Does the sharp decline in share price create a crisis or opportunity?

By Andró Griessel

02/04/2022

There’s one stock that has been a hot topic as of late; we are, of course, talking about Naspers.

The share price has declined by more than 50% over the past 12 months.

To see half of your investment vanish within the space of a year is a bitter pill to swallow, even for the most seasoned investor, regardless of the tenfold growth the stock has experienced over the 9 preceding years.

So, what are we to do with Naspers?

I can only guess what happens next for Naspers, but in the absence of new information on Naspers’s long-term prospects (and, therefore it’s true valuation), my opinion is that it does not make sense to sell the stock at current levels if you were not prepared to sell a year or two ago.

The best course of action is probably to sit back and do nothing.

This whole affair does, however, offer a few learning opportunities for future decision-making and opportunities to get your affairs in order now.

What we should learn

Investing is a marathon, not a sprint: The inclination to extrapolate historical (often very short-lived) performance into the future or to accept that either extreme positive growth or extreme negative growth will continue, leads to behavioural issues and usually results in poor outcomes for investors.

In the case of Naspers, as an example, a R1 million investment made ten years ago would have grown to almost R5,5 million within 5 years (an average return of 40% per year for 5 years)!

At this stage you would not have been able to convince a Naspers investor to bank some of these incredible returns. If you did manage to convince someone, they would be utterly disappointed 4 years later after Naspers continued to double its value to roughly R11 million (average return of 19% p.a. over these 4 years).

However, following the price decline this past year, the investor would be back at R5m in value, the same value as five years ago.

Therefore, in the last year, the previous 4 years of growth was nullified and the average growth of Naspers shares (taking into consideration the unbundling of Prosus) over the last 10 years is now roughly 17% per annum.

While these are still significant returns, it is only a 1% improvement on what an investor would have achieved by investing in the Ninety One Global Franchise Fund.

The latter is however a well-diversified foreign equity unit trust that took on significantly less risk and the manager does not have the Capital Gains Tax monkey on his back.

Your perception of Naspers as an investment will differ drastically depending on when you either bought or sold the share.

Someone who bought stock 10 years ago and sold it 5 years later would have enjoyed a 450% return on their investment in only 5 years.

Someone who bought the share 5 years ago currently has zero return. Someone who bought the share for the first time 3 years ago has lost 36% of their investment after three years.

There is no such thing as a good investment at any price. The price you pay for an asset matters.

If you buy an expensive asset, you lock in poor long-term returns from that point onwards, regardless of how well the stock performed previously.

This principle surfaced repeatedly the last year or two with regards to foreign investments, with specific reference to USA technology stocks. It seems this is a lesson investors will learn the hard way once again, or perhaps might be learning already.

Generational family wealth in the form of a large share portfolio that is usually dominated by a handful of stocks is a breeding ground for self-sabotaging behaviour.

The almost manic need to avoid capital gains tax and the consequent decision-making quicksand that the trustee or owner finds themselves in, often leads to poor or sometimes even catastrophic outcomes.

These types of portfolios, per definition, represent multi-generational wealth and the decision makers act as custodians of the funds for a limited time period only.

When one stock in the portfolio, such as Naspers, substantially increases in value year after year due to super performance, the owners or trustees often become too comfortable, thinking that they are doing a great job, rather than becoming uncomfortable with concentration risk that continuously increases and their lack of a clearly documented investment philosophy that would guide them as to when they should re-balance their position.

Now, let’s be honest with each other: It is easy to be the “know it all” now that Naspers has declined by 50%. The share could just as well go up by 100% over the next year.

However; the value of a thorough process remains, and I know from experience that few to none exist for such portfolios.

As custodian of either your own wealth or that of a trust, your first duty is to protect your capital (after distributions) against inflation and not to grow it as quickly as possible at any cost. The latter often leads to mistakes.

Are there opportunities?

This is a golden opportunity for investors who were reluctant to rebalance their portfolios due to the significant capital gain implication, as the drop in share price halved capital gains.

It may also be a good time to move shares from an investor’s personal name to a trust, which holds estate duty and capital gains tax benefits over the long term. Do yourself a favour and make the calculations on what the future saving could be.

Investors who swapped Naspers shares for Prosus shares to lower their exposure to Naspers, may have noticed that there is a high correlation between the two and that the expected diversification benefits are neglible.  Prosus shares currently trade at around 35% lower than its base cost after the unbundling.  These losses can by paired with gains to soften the impact of accumulated capital gains in Naspers.

I hope the recent events around Naspers’s share price is a reminder to any trustee who manages this share and others that diversification is of utmost importance.

Now is the ideal time to be looking at alternative options on how to manage and protect these assets in the future, so that by the time the share price recovers, you are ready to implement a new strategy.

The South African Revenue Service, in its benevolence, still allows the transfer of share portfolios to a unit trust fund via a Section 42 transfer, where you can trade units for your shares.  This option is in my opinion the most effective way to get rid of concentration risk without triggering capital gains.

There are other strategies that could also help to decrease concentration risk within a share portfolio.  If you act as a trustee of a trust (in other words, look after beneficiaries’ money), you have a responsibility to research these options and not overestimate your portfolio management capabilities or underestimate your responsibility towards the beneficiaries of the trust.

Andró Griessel is a certified financial planner and managing director at Woodland Wealth (previously known as ProVérte Wealth & Risk Management). Contact him at info@woodlandwealth.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.