You might hit the jackpot by holding on to shares in what becomes a hugely successful company. Taking an early profit will enhance your bank account but can prove wealth-destroying. Yet by buying and holding forever, your much-enhanced wealth can become highly and dangerously concentrated. So diversifying your risk by lightening positions in huge outperformers, to hold a mix of shares and other assets, makes wise, risk-reducing sense.
Owners of start-up businesses that have made them fabulously wealthy also have to make choices about how best to invest their wealth. They could diversify their wealth by redeploying dividend and other income received from the original enterprise. By investing in a portfolio of other assets, in a variety of jurisdictions, they reduce their risk. Alternatively, they could adapt the company they control to buy a well-diversified group of unrelated businesses, over which they continue to exercise management control.
This is what the Rupert family have done very well. They have diversified their wealth away from cigarettes in South Africa by establishing investment holding companies that invest in unrelated businesses here and abroad, over which they maintain control. They have done this most impressively by managing the exceptional growth of Richemont, a stand-alone Switzerland-based luxury goods company.
In 2007 Richemont fully divested itself from exposure to tobacco and became a specialised luxury goods business. R100 invested in the stock in 2009, with dividends reinvested, had grown to R2,200 by late 2023. That’s equivalent to an average rate of return of 21% a year, helped by a marked acceleration in its share price after Covid.
R100 invested in Richemont in 2009 with dividends reinvested had grown to R2,200 by late 2023. That’s equivalent to an average rate of return of 21% per year, helped by a marked acceleration in its share price after Covid
Investing R100 in the JSE all share index, also reinvesting the dividends received, would have grown to only R605, at an average 12% a year return over the same period.
The performance of Richemont in dollars is equally impressive: $100 invested in 2009 would have grown to $1,239 by late 2023. Investing the same $100 in the S&P 500 index would now be worth about $773. Johann Rupert is justified in proudly pointing this out to South African fund managers who have not availed themselves of the Richemont opportunity.
Fund managers, however, have been justifiably critical of the performance of two other JSE-listed vehicles that have been used to diversify Rupert family wealth. Remgro has performed in line with the JSE since 2009, with significantly more volatility, while Reinet has delivered below JSE averages. Worse, the share market performance of the Rupert-managed companies has been much less impressive if we start the comparisons later.
Remgro and Reinet have returned only an average 1.7% and 5.4% a year respectively since 2016, against the JSE all share’s average 8.4% return over the same period.
The two have thus served no obviously useful purpose to loyal outside shareholders in recent years and even Richemont, judged against a starting point of January 2016, does not look so good, when compared with its own peers, particularly LVMH. As we all should know, you are only as good as your last performance.
Book vs market value
Because the reported book or NAVs of Remgro and Reinet are higher by a larger margin than their share market values, the two would seemingly be worth more to these outside shareholders if these companies were wound up and the assets, including the shares held in listed and unlisted subsidiaries, distributed (unbundled) to shareholders. Better dead than alive is the harsh reality.
Yet such a presumption needs qualification. The value uplift, eliminating the difference between reported value and market value, and so eliminating the discount attached to the assets held by the holding company on their shareholder’s behalf, would be true only of the listed shares held by Remgro and Reinet. Whether the unlisted assets would also fetch their reported NAV is not at all obvious.
They might be too generously valued by the directors in their financial statements. If so, the NAV will be artificially high, making for a larger and exaggerated difference to market value and thus a greater discount.
Much Remgro capital was wasted in 2016 in expanding one of its major subsidiary companies, Mediclinic, with a £600m investment in a Dubai-based hospital group. Remgro’s recent decision to delist Mediclinic and take what has been a very expensive asset private, cannot be market value adding. The value assigned to Mediclinic on the books of Remgro by its directors is now unlikely to be market-related. And if generously valued by the directors, it will add to NAV — but not to market value — and raise the discount to NAV. It is the opposite of unbundling.
Making Remgro or Reinet better businesses and better asset allocators, as Rupert intends, would add to market value and be in the interest of all shareholders
Were the investment programmes of Remgro or Reinet regarded as more promising, their market values would increase. Making Remgro or Reinet better businesses and better asset allocators, as Rupert intends, would add to market value and be in the interest of all shareholders. He “just” needs to convince investors and fund managers that he can make better investment decisions that will enhance return on invested capital and increase economic profit. Management should be incentivised to grow economic profit.
The current market value of any holding company would also rise in anticipation of unbundling exercises — which is an exercise in the partial liquidation of holding company assets. The market value of a holding company would decline with any actual unbundling that would also simultaneously reduce NAV and market value. But the direction of the discount itself, after an unbundling would depend on the ongoing actions expected of the holding company.
A share buyback is another way to return assets, in this case cash, to shareholders. It might also add market value to a holding company while reducing NAV. It could make sense not because shares appear cheap, but because the holding company is unable to find cost-of-capital-beating investments or acquisitions with its surplus cash.
For a closely controlled holding company, attracting public money clearly has its advantages. In addition to the additional fee income that comes with a larger and better diversified balance sheet, it improves the ability to do larger and hopefully wealth-adding deals.
It has its downside: having to accept the harsh but objective judgment of the marketplace about future performance that is best reflected in the share price.
*Kantor is head of the Investec Research Institute and emeritus professor of economics at UCT; Holland is the co-founder at Fractal Value Advisors
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