Mutual's return droops, Spar's throbs

The succinct, objective and mostly sad report on the results by colleague Renée Bonorchis in Friday's newspaper should, I feel, have caused the share price to shudder.

I had not read either Old Mutual's quarterly report or Bonorchis's story when I wrote my Friday column. My gut feel, as I expressed, was that the share price could well reflect its intrinsic value. The shares were oversold, often a good indicator that the share price had fallen too far, but I wrote that I wouldn't buy the shares.

The market didn't agree with my view on Friday. The share price was R8,98 at the opening and R9,32 at close of trade, a gain of nearly 10% on Thursday's close and almost 4% higher than Friday's opening. More than 16-million shares traded during the day. Short term traders must have been jubilant.

I've now read the many pages on the quarterly report. The remedial measures taken by CE Julian Roberts and his team, including now the new chief financial officer, Jonathan Nicholls, should do much to remedy Old Mutual's financial pain. In particular, it will help if most of the clients holding variable guaranteed annuities accept the top-up offer and cash in.

The pain will, however, only have been relieved if stock markets sustain a recovery. Unrealised losses on equity values and, for that matter, guarantees on annuities that don't have to be exercised until some time in the future, don't hit cash flow directly. But don't bluff yourself. When Old Mutual writes off stock market losses and provides for future losses on guarantees, it hits the engine that provides its return on assets. The assets it manages, which include assets held by life assurance policyholders, produce income from management fees. The higher the market value of the assets, the greater Old Mutual's fee income, and vice versa.

In today's investment environment, Old Mutual is suffering from the effects of fund outflows as jaundiced investors seek refuge into cash-based investments and low market values on their funds' assets. Its life assurance sales have also slowed.

I note from the quarterly report that the group will soon adopt a new embedded-valuation methodology: market consistent embedded value (my personal conjecture is “consistent” implies embedded value will be less volatile than stock market volatility).

The Private Investor portfolio doesn't, by choice, hold shares in financial institutions. If it had one that managed a life assurance company, I would look carefully at its embedded value. But the major investment fundamental would still be its return on assets managed. Old Mutual's assetreturn engine is spluttering.

I plan to return to Spar's engine which, by contrast, is throbbing. Its results for the year to September are due out on Thursday. As I mentioned on Friday, my model showed Spar's return on assets managed was 15,32% in financial 2007.

Source: Business Day

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