The Editor’s Desk: Digging inside the Investec banking/AM split

DUBLIN — Investec is splitting up into a London-based asset management business and a South Africa-based bank. It's an unusual move in a sector that prizes size and synergy, yet the share price has reacted favourably to the news. In this episode, Alec Hogg and I dig into the Investec announcement and ask why it happened and why the markets seem to like it. We also discuss Apple's new product line and look at why South Africa is falling behind the rest of Africa in the investment race. – Felicity Duncan.Hello and welcome to this week's episode of From the Editor's Desk. I'm Felicity Duncan and this is BizNews Radio. With me on the line is Alec Hogg. .___STEADY_PAYWALL___.Alec, the big news this week that we were talking about just a few seconds ago is coming out of Investec. Now, you listened in on their conference call. Do you want to tell us a bit about the changes that are happening? .Felicity, yes, I've been very close to Investec for many years. From the days when I worked at the Sunday Times in the mid-80's and, in fact, ahead of their listing on the JSE (Johannesburg Stock Exchange) I got to know the five founders quite well. Of the five only two are still left there, Stephen Koseff and Bernard Kantor. If you take it from the mid-80's until now, they have built an incredible business. The decision, a few months ago, for the two of them to leave the stage and to be replaced by co-CEO's in Fani Titi and Hendrik du Toit caught quite a lot of people by surprise. Not the fact that Stephen and Bernard are leaving – because, I guess, they've put in more than their fair share of effort – but the record that companies have of having joint CEOs is not good. But now we see exactly, we saw on Friday exactly why they had done that and, I don't want to be cynical about it, but Hendrik du Toit started the asset management's division literally, with himself and a secretary and no clients, and he's built it up to this £100bn-plus business. That's a couple of trillion rand's assets under management. It's an incredible business that he's built up there and he's deeply ingrained into that business..Fani Titi, on the other hand, was the chairman of Investec, the Group, and he is still at an age, I guess, where he wants to get his hands onto something and wants to get his teeth into something. And to have these two characters somehow working together, although one would have been in London and one would have been in Johannesburg – it was really asking a whole lot. It now seems that through the whole process, they've realised that Hendrik's heart is with asset management, Fani is very keen on the South African side of the business and everything else in Investec, and they've done the rational thing. They're going to give, if you like, each of the joint CEOs their own empires to run and Hendrik will then have Investec Asset Management separately listed in London, where its heartbeat does exist, after starting off in Johannesburg first, and then Cape Town. Whereas, Fani will be based in Johannesburg running the rest of the business with a UK operation..So, there's going to be quite a lot of changes that the staff are going to see, moving from one business to the other. But having these two independent entities makes the world of sense when you've got a stage. I love what Stephen Koseff said. He described it in the conference call as being like when your daughter leaves home. His daughter left home to get married, and he was very sad. But then he was ecstatic because they've given him three grandchildren. So, it's kind of like asset management was built up within Investec. It's now like Stephen's daughter leaving home and he's expecting that shareholders are going to be delighted by this in time because the benefits, as with grandchildren, are going to be significant. I like this story that, the Investec story. They've been my bank for many years. They're incredibly good at everything. You just know that when you're a client of the company the quality of the service, the quality of the back end. I think that they're going to be even more successful as a consequence an so do investors..You saw the share price jumping up. We made a mistake on our site to say a nine-year, (I don't know where that came from), but it's gone to a two-year high, over R100 again, a share. It is in our SA Champions Portfolio. So, that helps to lift the performance of that as well. So, all round, it's the sensible and rational thing to do, and it will again, take time. This whole process that we've seen there of the succession planning has been extremely well-managed. Too often we see companies where the CEO leaves and then the board has to try and find a replacement, and you could have disaster. Take Aveng as a prime example, where Roger Jardine left and they didn't have a replacement and they put the FD in, and we've seen how that whole company has imploded. In this case of Investec, it's been a very good, long, and sensible process and shareholders can only be delighted at the fact that they have gone through this, which was always going to be a tricky transition, very smoothly..It's very interesting because, I would say, in most instances what investors like to see is they like to see companies merging business units that make sense, reducing overhead costs, and things like that. This is kind of almost the opposite, in that they're going to take what was one operation and split that. So, you're going to have a new HR department, a new auditing… a new accounting and financial engine, and all of that sort of stuff – all the administrative sides of the business are going to now have to double up because they're going to have these two separate entities. Yet, shareholders have reacted so positively. What do you think it is about the idea of splitting off the asset management division? Do people expect that