Denel: JSE suspension of public debt
As you may be aware, Denel debt has been suspended from the JSE. Fortunately, none of the client portfolios that Momentum Outcome-based Solutions manages had any exposure to Denel.
However, it is worth making you aware of this, as it is a significant financial event and also provides an example of how we manage and mitigate against unforeseen issues through our outcome-based investing philosophy.
Denel failed to submit annual financial statements for the 2021 financial year as per the JSE’s requirements in terms of debt listing, and thus the JSE decided to suspend its public debt in early February 2022. Interest and capital repayments were also not honoured on certain of its debt. Although Denel’s public debt does carry an explicit government guarantee, bond holders would have to wait for a formal decision by the National Treasury on the repayment.
During the last number of years, state-owned enterprises (SoEs) have been deteriorating and investment managers have become more vigilant in their assessment of the individual SoEs’ respective financial and governance situations. Investments in SoEs are dealt with case by case with due consideration of the level of compensation in the form of interest that is paid in relation to the risk assumed.
What Momentum Investments did?
In this instance, we held no Denel debt exposure in the client portfolios because of challenges highlighted at Denel.
Given our outcome-based investing approach, all our portfolios are well diversified across asset classes, strategies and investment mandates, and this helps us to cushion against and manage our risks to a large extent in instances like these.
Importance of risk management
We continue to manage our portfolios in the best interests of our clients and believe this incident provides further confirmation of our well-formulated and managed outcome-based investing philosophy. We monitor our portfolios using various risk management tools to make sure no undue market sensitivity and exposures are evident in any portfolio on an ongoing basis. This ensures that these types of events, even when the portfolios do have exposure, do not cause excessive losses or downside risk. It is quite important to note that these events will occur from time to time and, therefore, risk management is important.
A significant market decline over any given period would have a much larger effect on a portfolio than a single share event. We will continue to monitor the unfolding of events and want to assure our clients of our ongoing attention to risk management.