Deon Gouws stands out as a subtle thinker in an increasingly textbook-driven fund management industry. It is no surprise that after stints at Old Mutual, Sanlam and RMB Asset Management he has opted for the more creative environment of private client managers Credo Wealth. Credo is a few blocks from the Brait offices in Marylebone, London, but the worse the New Look owners do, the more Credo prospers.
Gouws can be seen rubbing shoulders with socialite Jemima Goldsmith in the local restaurants and joining SA veteran stockbroker David Shapiro at weekends in the season ticket-holders’ seats at Emirates Stadium to watch Arsenal (who else?).
In the latest Credo News, Gouws writes a note titled "Investing in China: caveat emptor". With lots of pictures of the Forbidden City in the brochure I can imagine he would have loved to change this to "caveat emperor". We seem to be seeing the rebirth of Chinese imperialism, after all.
Gouws points out that just three of the top 10 holdings in the EMQQ, an emerging-markets internet and e-commerce exchange traded fund, are not Chinese, and of these, one, Naspers, is a proxy for Chinese giant Tencent.
But Gouws warns that Naspers doesn’t own its shares in Tencent in the sense understood in the West.
It has an exposure through a structure known as a variable interest entity (VIE). The listed entity is wholly owned by Chinese citizens and typically the tech firm’s founders. Crucially, it holds the operating licences.
The VIE’s economic benefits are transferred to the listed entity via contractual arrangements, so technically there is no foreign investment in the controlling entity.
China is expected to take a big stride … towards a ‘one person, one vote’ shareholder structure
Most foreign investors assume that they will still enjoy most of the benefits of shareholders, such as security of ownership and a regular dividend flow. Will China want to compromise its reputation among foreign investors?
RV Capital founder Rob Vinall says the structure squares the circle of China’s insistence on local ownership, Chinese companies’ need for capital and foreign expertise, and overseas investors’ desire to profit from the growth in Chinese companies.
But foreign investors do not get the economic power that they would normally expect from a large shareholding. Naspers is a passenger on Tencent, even with a 30% interest, with no influence on strategy or management.
US-based Yahoo hoped to be far more than a passenger from its 43% holding in Alibaba, but in the end Alibaba founder Jack Ma still called the shots, and benefited far more when it spun out the Alipay payment business.
China is introducing a foreign investment law which is expected to take a big stride away from the legally murky VIE towards a "one person, one vote" shareholder structure.
Credo analyst Alison Norbury says there are plenty of ways to exploit the China and broader Asian growth story without resorting to VIEs, such as the insurers AIA and Prudential and casino group Las Vegas Sands in Macao.
Life insurance has proved to be increasingly popular in Asia, as more people recognise that they have wealth to protect.
With the right underwriting and actuarial skills, life cover can be much more profitable than increasingly thin-margin investment products such as mutual funds.
AIA and Prudential have far stronger brands in the region than their Western peers. Their main challenge comes from the excellent local group Ping An.
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