Old Mutual’s policyholders have profited from the surge in the stock market. Reg Rumney reports on the assurance giant’s views about the future of share investments
DESPITE interest rates that are high — and might go higher — and nervousness about the effect of a possible scrapping of exchange control, giant life assurer Old Mutual is not about to desert the Johannesburg Stock Exchange in which it is one of the biggest players.
This becomes clear when speaking to Johannes van der Horst, who heads up the investment side at Old Mutual.
Since it behoves the company, a custodian of other people’s money, to get the best returns, and those returns should logically be boosted by switching from expensive shares to increasingly attractive interest- bearing investments, why not?
The answer is manifold, and Old Mutual’s views not merely of academic interest, given the number of chips it has at the JSE casino tables.
The life assurer, which juggernaut-style keeps on rolling along the growth path, reported total assets under management up almost a third at around R128-billion this week.
That, by way of illustration, is almost 15 percent of the total current value of the shares on the JSE, giving a hint why some commentators have expressed concern about the economic power of Old Mutual and its chief rival, Sanlam, particularly on the JSE. Sanlam’s total assets under management stood at R72-billion for 1993, and if they grow at the same rate as Old Mutual’s will be around R94-billion when it reports.
The lion’s share of Old Mutual’s assets, around R120-billion, is invested in South Africa. And of that R120-billion, approaching two thirds — or R74-billion — was invested in shares at end-June this year.
Around R37-billion was in interest-bearing investments such as the long-term IOUs of the bond market or short-term investments of the money market, and a mere R8- billion in property, which still adds up to a great deal of commercial, industrial and even residential property.
Van der Horst comments that if annuities, which are not actively managed as an investment, are stripped out of the total pie, three quarters of the Mutual’s assets are in the JSE.
While the property and interest-bearing investments are not small beer, Old Mutual’s share portfolio is the biggest cash generator.
Old Mutual’s investment in shares has given a 40 percent return over the year. By contrast, the remaining quarter put into interest-bearing investments and property gave a 12 percent return.
Given the superb returns, despite the enormous uncertainty of the past year, Old Mutual has cause to be pleased it put most of its eggs into one basket.
What of the future?
Van der Horst points to various factors.
Long-term interest rates, which arguably better reflect supply and demand than short-term rates because there is no intervention in the market for bonds, have surged, yet the stock market is 40 percent up on a year ago.
Rates in the capital market, where bonds are traded, have risen to above 15 percent.
Short-term rates, where the Reserve Bank does exert influence, have probably bottomed. While they may well stay at present levels for a while, they might well have risen much further in a year from now.
The capital market, notes Van der Horst, is worried by various factors, including persistent rumours about the scrapping of the financial rand system soon.
But he quotes Old Mutual’s chief economist, Dave Mohr, to stress that the trend towards higher capital market interest rates is world-wide. All international yields on long-term bonds have surged since the end of last year, and world trends strongly influence the South African capital market.
There are also lingering fears that spending on the ANC’s grand economic plan, the reconstruction and development programme, will cause the government to overspend, and a general expectation that inflation is also at the bottom of its cycle.
Van der Horst concedes the equity market looks high in terms of its own history, with P/E ratios of 20 times. As a rule of thumb the higher P/E ratio, which is the share price divided by the current earnings a share, the more expensive the share. Added to expectations of higher interest rates, this is not the stuff of which booms are made.
So Van der Horst is not looking at the market doing great things in the next six to 12 months.
On the other hand, profit growth is picking up. The market is looking beyond a year to the next two to three years, he argues.
The other compelling reason to stay in the market is that it is not exactly easy to move in and out.
That the JSE is intensely illiquid — simplistically, too few shares are bought and sold — compared to other exchanges is well known. And trading costs on the JSE are among the highest in the world because of marketable securities tax, notes Van der Horst.
So Old Mutual will try to shift its interest- bearing investments between money and capital market to get the best rates, but being trigger happy in the share market is expensive, reckons Van der Horst. “You can’t try to be clever and buy back shares at a lower level.”
There may be turbulence ahead, but Old Mutual can only brace itself for the ride on a long-term ownership basis.
On the thorny and complex issue of the abolition of exchange control, Van der Horst is surprisingly sanguine.
“If the world became your oyster you would basically have to start from scratch,” he admits. “Yet the impact on the stock market would be much less than common sense suggests, at least initially.”
One reason is that legally the domestic liabilities of pension funds must be covered by domestic stocks. Only free reserves, that is after subtracting the value of domestic liabilities from the value of domestic stock held, can be invested abroad. That automatically puts a lid on how much money now in the JSE can flow out into the New York-listed Microsofts and others.
Secondly, the exchange rate will fall rapidly as it adjusts to expected outflows. Suddenly overseas shares that looked good value with the commercial rand at its present value of around 27 US cents, will look a lot more expensive as it drops to say 10c. At the same time, the devalued rand will make South African shares look a much better buy for foreigners, especially without the financial rand worry.
While the JSE could prove an over-interesting place to be invested over the next 12 months, commercial and industrial property investment is looking up.
Van der Horst says there are signs that demand for commercial and industrial property space is rising again, after staying static in 1993.
because of continued recession. Some major metropolitan areas are reporting a decline in vacancies, and the number of new property developments has declined drastically in the past 12 months.
This, together with consensus that economic growth will accelerate next year, mean pressure on office space is increasing and average rentals could rise 20 percent or more in the next 12 months, he reckons.