Hidden gem in the securities lending, borrowing market – Business Daily
As we count on the short seller to expose bad management and fraud, long-termers can boost their total yields through the lending side. PHOTO | SHUTTERSTOCK
I was happy when I read this: “Short sellers are reaping huge profits this year at the Nairobi Securities Exchange as the market’s brutal bloodbath fuels their bearish bets — NASI share index is down 20.3 percent year to date and still pressing lower. Poor longs are getting trounced while the short-selling cohort is making trailer loads of cash.”
Only problem with the statement is that I read it in a dream. On waking up, someone cared to explain my reality and this is what they said, “This stuff is non-existent. You also know it sometimes feels bad profiting from someone else’s failures. Besides, markets are meant to help companies create value.” I disagreed. There is real value in the practice.
Let’s think about an example of a failed firm that most readers are familiar with: Uchumi Supermarkets.
It was sitting on a mountain of debt plus there was the fraud side. Imagine if some savvy investor analysed its financial statements and realised there must be some shenanigans. He/she then shorts the firm and goes on a campaign to expose the truth. Let’s say he/she succeeds and makes quite a bit of money. But then there’s the clear benefit to the investing public — Uchumi’s scheme would’ve been brought to light.
Its mismanagement would have been stopped. Investors would have shifted their money to firms with legitimate money-making potential. Everyone would have been better off.
But there’s a flipside which is not well understood by sceptics and especially the institutional long-term investors. This is the lending side.
Let’s take KCB, for instance, which holds a conservative dividend payout ratio (28 percent) and spotted a 7.7 percent dividend yield sometime early this year. Assuming an investor has 100,000 KCB shares and decides to loan the shares for a year at nine percent lending fee — a decent request. At the current price of Sh42, total share loaned will be Sh4.2 million which yields Sh378,000.
Taking away the 16 percent lending commission charged, the long term investor gets to keep a net lending fee of roughly Sh317,520, which works out to a 7.56 percent annual return. Adding this to the dividend yield, the investor brings their total yield to 15.26 percent — this beats inflation at 9.2 percent, 364 t-bills at 9.9 percent and even much of long-term fixed income. This is the lucrative and unseen “passive income” side.
Good to note the Retirement Benefits Authority has provided no objection for pension schemes to participate in the securities lending and borrowing market.
In short, both longs and shorts have equal chances of making money using the securities lending and borrowing (SLB) platform run by the Central Depositary and Settlement Corporation. More importantly, one cannot exist without the other. As we count on the short seller to expose bad management and fraud, long-termers can boost their total yields through the lending side.
Mwanyasi is MD, Canaan Capital.