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Be an activist for your investments

I am a member of a tennis club here in Cape Town. The club provides the members with well maintained grounds and courts to play tennis on, a club house with a bar, an equipped kitchen and changing room facilities all in exchange for a yearly fee. The club also holds an annual general meeting (AGM) every year where the committee presents the annual financial statements of the club and discuss any pressing issues that need to be addressed with the members. After the discussions the members of the club need to vote on the way forward for the club, this mostly involves voting on membership fee increases for the following financial year and voting on issues where there is a large expenditure for the club for example putting up new floodlights or resurfacing tennis courts. As a part-time tennis coach at the club and as a member who is actively involved in the club and has previously served as treasurer I think it is important that I am there every year to keep up to date with how the club is doing and to let my vote be heard on topics that I have an opinion on. This will give me peace of mind that my money is being spent well and will help to ensure the club is around for many more decades to come.

As a side business I also run an investment property. I take this very seriously and I am very actively involved in the planning and management of this property. Part of this process involves ensuring that the sectional title scheme to which my property belongs to is well run by the body corporate. This is done on an annual basis at the AGM of this sectional title scheme where all present owners are taken through the financials, budgets and upcoming capital expenditure of the sectional title. I use this time to ask any questions where I have concerns that I feel have not been addressed, to cast my vote on any areas where a vote is required and to ensure that I am comfortable with the current state of the sectional title that I belong to. The last thing I ever want is to be surprised one day with a huge special levy because the scheme is running at a loss, because of the close eye that I keep I will be long gone before that ever happens because I would see it coming.

When I first started buying shares in companies as a part-owner I would get invited to the AGM’s of these companies. I remember getting my invitations to the Richemont AGM’s in the post (very old-school). Like my tennis club these AGM’s would allow me to cast my vote on pressing issues that face the business however this time in a pool of hundreds/thousands of other shareholders all with a different level of voting rights depending on the amount of shares they owned*1. Since attending these meetings would often require a plane ticket and a day’s leave, I unfortunately have never attended an AGM and I have sold most of my individual company shares.

When I started buying ETF’s I stopped getting these invitations. This is because when you invest in an ETF or unit trusts you hand over your voting rights to your ETF issuer or your unit trust fund manager. This places a very important function onto this fund manager or ETF issuer.

A unit trust fund such as the Allan Gray Balanced Fund has a fund size of over R157 000 000 000 (that is one hundred and fifty seven billion rand) compared to the Satrix 40 with a modest in comparison but still massive R8 300 000 000. Due to the size of these funds they can collectively hold a significant ownership in a company that they invest in. For example back in 2017 0.7% of Allan Grays Equity Fund holding was invested in Net1 the parent company of a business called Cash Paymaster Services (CPS) which was responsible for the payment of social grants to millions of South Africans. This 0.7% contribution of the total Equity Fund portfolio amounted to a shareholder ownership of 16% of the business of Net1. This is a significant ownership in a business and one can argue that Allan Gray as such a large shareholder can have some level of influence over the board of Net1. Drama ensued when allegations were made against Net1 and CPS that unethical practices were being used in lending and selling financial products to the poorest of the poor in South Africa, and Allan Gray was called to answer what they were doing to influence some of the ethically questionable practices at Net1 and CPS. This led to a large re-shift in focus at Allan Gray about the social and economic impact of the businesses which they invest in and a strong emphasis is now placed on how sustainable the ethics are of their businesses going forward.

When Warren Buffett was tucked away in his study using ever cent that he could get his hands on to invest in what he called “cigar butt’s” he would build up massive holdings in companies so that he could demand change as a shareholder (a term called activism investing). He would find companies which were worth more liquidated than the cost of its shares and if he could not sell the shares at a profit he would continue to buy until he as the majority shareholder could bring the companies to liquidate its holdings to its shareholders to make a large profit.

As the average single shareholders we have very little impact on a business especially since we cannot travel to AGM’s or develop holdings in a company that are sizable enough to have an impact at board level. But where we have sizable holdings and we are able to attend such events we this is our business and we should be there. Why do we have a different approach with our shares than we do have with our own small businesses? In the end they are both important assets of ours. As index or fund investors we should not lose this right and we should put pressure on our ETF or unit trust providers to ensure they are doing their part in influencing the businesses that their clients have invested in.

There is still one company that I do own individual shares in, and that company is Woolworths. I really like this business and intend on keeping these shares in the future. I received this notice of their AGM this week and although I cannot make this meeting on the 30th of November I do intend to go to the AGM next year and write a full report of my experience.

*1 Companies may grant shareholders one vote per share or sometimes only one vote per person regardless of the number of shares they hold

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