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This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

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    Seed Weekly - Targeting Returns

    In financial planning, targeting a return is a very specific and individual thing and each investor has a different set of circumstances affecting them. As an adviser and investment manager I have tried over the years to blend the needs of the investor with the available tools and skills to provide a satisfying solution.

    I was recently presented with an interesting challenge by a serious investor, in this case the investor was not asking for the near impossible i.e. I have too little capital so I am looking for very high growth with low volatility. It was an exercise of asset and liability matching for retirement.

    The investor had adequate capital to fund their retirement needs at an approximate inflation plus 3% p.a. return profile. The challenge was that retirement was 9 years away. The investor was prepared to take on more risk to achieve excess capital growth over the intervening nine years and had in fact signed a mandate to do so. However, given all of the current and possible future social, political and economic unrest and uncertainty, how do you implement a high growth strategy with low volatility and capital security at retirement? So as not to confuse you, the funds were discretionary i.e. outside of a retirement fund structure and thus would be subject to income tax and capital gains tax on returns.

    The original advice had been to go into a blend of balanced multi-asset high equity funds and several alternatives options had included a target return fund of inflation plus 3% p.a. What the investor was looking for was a gradual process of increasing volatility from 1% to approximately 6% and then holding it there until three years prior to retirement date.

    The “gradual in” process is not the difficult part. The concept of rand cost averaging into the higher volatility investments is not new, however the challenge lied in de-risking the portfolio closer to retirement. It required an active asset allocation decision at some point. These tactical decisions are better left to investment professionals rather than financial planners, but even professionals can get it wrong.

    There are many negative “What if’s” to consider, what if there is a financial crisis 3-4 years prior to retirement and could the investor lose 10-20% of accumulated capital in a short period and not recover it in time for retirement? What if traditional high growth assets such as equities and properties do not deliver the high returns of the past in a new “low growth” environment, would it be worth taking the risk? To name but a few.

    We designed a few scenarios and aimed at offering a “most probable outcome” scenario based on asset allocation and diversification, we took into account the very expensive local equity market PE’s, the likelihood of stable high real interest rates, the increasing global government debt burden, along with many other factors and realised that if you do not need to take capital risk don’t. Rather optimise your planning by using sustainable planning tools to minimise the tax burdens and invest only excess returns in growth assets. Below is a graph of the model selected and the risk statistics attached.

    Source: Seed, Zephyr (10 November 2016)

    * Illustration above is using a R1m investor investing 10 years ago, using actual historical performance numbers (after all investment, platform & advisor fees). Risk & Return statistics are annualised over the 10-year investment period where applicable.

    Source: Seed, Zephyr (10 November 2016)

    This way the investor and the adviser sleep easier and still participate in the upside, getting the much sought after free lunch so to speak.

    We are not all as disciplined and or as fortunate as my new client to have built up sufficient capital not to take excess risk when you can least afford it, however if you are in a similar position I would consider following this course of action.

    Kind regards,

    Robert Foster

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-11-11, 08:46:48, by Mike Email , Leave a comment

    Seed Weekly - Is this the end of the world as we know it?

    As many of you will know, I have been a financial planner for more than 20 years and in those 20 years there were certain foundation assumptions that were made with regards to Estate Planning. As my old Tax Professor used to say “Paying no Estate Duty is easy, you just give your entire Estate to the Church”. It should be noted however that the essence of Estate Planning has always been paying the least possible estate duty within the framework of your wishes. Now with Davis Tax Committee second interim report and the publication of the Taxation Laws Amendment Bill (Second Draft), it would appear that many of the mechanisms which we used to use for Estate Planning are now in danger. It must be noted however that these are proposals and they could therefore change before they are finally implemented in the Income Tax Act.

    The two most interesting aspects of the Davis Commission are as follows:


    Scraping Inter-spouse Abatement

    The Section 4Q abatement has been the backbone of Estate Planning for many years and the scrapping of this abatement along with the CGT exemption and Donations Tax exemption between spouses could cause huge liquidity problems in many estates going forward. Davis has however softened this blow by proposing an increase in the Primary Estate Duty Abatement to R 15 000 000.00 per tax payer. Davis is also proposing to increase the rate of Estate Duty to 25%.

