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Increasing shareholder participation

OCTOBER, surprisingly, turned out to be the best month for investors on the local bourse so far this year.

This was contrary to the “October effect” phenomenon which suggests that stock market returns are usually low during this month. Few investors, if any, could have anticipated the bulls to return so soon owing to the lean period the market had endured in the first nine months of 2010 as a result of  political uncertainty.  If anything, most investors could have written off any hope of better prospects for the remainder of 2010. An increasing number of institutional investors had turned to the money market for better and less risky returns. Quite the opposite, the equities were bullish for the greater part of the month with only seven out of the 20 one trading days closing on the downside.      
The mainstream industrial index amassed 15,07%, the highest return recorded this year, so far. Resource counters also followed suit with the mining index jumping a hefty 49,04% powered by a solid performance in Hwange that pushed 86,7%, becoming the second best performer for the month in the process. Other counters making the top five movers include Steelnet, ZBFH, Turnall and Zimplow all with gains ranging from 46,7% to 100%. Laggards for the month comprised Gulliver, PG Industries, Interfin, Pelhams and Zimpapers all with losses from 14,3% to 40%.
Market capitalisation for the month surged 18,9% riding on solid movements recorded in the heavily capitalised counters.  The foursome of Meikles, AICO, Hippo and Delta for instance had gains between 25% and 40%, correspondingly. Monthly turnover also surged 15,4% to US$29,4 million with approximately 70% of the rise being attributed to offshore investors. The bulk of these funds were channeled into Delta, Econet, Innscor and Hippo.
As highlighted     in this column last week the presence of offshore investors was the main driver of the market in October. The high demand for shares coupled with a general limited availability of free floating scrip saw prices being pushed up by huge margins on the back of very thin margins. For instance the share price of Afre on one October day jumped 45% on 336 shares worth only US$27. Currently, to get scrip for some decent counters one has to pay huge premiums.  Share prices for Colcom and Turnall, for example, have rallied by 48% and 77% since the firms published results for the period ending June 30  2010 which the market regarded as above average.
The small free float of shares available for trading is the reason behind the jumps on share prices. A snapshot of most share registers reveals that the top 20 shareholders within companies account for approximately 80% of the shares in issue with some counters having a float of less than 5%. Border Timbers, for instance has a free float of less than 1% with approximately 96% of its shares in issue held by the largest four shareholders. Chemco is another tightly held stock with a free float of less than 3%. Colcom has a free float of less than 8% with Innscor, the main shareholder, holding a stake of 80%. Likewise, the free float for Turnall is below 8% with FBCH the main shareholder sitting on a 60% stake while few other institutional investors also hold significant proportions. In general, the majority of shareholders in listed firms are institutional investors such as pension funds that have long term investment horizons. They seldom sell their scrip.
The scenario has been further worsened by the dominance of foreign funds post dollarisation as these investors buy blocks of shares for the long haul. The large parcels being taken up take time before returning onto the market because of the long term horizons that these investors have on the country.
This behaviour by institutional investors can be explained to be a result of the unavailability of alternative investment options. No one wants to sell his or her scrip and be left stuck with cash or face the prospects of reinvesting in counters of poor fundamentals. Out of the 76 listed counters on the exchange only about 10 counters look appealing to both local institutional and foreign investors. This is because the majority of the listed companies are still in loss positions and require huge capital outlays, at times exceeding their market capitalisations, for them to be able to resume operating at optimal levels. Other firms are too small for off shore investors, or their prospects are too limited to attract investment.
The market is in dire need of new listings for quality businesses such as the big mining firms in the platinum sectors. That will provide some more options to the investors. Equally, existing listed companies may need to consider improving their liquidity and this can be achieved by such measures as share splits or increasing shares in issue.
Regulators should also consider putting a cap on share repurchases by companies as this practice also reduces shares available for trading on the market. There may be a need to set and strictly enforce a minimum free float for all listed companies. What is the point of listing a company with a free float of less than 10%? In such a case only the major shareholders benefit at the expense of minority holders and it only makes sense to buy out the minority holders and de-list the company.
Most of these situations are the result of historic conditions. Now is surely the time for a management rethink of the obvious merits of broadening shareholders participation.


Kumbirai Makwembere

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