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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 - Investment Returns from Local Shares

    Half way through the calendar 2017 is a good time to take stock of what investments have produced – not only for the 6 months – but for longer periods of time as well.

    It would be fair to say that investors into the local equity market have been disappointed now for at least two to three years, where both the rolling annual returns, and the compounded 3 year return, is far lower than what investors have become accustomed to. Below are a few of the numbers for clarification purposes:

    • The JSE All Share index up 3.4% for the 6 months to June 2017
    • Over the last 3 years, this index has compounded at the same level at 3.4% per annum
    • The Top 40 index fared slightly worse at just 2.5% per annum
    • The Resource index has had a torrid time, declining by 15.4% per annum over 3 years
    • Industrials, the best performing main sector, has also only returned 7.6% over the 3 years (annualised)

    Naturally, these returns are far less than what investors have come to expect, and also relative to expectations, given the risk levels. As mentioned above, the total return from an investment into the JSE All Share index has now compounded by only 3.4% per annum over the last 3 years – very poor when compared against a relatively lower risk investment of money in the bank.

    One concern we have regarding the sideways price movement over the last 3 years, is that it has not been accompanied by an improvement in valuations. Typically, there is an improvement in valuations as prices fall or move sideways. However, when we measure current valuations compared to long term valuations, they remain on the expensive side.

    On a positive note, one of the factors that has put pressure on the JSE All Share index over the last 18 months has been the firmer rand, which, from closing at R15.86/USD at its weak point in January 2016 has strengthened to its current level around R13/USD. As 50% - 60% of the JSE All Share is rand hedged, this headwind has the potential to turn into a tailwind, should we see rand weakness from this level out.

    Chart 1 (below) reflects the annual total return from an investment into the JSE as measured by the JSE All Share index. Since 1986, the 12 month return has varied from a positive 80% to a negative 37% as measured on month end prices. Clearly, there is huge volatility in the 12 month total return that an investor experiences on the local stock market.

    Chart 2 (below) compounds up these returns from January 2003. Even with the large 2008 sell off in the global financial crisis, prices have moved up on average by approximately 15% per annum from the base in 2003. When taking into account dividends, the total annual return for this period came in at 18.4% per annum. Extending that for the poor performance over the last 3 years has now reduced that compounded return to 15.9%.

    Chart 1 : FTSE/JSE All Share total annual return

    Sources : Inet, Seed Investments (30 June 2017)

    Chart 2 : FTSE/JSE All Share Index Price Return

    Sources : Inet, Seed Investments (30 June 2017)

    In conclusion, given the range of issues that has concerned the rating agencies resulting in downgrades, it would be fair to say that the risks of investing in South Africa have generally increased. Therefore, investors should demand a higher required rate of return. Over the long period of history, investors have been rewarded with higher returns, but as illustrated in the charts above, this return is never achieved linearly.

    Kind regards,

    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.

    Permalink2017-07-20, 13:03:17, by Mike Email , Leave a comment

    Seed Weekly - Investor Returns and the Cost of Timing the Market

    The current investment environment provides a test of patience for investors, particularly when one is not prepared for periods of underperformance. It is normal for funds to underperform as performance goes through cycles. Knee-jerk reactions fuelled by emotions of fear and greed often result in investors not achieving the full investment cycle returns from the funds they invest in.

    Fund total returns widely published by independent data providers on fund manager websites and marketing materials reflect a buy-and-hold strategy over the investment period. However, some investors, because of fear and greed, do not follow this strategy, but rather attempt to time the market, selling underperforming funds and buying those that are outperforming. This behaviour can be harmful, particularly if investing in a fund that has already reached the peak of its performance cycle. Chart 1 (below) illustrates such investor behaviour, and Chart 2 illustrates the cost of trying to time the market.