    Taxation of all income and Capital Gaines within the Trust

    A number of Tax Planners misused the conduit principle vesting Income and Capital Gains in the hands of beneficiaries. Whilst the tax advantages of the practice are obvious, it does however undermine the actual purpose of why the trust was created (By vesting the capital in a beneficiary you lose the protection of the trust).
    The Taxation Laws Amendment Bill (Second draft 23 September 2016) also brings two interesting changes to our post retirement and estate planning landscape:

    Section 7C

    The use of interest free loans has long been a mainstay of our Estate Planning Landscape; it has allowed a person to transfer an asset to a Trust without incurring donations tax and without placing an undue burden on the finances of the Trust. Now whilst the amendments are rather complex and you definitely need to discuss them with your tax planner and probably your financial advisor, in a nutshell there will be an annual donation on any interest free/ low interest loans.

    Disallowing the offshore exemption on an annuity from a local Retirement Fund

    A number of people who were employed by multinationals and up until now have received exemptions on pensions for the time they spent working offshore, will now find that that exemption will no longer be in place.

    Please remember that these are proposals but you would ignore them at your peril. One needs to assess how these changes will impact your financial planning and start putting contingency plans in place.

    Kind regards,

    Barry Hugo

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-10-26, 11:01:33, by Mike Email , Leave a comment

    Seed Weekly - Asset Class Valuations – The Year to Date

    An important part of Seed’s multi management process is performing monthly asset class valuations using our in-house quantitative models. This process covers all of the local and global asset classes that are suitable for inclusion in our multi asset class funds and model portfolios. The output of these models guide our tactical asset allocation decisions, where we under or overweight certain asset classes in the short term, compared to our longer term target weights. Let’s take a look at how our views on some of the local asset classes and currencies have changed for the year to date.

    In terms of the Price to Earnings ratio, the local equity market has been extremely expensive for the whole year. The ratio has been above 21 since March, compared to the 10 year average of 15.9 and 30 year average of 14.4. Earnings have come down 16% for the year to date, and are now at very low levels versus our trend model and the Graham and Dodd average, which is an inflation-adjusted number smoothed over seven years. This is illustrated in the graph below:

    Source: Seed Investments

    On a sector level, we have seen significant changes in the relative valuations. Financials, weighted down by political uncertainty and the prospect of a ratings downgrade, have become cheaper and cheaper. Resources have had an excellent run this year, and the PE relative to the broader market has increased significantly.

    Local bonds have remained relatively attractive for the whole year since the December 2015 yield blowout, although yields have come down significantly since. The average 10-year yield of 9.0% for the year appears attractive vs. the short term average of 8.2%, but not against the 30 year average of 11.4%.

    This asset class has been very volatile for the last year, presenting the chance for opportunistic trades but requiring excellent timing. At Seed we have retained our preference to take on some duration risk in via our property exposure, where the yield can grow, rather than bonds.

    The real return on cash is the 3 month JIBAR rate, which is the rate used for interbank lending, less annual inflation. The two rate hikes this year have seen JIBAR rise to 7.4%, while inflation has come down to 5.9%. As a result, cash has offered an increasing real return for the past two years, unlike the period from 2011 to 2014. Therefore, the optionality that cash offers to the multi asset class investor has become even more attractive.

    Source: Seed Investments

    For the year to date the ZAR has strengthened tremendously, from R15.46 to R13.72 at the end of September versus the USD and from R22.55 to R17.59 versus the GBP. Of course, these moves are partly in reaction to the severe weakness towards the end of 2015. The ZAR has now returned to the levels of a year ago against the Euro and Dollar, and is approaching the long term Purchasing Power Parity fair value vs. the GBP. History has taught us that the Rand will not necessary return to PPP fair value and stay there, but might strengthen beyond that level and stay overvalued for some time.

    But how has this influenced Seed’s asset allocation decisions this year? In the Seed Balanced Fund, local equity exposure has been brought down to a 35.2% average this year, compared to the 50% benchmark weight. In addition, with the local market remaining expensive, the decision has been made to reduce equity even further.

    A currency hedge was put in place towards the end of 2015 to protect our offshore exposure from Rand strength, which seemed inevitable at the time. This hedge successfully offset the negative effect of Rand appreciation in the global portion of the Seed Balanced fund this year.

    We have also made increased use of cash-plus type strategies, which use floating rate instruments that yield a certain percentage above the JIBAR rate. With JIBAR increasing considerably, the yield on these strategies has been very attractive indeed.