there was locked value and that was being muted by keeping the whole together? Now, that they've split this apart, we're going to see an appreciation in the value given to the asset management business versus the value given to the banking assets?.It's a highly complex world that we live in and the bigger you get the more difficult it is to manage those businesses. Many people have shown how successful this can be in the past. Barlow as been one of the obvious examples in South Africa, where the old Barlow's Group was by far the dominant industrial company. It then went through a series of spinoffs where it spun-off CG Smith, which became Tiger Brands. It spun-off various other parts – the mining section, for instance, the property section, and each of those units together have achieved a whole lot more than the old Barlow's would have. Barlow's itself has achieved more because it's been more focussed, more refined. But it takes courage to do that because, first of all, having worked in a corporate, your salary gets judged on the number of people that you, well often on the people or the size of the business unit that you are running, the different processes that the HR people put in there. So, that's the one thing..Then the second thing is, you've got investment bankers who are encouraging you to merge companies or acquire companies. Of course, that placates the egos of the CEOs, even though we know from history that over 80% of these mergers fail. So, to see a business that actually grows to a certain level and then spins-off or unbundles, as is happening in this case – spins-off into two entities – is… Investors know. They aren't fooled by the investment banking kind of propaganda that mergers are good. Only in certain cases are mergers good, and that's when you take the people element out of it, and actually why you're investing in companies, you're investing for the people, in most cases. .So, in this case, the markets are delighted. They can see value being unlocked here. They can see both companies doing better apart than they did when together. And as Stephen Koseff explained in the conference call, there is very little synergy between the bulk of Investec or the banking part of Investec and the asset management part of Investec. There's this theory that you'll get your banking clients and then you'll be able to sell asset management services to them. In reality that doesn't happen, because your banking clients or every individual wants their choice of what they're going to invest in. So, it's really common sense coming through and the market is telling you that, well, investors like Allan Grey who I know are a big investor in Investec, are delighted with the response because they can see that there'll be lots of value unlocked. .Now, let's talk about value unlocked – this was a big week for the world's most valuable company and I know you've been following what happened at Apple..Yes, this week was their big event. So, every year around this time Apple has a large event. They have it at the new Steve Jobs Theatre. They had it there for the first-time last year and they had it there again this year and apparently, it's very beautiful. And they launch all their new products. Now, last year was obviously, a very exciting year because it was the 10-year anniversary of the iPhone and they launched the iPhone X, which was a significant change in the design and specs of the iPhone. So, it was something very new. So, ahead of this year's event, obviously, people were asking if Apple was going to be able to deliver the same punch as they did last year, give that the iPhone X is out now? .What Apple ended up doing is kind of really more along the lines of what they usually do, which is they made the iPhones larger, and faster, and they did some incremental improvements on the specs and raised the prices slightly. So, now you have some very high-end options called the iPhone Xs Max, which is a bit of a mouthful. That is now the premium iPhone. It has a gigantic screen. It's like 16.5cm screen and an OLED display, very fancy and that's going to cost you $1,00. They have increased the size of the iPhone 8 and there's a couple of intermediate Xs that you can also pick up if you're not keen to spend quite that much money. Then, the other big news of course, is that they relaunched or launched the Series 4 of the Apple Watch and very interestingly, it now features a fully functional ECG. It's been FDA approved to actually monitor heartrate. So, that kind of opens up the Apple Watch to a whole new audience of people who have health concerns that would benefit from having a heart rate monitor. It clearly shows the health direction that they're taking the W atch in..So, analysts were pretty excited, as they're always are, to see this. The big bottom-line of this is that it looks like that Apple is going to be able to once again, raise its average selling price per unit. For the last couple of years, maybe the last 3 or 4 years, smartphone sales growth has really moderated. They're just not growing as much as they did before. The market is fairly saturated. People are changing their phones less frequently. They're not upgrading every year any more. They're stretching it out a little more. Yet Apple has managed to maintain its revenue because they have this system or strategy of being a really premium brand and charging a premium for the product. .By increasing the screen size Apple, very wisely, is able to push its price up without dramatically increasing its manufacturing costs. So, it looks like we're going to see another year of revenue growth for the iPhone. Higher average selling prices, which means juicier margins, and more cash coming down for Apple shareholders, which hopefully will either come back in the form of dividends or buy-backs or will be invested in growing products like the Watch or Apple Services. Did you check