Coronation Fund Managers, one of South Africa’s biggest asset management groups, has taken a handful of weighty positions in selected small-cap stocks. Much can be read into this, and probably has been, by investors looking for clues in institutional buying and selling.
Share registers will show that Coronation has moved to, or past, the 25% line in several of these counters — most notably private education businesses Stadio and AdvTech; retailers Lewis Group, WeBuyCars and Dis-Chem; technology group Bytes; and real estate company Fairvest.
Some might argue that Coronation is buying around a legal threshold — and taking positions the market would not normally associate with traditional fund management. A long-only manager usually spreads risk, stays somewhere near the index and avoids stakes that drag it into control fights and governance problems. Coronation seems to be doing the opposite.
A 25% holding is surely where a shareholder stops being merely noticeable and starts becoming difficult to ignore. Under the Companies Act, ordinary resolutions pass with simple majorities, while special resolutions need at least 75% of the votes exercised. The memorandums of incorporation (MOIs) of companies such as Fairvest and WeBuyCars make the same point in more practical terms: the big levers, including changes to the MOI, capital structure shifts and large share issues, sit behind special resolutions. That means a holder of more than 25% can block the decisions that matter most when the rules of the game are changed.
It does not give operational control, and it does not let a shareholder run the company day to day, but it does allow that shareholder to stop other people from changing the capital structure or shareholder rights without consent. Not every major transaction turns on a special resolution, and some schemes, delistings and other deals run through different mechanics. But wherever 75% is needed, 25.01% is a hard veto.
It could be easy to argue that Coronation wants protection as well as upside. A blocking stake makes it harder for a company to dilute existing holders through a badly timed capital raise. It gives real weight in fights over buybacks, dividends, issuance authorities and governance changes. And in a market where take-private and delisting schemes keep turning up, it gives Coronation the ability to say no when the price is wrong. Many institutional investors like to talk about stewardship, but very few buy enough stock for that stewardship to have real force when a board or a bidder wants something done.
While it’s an interesting angle, the truth is a bit more mundane
— Karl Leinberger
However, Coronation chief investment officer Karl Leinberger reckons this premise reflects a misunderstanding about how the group builds its portfolios. “While it’s an interesting angle, the truth is a bit more mundane.”
Leinberger says Coronation is not an activist investor and does not take positions with the intention of exercising control or blocking rights. “What you see today is no different to what has been the case for Coronation for more than three decades. We have a culture of deep proprietary research and … invest heavily in our own internal research capabilities. There have been many occasions over the years when Coronation’s clients have held a large percentage shareholding in a company with a small market capitalisation.”
He says that when special opportunities present themselves, Coronation’s holdings will go into the 20% range. “We have no real interest in whether our holding is above or below 25%, though we do have an internal cap of 30% of total company shares in issue.”
Leinberger adds: “We think that the only informational value in a holding in the high teens or 20s would be that this is a small- to mid-sized company that the Coronation research process has identified as offering exceptional value.”
Still, it’s interesting to compare Coronation’s positioning with other large South African managers. Ninety One’s disclosed holdings are substantial, but they mostly stop well short of what might be construed as “blocking territory”. Ninety One’s biggest stakes in operating businesses include KAP at 16.17%, Hyprop at 15.68%, JSE Ltd at 12.85%, Raubex at 11.90%, Pick n Pay at 11.39%, Sappi at 11.34% and Resilient at 10.81%.
Allan Gray shows much the same pattern. Its largest listed positions include Woolworths at 19.46%, Super Group at 18.55%, Cashbuild at 17.26%, Oceana at 16.78%, Adcorp at 15.22%, City Lodge at 15.13% and Spar at 15.01%. Those are large positions and they clearly signal conviction, but they are still shy of Coronation’s big stakes — Stadio at 25.01%, Lewis at 26.90%, Bytes at 28.06%, AdvTech at 28.51%, Dis-Chem at 28.86% and WeBuyCars at 29.08%.
With that in mind, perhaps it’s worth mulling Coronation’s next moves. The group already holds a 23.86% stake in automotive group Metair, 22.4% in technology conglomerate Altron, 20.5% of property counter Attacq, 20.05% of specialist financial services business Nutun and 17.5% of packaging giant Nampak.
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