    Kind regards,

    Cor van Deventer

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-10-19, 11:22:11, by Mike Email , Leave a comment

    Seed Weekly - A low turnover investment strategy

    A low turnover investment strategy has a lot of attraction, not least of which is lower brokerage fees. Many fund managers, however, adopt an approach that sees them buy into a company only to sell out again in one quarter. Higher and higher turnover is more and more typical of fund management today, but we ask: “Does a lower turnover strategy have merit?”

    Warren Buffett, who is arguably the best investor the world has seen, makes the comment “Our favourite holding period is forever”. He, together with his partner Charlie Munger, have been managing the assets of listed Berkshire Hathaway since 1965.

    His success has largely come about because he thinks about investments in multi decades, and not in monthly or quarterly terms. He first bought into American Express in 1964, Coca Cola in 1988 and Wells Fargo in 1989. An investment into Berkshire Hathaway stock from 1965 to end of 2015 returned 20.8% per annum versus the S&P500 compounded average of 9.7%.

    Another investment model that requires only an annual rebalance of the portfolio is known as the “Dogs of the Dow”. The Dow Jones Industrial Average index comprises 30 of the largest companies in the US. This index itself changes infrequently. The portfolio theory selects the 10 shares out of the 30 that have the highest dividend yield and holds these for one year, rebalancing annually.

    Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. Performance has not always beaten the Dow or S&P500 indices, but it is a proven methodology.

    Over the 10 year to 2015 the Dogs of the Dow portfolio returned 10.6%, and since 2000 the portfolio returned 7.9% per annum. Over these periods it outperformed the Dow index itself, which has returned 9.1% and 6.3% per annum.

    A fund manager that we follow and invest into adopts a strategy of trying to buy shares in good companies, not to overpay and then do nothing – i.e. have an ideal holdings period of “indefinite”. The fund performance over 5 ½ years has been 16.3% against the MSCI All Country World Index of 7.7% per annum.

    Finally there is one investment fund that has truly demonstrated the benefits of long holding periods. One of the longest running funds with almost zero turnover is the Voya Corporate Leaders Trust Fund. The trust fund goes back to its original founding in 1935 with the original founders buying an equal number of shares in the New York Exchange top 30 shares by dividend. The Trust's founders believed companies that could prosper in the Great Depression would succeed in all economic and market conditions.

    The decree was that holdings could not be sold, unless in exceptional circumstance, such as bankruptcy, spin offs, etc. Therefore, only in certain rare circumstances can a share be sold and none added, unless directly tied to one of the original. For this reason, turnover is essentially at 0% and the fund is managed on an “autopilot basis” The fund is not necessarily diversified across sectors because of its original construction. It therefore has an overweight position in energy, basic materials and industrial companies, and is underweight in technology and healthcare.

    The 30 holdings are now down to 22 shares. Over time there have been name changes, mergers, etc, but no active management of the original shares. Current holdings also now include Warren Buffett’s Berkshire Hathaway, because this company issued shares when it bought railroad company Burlington Northern Santa Fe in 2010. The original 1935 holding was Atchison, Topeka and Santa Fe Railway, which merged with Burlington Northern Railroad and Santa Fe Railway in 1996.

    The performance over the last 40 years has been ahead of the S&P500 and the Dow Jones. Over the last 10 year to the end of June, it has returned 7.99% against the 7.42% of the S&P500 index.

    One of the metrics that we look at when allocating money to a fund manager is their turnover. We are not necessarily against higher turnover in a fund if value can be added, but generally speaking higher turnover reflects lower levels of conviction, and is not necessarily ideal.

    Sincerely,

    Ian de Lange

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-10-12, 10:17:26, by Mike Email , Leave a comment

    Seed Weekly - Portfolio Construction

    Portfolio construction is a vital part of portfolio management. At Seed Investments it is an area that is extremely important, both when assessing other portfolio managers and also when managing solutions for our clients.

    What is portfolio construction?” you may ask?

    Portfolio construction is the process of building an investment solution, such that its performance is as consistent as possible. This is done through selecting assets that are uncorrelated with each other as well as getting their position sizing correct. In a Fund that has a relatively conservative risk budget (i.e. don’t lose capital over any 12 month period) but that at the same time has a moderate return objective (i.e. CPI + 4% pa over rolling 3 year periods) risk needs to be taken in order to generate the required return, but that risk needs to be managed and controlled in order to ensure the capital preservation target isn’t breached.

