?"

There is plenty of scope for deal-making, with Reinet sitting on more than €300m in cash and liquid funds.

Naturally, smaller investments would stand out more prominently if the BAT holding were unbundled to Reinet shareholders. But that seems highly unlikely, as doing so would dramatically slash its size.

The next few months will be intriguing for Reinet. The effect of the recent share buy-back will compound greatly if BAT recovers. For Rupert, who has built a reputation on picking the right time to buy and sell, a lot hinges on Reinet’s next year.