In 1999, the year Old Mutual became a listed company, its stock reached a high of R16.15 per share. Last month, the company’s shares hit a low of R17.70.
This is, of course, not a completely fair comparison. The Old Mutual plc that listed 20 years ago included an interest in Nedcor (now Nedbank), and its UK assets have since been unbundled. It is nevertheless extraordinary that its share price should be trading in a similar range to where it was two decades ago.
This is particularly the case if it is compared to Sanlam, which demutualised and listed a year earlier at R6 per share. That company’s shares are now trading at over R75.
A clear winner
The below graph put together by Denker Capital contrasts the performance of these two companies since Old Mutual listed. To try to make the comparison more accurate, Denker has added back the value of Quilter and Nedbank shares after the managed separation that was completed last year to provide a broadly complete picture.
Although this graph doesn’t include dividends, it is obvious that shareholders in Sanlam have enjoyed far superior returns. What has defined this distinct difference in fortunes can be neatly summed up in two words: capital allocation.
“If you look at Old Mutual and Sanlam, the main difference is in how they allocated capital,” says Kokkie Kooyman, portfolio manager at Denker Capital.
“Both of them had fairly large life insurance businesses and as growth in those core businesses slowed, they looked to use the cash generated there to grow into other areas,” he adds.
In Sanlam’s case, the company looked for growth firstly in other financial services business in South Africa, such Sanlam Investments, Glacier and Sanlam Private Wealth. It also expanded across Africa and into India through buying a stake in Shriram Capital and developing Shriram’s life and short-term insurance with the Shriram Group.
Old Mutual, on the other hand, immediately sought to internationalise into developed markets – first in the UK, and then countries such as the US, Portugal, Australia and Sweden. Its ability to succeed in these markets, however, did not match its eagerness to externalise its revenue streams.
Value gained, value destroyed
Old Mutual made two particularly poor, and expensive, purchases – United Asset Management in the US in 2000, and Skandia in Sweden in 2005. It has since incurred losses in selling most of both of them.
“Essentially they used a lot of capital that they never really made return on,” Kooyman says.
This experience mirrors what many other South African businesses have discovered over the past 25 years – that it is not that easy to translate local success into sophisticated markets overseas.
“The level of competition is different, regulation is different, and the culture is different,” points out Glen Heinrich, portfolio manager at Perpetua Investment Managers.
“Many companies have made the mistake of thinking that as they have managed to be successful here in South Africa, it will be the same in other markets.”
Sanlam, on the other hand, looked for regions where it could more obviously be competitive.
“Sanlam realised that it’s easier to go into emerging markets where you have an expertise differential, and you can add something to whoever you do a joint venture with,” Kooyman says. “In somewhere like the UK you are always up against businesses that are bigger and better than you.”
Knowing what you don’t know
While it is still too early to evaluate Sanlam’s more recent move into Malaysia and North Africa via Shriram, it has certainly found traction in the rest of Africa and India.
“Sanlam has now built a unique footprint across the continent that very few players can replicate,” says Brad Preston, head of listed investments at Mergence Investment Managers. “It has become a very pan-African business, whereas Old Mutual embarked on becoming a global business and has now come back to being largely a South Africa-only business.”
What makes this even more interesting is that Old Mutual moved across the border first.
“They were ahead of Sanlam in the rest of Africa – in Kenya, Zimbabwe and Malawi,” Kooyman points out. “But they are basically still there. They never succeeded in growing in Africa.”
Another differentiator is that Sanlam was never lured into banking in any significant way. Until last year, Old Mutual was tied to Nedbank in a relationship that wasn’t always easy to manage.
“We’ve seen so many financial services companies either from banking crossing over into insurance, or insurance crossing over into banking,” Preston notes. “Sanlam has stuck to its knitting in pursuing an insurance strategy.”
In this respect, it’s also noteworthy that the fortunes of short term insurance businesses run by the two companies has been markedly different.
“In the late 1980s, Mutual & Federal was the dominant player in the South African short term market,” Kooyman points out. “And when Old Mutual listed in 1999, it was still a very good business.”
Last year, however, Old Mutual’s short-term insurance operations generated less than half the revenues Santam did.
“Santam has been a consistent and phenomenal performer, but the Mutual & Federal business that is now Old Mutual Insure has not performed anywhere near comparably,” Preston says.
A culture differential
Overall, Preston argues that Sanlam has also been more disciplined in identifying the areas of the financial services industry where it might have a competitive advantage, and those where it isn’t worthwhile trying to compete.
“I think one of the challenges these large, diversified financial services businesses have is that they often need to have a full product suite for their financial advisors – their distribution force,” he points out.
“So sometimes they are forced to either acquire or continue investing in businesses that do not generate good returns on capital just to keep that product suite filled out. I think Sanlam has been pretty good at generating at good returns on capital where they have played, or exiting where they haven’t been able to.”
An important question for investors is why these companies should have taken such different paths.
For Kooyman, two things stand out: “In the end it comes back the quality of the management you have, and then how they are incentivised. It looks like the Old Mutual guys were most probably incorrectly incentivised.”
Sanlam, on the other hand, was fortunate in its appointment of Johan van Zyl as CEO in 2002. Until that point the company had showed some of the same inclinations as Old Mutual, having made acquisitions in the UK, USA, Europe and Australia. These were much smaller than those of its rival, but Van Zyl and his team settled things down and took the decision to focus on the local market instead.
The culture that management team instilled in Sanlam has continued to benefit shareholders.
“Whenever investors talk about Sanlam in terms of their culture, their reporting, their products, and what they’ve done, the word ‘conservative’ comes up a lot,” Heinrich points out.
“There is a lot of merit in that because the way they report their numbers, nobody ever thinks that they are ever trying to boost what’s there. They always take the conservative view and don’t report numbers that overly flatter their performance.
“There is a lot of comfort in that,” Heinrich adds. “Because while Sanlam does look more expensive optically, it is backed by higher quality cash flows.”