    Perhaps that easiest way to describe how portfolio construction works in the real world is to work through an actual example. The Seed Stable Fund has the same risk and return objectives as described above and has been able to deliver on these objectives through a meticulous focus on portfolio construction.

    The charts below show the risk and return of the underlying strategies within the Seed Stable Fund for the 12 months ending 31 August 2015 and 31 August 2016 (i.e. 2 non overlapping periods). Some key take outs are:

    • Property: High Yield strategy 12 month return drops sharply from 17.6% to -2.5%
    • Equity: High Yield strategy 12 month return rises sharply from 1.5% to 13.7%
    • Global: Absolute strategy 12 month volatility rises sharply from 8.5% to 17.2%

    Despite the sharp moves in the underlying strategies, the Fund’s 12 month return shifted up from 8.9% to 10.6% with its volatility only marginally moving from 4% to 4.5%.

    Source: Seed Investments, 3 October 2016

    Source: Seed Investments, 3 October 2016

    The Fund has been able to consistently achieve its risk and return objectives over this period as the performance of the underlying strategies are uncorrelated with each other, and the sizing of the strategies has also been prudently thought about. Property: High Yield has been highly volatile over this period, but the weighting has been kept lower than the other strategies, resulting in its volatility having a low impact on the overall Fund’s returns. Equally, while the Income: Flexible strategy has a very low volatility over both periods, its return has also been on the low side, and its low weighting within the Fund has also therefore been justified.

    Going forward, with equity markets at extremely expensive levels, we have increased the diversification of the equity centric strategies (Equity: High Yield) and (MA: TAA – Multi Asset – Tactical Asset Allocation) by including a third equity strategy (MA: Opportunistic) and also reduced the aggregate weighting to these higher risk strategies (as well as Property: High Yield) in favour of Income: Flexible as the return OF capital becomes increasingly more important than the return ON capital.

    By constantly reviewing our portfolio construction in this manner we strive to ensure that the risk and return objectives of all our Funds meet their stated benchmarks.

    Take care,

    Mike Browne

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-10-05, 08:34:50, by Mike Email , Leave a comment

    Seed Weekly - How much is enough? (Take 2)

    Last year I wrote an article about how much capital a person would need to retire. At that stage I wrote the article because of how often I get asked the question – “How much do I need to retire?”

    Unfortunately, what I have seen in the last year is that not many people have read my previous article, because it is still the question I get asked most often.

    My general answer to this question is “how long is a piece of string?” Now obviously this answer is not satisfactory but it is probably the most correct answer because without doing an analysis of the three factors which determine how much you need to retire, giving a reasonable answer is impossible. Let’s have a look at each one of the three determinants separately:

    Monthly income needed
    This is the factor which most people should have the most control over, but where unfortunately a lot of people are living in a fantasy world. They have no idea of their personal expenditure. I recently did an analyses for a person who says that R 50 000.00/month is more than enough for them to retire on, if that was the case why can’t they then save R 70 000.00 a month when their take home income is presently R 120 000.00? In this case especially they will probably need more income after retirement than at present, because of their love of travel and the fact that they work very hard at the moment, and therefore don’t have the time to enjoy their holidays. When doing retirement planning I also find that husbands often have no idea about the cost of food and monthly living, and therefore also have very little idea about how much they need to retire on. In this regard a budget is an invaluable tool for both building capital and containing expenses.

    How long does the money need to last?
    Again with this variable, each person’s circumstances give very different outcomes. Obviously life expectancy is very important. Coupled with life expectancy is the age at which you are planning to retire? The difference in the needs between a person retiring at 55 and a person retiring at 65 is huge because a person retiring at 55 has 10 years less to save, his capital has 10 years less to grow and he is drawing an income for 10 years more than a person retiring at the age of 65. A second “problem” is the age of your spouse. Remember that ladies generally have a longer life expectancy than gentlemen. So if you have a wife who is 10 years younger than you, you will probably need to provide for an extra 15 years of income.

    Investment return
    It stands to reason that the higher the rate of your investment return, the less capital you will need to fund your retirement. The higher investment return does however come with a caveat, namely risk, because the higher the return needed, the more risk we need to take and therefore the higher the volatility of your investment will be.