out the new phones?.I haven't yet but I've been checking out the share price and there was a good reaction to it. Clearly, when you're a trillion-dollar company the potential for disappointment is significant. So, you have to get everything right and the shares are telling us they've got this right. Not that they shot any lights out but that it stayed above $220 a share and that means the market was pretty pleased because there was a significant amount of anticipation, as there always is, going into the September launch every year for Apple. So, I like that part. But I particular like the Watch story, the Apple 4 Watch, because Discovery is also in our portfolio – that's in the SA Champions Portfolio – and Discovery is quite closely aligned with Apple. .Talking to the guys there, the back story is that Discovery is now the biggest seller of Apple Watches outside of Apple itself. That's quite an interesting stat and it does that because Apple obviously gives some kind of incentive to Discovery, but Discovery has an incentive to its potential customers or existing customers, where if you follow certain health rules, just walk 10,000 steps a day or something, I think, or go to the gym or whatever it might be – you get to own your Watch for free. They then work that back into their system – if you are healthier you're going to live longer, and you're also going to spend less time at the doctor so, you'll have less health costs. It's lovely to see a South African company as part, an important part of this whole ecosystem of the most valuable company on earth. Hence, it makes me even happier to have Discovery as one of our core holdings..It's interesting you say that. This year, for the first time, South Africa has moved up into Tier 2. So, Apple rolls out all its new products to the US, the UK, Germany – to all the big, developed countries. Then a week later, it rolls out to a second tier of countries and then it has a Ties 3 staggered release. South Africa has always been in Tier 3 and it's now moved up into Tier 2. So, South Africans will be able to get their hands on these products just a week after the Americans, which is interesting in the light of the Discovery relationship there with the Apple Watch. Maybe it's not only Discovery who are seeing some opportunity there..Yes, that's good news to see an area where South Africa is moving up, because this week I had an interview with Celeste Fauconnier on Where to Invest in Africa and sadly, SA is, although it's still second, it's now losing ground increasingly to Egypt, which is the number-one destination. What RMB does is they compile any number of statistics and data to put together all 53 African countries and then ranks them. It's a fascinating table and South Africa was always number one, until last year, when Egypt just snuck ahead with 2 basis points on the index. This year they've widened that gap to, I think, nearly 20 basis points, with the third, fourth, and fifth countries coming closer to South Africa because South Africa went backwards. Well, maybe we'll see in the data that things start improving for the country again, under Ramaphosa. But the sense I'm getting from most people, who are plugged into this stuff, is that it's going to have to wait until after the elections before we see any significant changes there in the economic base lines. So, bring on 2019. .That's interesting. Would you say that it is, and unfortunately, I didn't see this, but was it that South Africa is regressing or is it that other African countries are progressing more rapidly? So, has Egypt been enacting reform very quickly, or has South Africa been deteriorating? .Well, Egypt is now the biggest economy in Africa, which is from a starting point, quite important to this index. It's based on PPP (purchasing power parity) terms and Egypt surpassed Nigeria. So, Egypt is number one, Nigeria is number two, South Africa is only number three. And you'll know, Felicity, that in 1985, before the Rubicon, South Africa's economy was as big as the rest of Africa put together. That kind of gives you a little bit of concern. So, from '85 until now, with South Africa going through its political transition, it has not grown anything like the rate of the rest of Africa and it shows you that. You can't go back and say it's '94 that caused the problem. You've got to go back to where it really began, which was in the 1980s, when the cost of apartheid then really started to impact the country. .Now, it's trying to fix all of those issues and all the socio-political things and the mess that comes from it. But if South Africa could have had a different transition or if it never had apartheid in the first place, if in 1948 they hadn't voted for the National Party and Jan Smuts' party had managed to find some kind of miraculous transition at that point in time, it would now be just so far ahead in Africa, it would be a bit embarrassing. But anyway, the reality is we are where we are but the potential remains where it is. .The rest of Africa has moved ahead but off an incredibly low-base. However, with these bigger populations that you have in Egypt, with about 90 million people and Nigeria approaching 200 million, as against South Africa's 60 million. The size of the populations are now starting to impact, as well, the size of the economy. And South Africa's stagnation since 2011, and, in fact, contraction if you take it in GDP, in US dollar terms, is really hurting, compared with other African countries, who have been going in the other direction. Yes, it's a combination of all things, but we need to see it in context and we need to go back to 1985, rather then say it all went wrong in 1994, which is not the truth. It actually all went wrong when PW Botha stood up and made his Rubicon speech.

The Editor’s Desk: Digging inside the Investec banking/AM split

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