    So to try and be less facetious with “how long a piece of string is”, I would probably use the following guidelines; if all things are equal, you don’t have an exceptionally young wife or an extremely low risk appetite for investments:

    - if you are retiring at the age of 55, you would probably need around 25 times your annual income needs as a capital base
    - If you retire at the age of 65 it would be around 22.5 times and
    - At 70 around 20 times
    - Put differently, a 70 year old should not be drawing an annuity of more than 5%

    Please remember that this “ball park guestimate”, is only that, and it doesn’t replace a proper analyses taking things like taxation, compulsory versus discretionary capital, estate planning or any other exceptional circumstances into account. You do need to speak to your financial advisor to ascertain whether your plan is on track or not.

    Kind regards,

    Barry Hugo

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-09-27, 17:15:08, by Mike Email , Leave a comment

    Seed Weekly - Do the work stay your course

    Sticking your course over the long term is a very valuable lesson for investors, albeit, a difficult one in practise. Juxtapose this with another valuable lesson of not holding onto mistakes for too long and it becomes apparent how complicated the investment decision can be for the investor, particularly in tough markets. In order to get the maximum benefit of your investment, you need to stick with the investment over the long term, even during painful periods of underperformance which make it more challenging to determine whether you are holding on to a mistake or not.

    The investment decision for average investors and experienced professionals alike is clearly not easy, particularly when the markets are so volatile. The emotions of fear and greed are quite highly associated with the unpredictability of markets. Investors have an inherent fear of losing money (rightly so) and also of not making as much money as others, that is, underperforming the market. Greed can be broken into the greed of making more money, and a type of greed that is synonymous with fear of losing money, where it is greedy to just bank returns already made rather than let the investment run its course for higher potential future returns (let the winners run). This is illustrated below.

    Source image 1: [Online] Available at: http://energyandgold.com/2015/04/01/from-greed-to-fear-in-one-month/ [Accessed 20 Sep. 2016]
    Source image 2: [Online] Available at: http://www.innovativewealth.com/wall-street-wisdom/investing-with-fear-and-greed/ [Accessed 20 Sep. 2016]

    Unfortunately, the results of investment decisions motivated by emotions of fear and greed can be detrimental. Numerous research has been done pointing to the benefits of staying invested. Morningstar recently published an article which highlights the benefits of staying invested. Whilst the article looked at market timing, it is interesting to note that over the last 20 years, missing the best 25 days on the South African market would have halved your returns and missing the best 30 days on the S&P 500 would have reduced the return to zero. Since one cannot determine beforehand when the good days will occur, it is very important to stay invested.

    Source: Morningstar Direct. Data from 31 August 1996 to 31 August 2016

    In order to have better chances of success in one’s long-term investment strategy, controlling emotions and not blindly following the market is critical. However, the ability to divorce one’s emotions from investment decisions is a skill which is not easily come by, especially when the confidence in your investment or investment manager has dwindled. Some skilled professionals (managers) through years of experience have mastered this and can detach their investing from their emotions. If such professionals possess the right kind of skills and investment strategies, it would be wise to rather allocate the investment making decision to these managers.

    Also, it is important to recognise that even the best managers underperform at times and skilled professionals also make mistakes. As highlighted earlier, it is important not hold on to mistakes for too long. Figuring whether current underperformance is a result of a mistake that will persist is difficult particularly because sometimes it takes time for value to be unlocked. Good managers, acknowledge when they have made a mistake and accordingly correct such mistakes.

    Getting comfort through this “long-term” journey requires one to do proper research on managers before selecting them and then sticking with them over the long term. At Seed Investments we have a rigorous manager selection process that emphasizes qualitative characteristics in addition to quantitative measures. It is not enough to know what a manager has achieved in the past but more importantly, what they can potentially deliver for clients in the future.

    Therefore, a manager’s philosophy and process and how this reflects in their portfolio and performance is import. The quality of the team, commitment to the philosophy, consistency, passion, perspective and progress over time also highlight some of the things we look out for. We continually monitor this and have regular interactions with the managers.

    The confidence that we get from our rigorous process, continuous research and monitoring, not only gives us the comfort to stick with the managers over the long term but also to have the confidence that we are not holding on to a mistake for too long.

    Kind regards,

    Tawanda Mushore

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-09-21, 11:05:24, by Mike Email , Leave a comment

    Seed Weekly - Dearest of Precious Metals

    In general, South Africans attach a high importance to precious metals, especially gold. Many believe that the price of gold has a direct link to the well-being of the economy, and therefore follow the price of gold closely in the news. It easily captures the imagination of the broad public because of its perceived simplicity and the ‘realness’ of its value.

    In the current environment, where uncertainty and fearfulness reign supreme, gold has become a frequent topic for discussion as it traditionally serves as a hedge in negative market conditions.

    Should you wish to invest in gold you have a few options available:

    Physical Gold

    This is the option that most would argue is the purest form of gold investing. The simplest way of buying physical gold is by means of Krugerrands. It is legal tender in South Africa and widely traded locally and globally, making it highly attractive.

    There is a caveat to keep in mind. Gold, in its physical form, does not produce any interest or generate revenue. It is purely supply and demand that dictates the daily price. Demand is likely the more important of the two in the shorter term. Longer term, this may be somewhat more problematic as it can take years for gold bull markets to materialise.

    Added to this option is the problem of storage. If you own Krugerrands, you have the option to hold it yourself (hopefully in a safe) or pay a third party to store it on your behalf. As gold cannot produce any cash flow to offset this, you will need to provide funding through other means, which may not be a practical solution for many.

    Gold ETF/ETNs

    These Exchange Trades Funds/Notes track the price of gold and are listed worldwide on various stock exchanges. They generally offers higher liquidity than gold coins and while ETFs have an underlying gold asset, ETNs mostly track the price of gold through derivatives without an underlying bullion holding.

    As with all ETF/ETNs, there is a bid offer spread involved when buying in/selling out. This means that short term trading is unlikely to produce returns perfectly aligned to those reported on a fund or note fact sheet. There are certain costs involved in insuring and storing the underlying assets, but these are recouped within the fund. This, of course, means that these instruments do not track the price of gold precisely.

    For those wearing a tin foil hats and are invested in gold ETFs in preparation for the apocalypse, it is worth noting that not all gold ETFs can be exchanged for physical gold from the issuer of the fund. There are some products that offer an exchange service, but these are a mere handful.

    Mining Companies

    While the fortunes of gold mining companies generally follow the price of gold, they are diluted or amplified to a higher degree than the physical gold price. These companies generate revenue (not always profitable though!) and have a multitude of factors that influence the share price, such as the strength of the balance sheet, cost of borrowing, labour, quality of shafts it operates and the competence of management. These can either work in your favour or against it, depending on the company itself.

    Diversified miners are even more diluted as gold makes up only a percentage of its general portfolio. This can be seen as a diversification measure.

    Emerging Market Tracker

    For those painting with the broadest of brushes, you can also decide to buy the currency or broad market ETF/index of market that heavily depends on exporting resources to balance its books. This is by far the most diluted, compared to those above, but still remains an option.

    As with any investment option, the decision to invest in gold is not simply a binary, buy/sell decision. At Seed, we always spend a significant amount of time considering as many of the influencing factors as possible before offering advice or making an investment decision. We do this to ensure that the best possible option is selected given the unique environment in which the decision must be made.

    Kind regards,

    Stefan Keeve

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-09-14, 09:21:24, by Mike Email , Leave a comment

    Seed Weekly - Dearest of Precious Metals

    In general, South Africans attach a high importance to precious metals, especially gold. Many believe that the price of gold has a direct link to the well-being of the economy, and therefore follow the price of gold closely in the news. It easily captures the imagination of the broad public because of its perceived simplicity and the ‘realness’ of its value.

    In the current environment, where uncertainty and fearfulness reign supreme, gold has become a frequent topic for discussion as it traditionally serves as a hedge in negative market conditions.

    Should you wish to invest in gold you have a few options available:

    Physical Gold

    This is the option that most would argue is the purest form of gold investing. The simplest way of buying physical gold is by means of Krugerrands. It is legal tender in South Africa and widely traded locally and globally, making it highly attractive.

    There is a caveat to keep in mind. Gold, in its physical form, does not produce any interest or generate revenue. It is purely supply and demand that dictates the daily price. Demand is likely the more important of the two in the shorter term. Longer term, this may be somewhat more problematic as it can take years for gold bull markets to materialise.

    Added to this option is the problem of storage. If you own Krugerrands, you have the option to hold it yourself (hopefully in a safe) or pay a third party to store it on your behalf. As gold cannot produce any cash flow to offset this, you will need to provide funding through other means, which may not be a practical solution for many.

    Gold ETF/ETNs

    These Exchange Trades Funds/Notes track the price of gold and are listed worldwide on various stock exchanges. They generally offers higher liquidity than gold coins and while ETFs have an underlying gold asset, ETNs mostly track the price of gold through derivatives without an underlying bullion holding.

    As with all ETF/ETNs, there is a bid offer spread involved when buying in/selling out. This means that short term trading is unlikely to produce returns perfectly aligned to those reported on a fund or note fact sheet. There are certain costs involved in insuring and storing the underlying assets, but these are recouped within the fund. This, of course, means that these instruments do not track the price of gold precisely.

    For those wearing a tin foil hats and are invested in gold ETFs in preparation for the apocalypse, it is worth noting that not all gold ETFs can be exchanged for physical gold from the issuer of the fund. There are some products that offer an exchange service, but these are a mere handful.

    Mining Companies

    While the fortunes of gold mining companies generally follow the price of gold, they are diluted or amplified to a higher degree than the physical gold price. These companies generate revenue (not always profitable though!) and have a multitude of factors that influence the share price, such as the strength of the balance sheet, cost of borrowing, labour, quality of shafts it operates and the competence of management. These can either work in your favour or against it, depending on the company itself.

    Diversified miners are even more diluted as gold makes up only a percentage of its general portfolio. This can be seen as a diversification measure.

    Emerging Market Tracker

    For those painting with the broadest of brushes, you can also decide to buy the currency or broad market ETF/index of market that heavily depends on exporting resources to balance its books. This is by far the most diluted, compared to those above, but still remains an option.

    As with any investment option, the decision to invest in gold is not simply a binary, buy/sell decision. At Seed, we always spend a significant amount of time considering as many of the influencing factors as possible before offering advice or making an investment decision. We do this to ensure that the best possible option is selected given the unique environment in which the decision must be made.

    Kind regards,

    Stefan Keeve

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-09-14, 09:21:23, by Mike Email , Leave a comment

    Seed Weekly - How active is our active share?

    In one of my previous articles, I looked at how benchmarks influence both active and passive investment management. In this week’s article we take a look at active management, specifically the active share of the property portfolios within the Seed Balanced and Seed Stable Funds.

    Firstly, we need to define active share. Active share is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. An active manager can add value only by deviating from his benchmark index in one of two ways: stock selection or tactical asset allocation. Stock selection involves active bets on individual stocks e.g. selecting only one stock from a particular sector or a small number of stocks from an index like the FTSE/JSE Listed Property Index (SAPY). Tactical asset allocation involves an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing differences or strong market sectors. Examples include, overweighting certain sectors of the economy, having a brief preference for certain stocks or even choosing to keep assets in cash.

    When looking to include property mandates in Seed’s multi asset funds (Seed Balanced and Seed Stable Funds) we had 2 options: 1) track the market as cheaply as possible, or 2) pay a bit more, but get an active manager. We chose the latter and further looked to get the manager’s ‘best ideas’ in a concentrated building block, as property only makes up a portion of the Funds’ total assets.

    Once we selected Grindrod as our preferred active property manager, it is important to monitor the active share of the portfolios to ensure they are managing the portfolios in line with our expectations (i.e. high active share). Below is a chart illustrating the active share of the two portfolios over the past year – in both instances the active share is high (in excess of 80%). It is therefore obvious that the mandates have the greatest probability of generating a return that is different from the benchmark.

    We also compared the returns of the Grindrod portfolios, an index tracker fund (Satrix) and an enhanced tracker fund (Prudential) with the returns of the SAPY index. The purpose of this exercise is to determine the active return (in absolute terms) of the above portfolios in relation to the SAPY index. The chart below illustrates that the high active share of the Grindrod portfolios translates into very different return series to the benchmark, while the Satrix tracker virtually matches the monthly returns and the Prudential Enhanced Tracker has a small monthly variation in return. These are all in line with our expectations. Note – this chart doesn’t show which portfolios delivered better or worse returns, only how different the returns are from the benchmark.

    By selecting an active manager to manage our property mandates, we believe it provides our Funds with the best opportunity to outperform our peers over the longer term – particularly on a risk adjusted basis. The high active share of the Grindrod portfolios also validates the active management fee of these portfolios. Active share is only one aspect that we monitor to ensure that all the underlying portfolios in our Funds are managed as expected.

    Kind regards,

    Stephan van der Merwe

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-09-07, 10:47:14, by Mike Email , Leave a comment

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