    Chart 1: Investor Behaviour Fund Flows Follow Short-Term Performance
    1 Year Rolling Return Quartile Rank and Monthly Fund Flows
    Chasing Performance = Greater Inflows When Top Quartile Performer

    Fund A is a South African Multi-Asset High Equity Fund. Inflows and outflows are closely linked to the short-term performance illustrated by the 1 year rolling return quartile rank.
    Source: Morningstar Direct (10 July 2017)

    Chart 2: Investor Behaviour – The Cost of Chasing Performance
    Switching from High Equity to Low Equity During Period of Underperformance

    Leading up to February 2009, the Multi-Asset High Equity Category fell -15% compared to the Low Equities -1%. A switch at the time to the Low Equity to minimise losses would have seen a subsequent 3 year cumulative return 16% lower in the Low Equity Category.
    Source: Morningstar Direct (10 July 2017)

    Since cash flows result in a different experience for the investor compared to the actual fund total return, a dollar-weighted return (investor return) gives a better indication of how the average investor performs over time. When the investor return is lower than the fund total return, it implies that more investors participated in downside returns and less in upside returns. This is common when investors chase returns and pile flows into funds at the peak of their performance and can also be exacerbated by not selling a losing fund. Investor returns are greater than total returns when there is more upside participation by investors.

    A global report published by Morningstar showed a 5 Year return gap between investor and total returns up to the end of December 2016 ranging from -1.43% to +0.53% (negative indicates lower investor returns). Results from the US and Europe where data sets are more reliable show the challenges that investors face because of the unfortunate timing of cash flows, generally resulting in lower investor returns. The more volatile Funds and higher cost funds tend to have the larger return gaps. A sample of local funds in the Multi-Asset categories over a 5 Year period gives a mixed bag of results as shown below. Wide negative return gaps on some funds illustrate how investors lose out in comparison to overall fund returns.

    Chart 3: Selected Large South African Multi-Asset Fund Investor Returns Compared to Total Returns
    Difference Between Investor and Fund Total Returns (%)
    5 Year Local Multi Asset Fund Returns

    Source: Morningstar Direct (10 July 2017)

    It is key for investors to select appropriate funds aligned with their investment objectives from the onset and then stick with these Funds through cycles. At Seed, we are guided by a well-defined investment philosophy and rigorous process which means our fund and manager selection is in line with our long-term strategy. This ensures that our portfolios behave as expected, including periods of short-term underperformance. Sticking with such a strategy over the long term is key to attaining investment objectives.

    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.

    Permalink2017-07-12, 12:16:15, by Mike Email , Leave a comment

    Seed Weekly - The Great Exodus of 2017

    The past month has been interesting, and not necessarily in a positive way.

    A topic that has dominated discussions professionally and socially, for me at least, has been the increased desire of investors to invest a meaningful portion of their assets offshore. This follows a growing trend where assets under our care are steadily tilting towards hard currency global solutions as time wears on.
    The reasons for this vary. The main theme recently has been a desire to hedge oneself from SA political & systematic risk.

    When you look back to even a month ago, the risk of a political fallout has increased. Although we don’t think it is highly likely that we will see the country imploding in the next couple of weeks, the risk, in fact, is non-zero and thus does requires our dedicated attention.

    In spite of this, we still believe that the most important reason to invest overseas should not be because of a state of nervousness, but rather due to portfolio diversification strategy. It is something we tout quite often as being fundamental to a successful investment strategy.

    You may now ask if doing the right thing for the wrong reasons remains the right thing. I would say, ‘In a way, yes’.

    The political risk that South Africans believe they face, correctly or otherwise, is that we are at a crossroad where either it all breaks down, or not. The stakes are high. The higher the stakes, the more harrowing the experience of having to live through the events as and when they occur. This is compounded by the fact that what a person stands to lose is the ability to call South Africa home, which is indeed a very emotional consideration. It is therefore very difficult to completely disregard these emotions when making investment decisions.

    The problem with making decisions emotionally, is that it is always reactive. In order for your investment strategy to be successful, it is of utmost importance to remain proactive. Not in the sense of trying to predict the future at all, but rather ensuring that your asset & liability profile, remain aligned with a suitable strategy after considering the risks involved in the various options available.

    We support the idea of having a healthy portion of your assets invested outside of the country, even if your liabilities are in Rand. By comparison, SA is a small country, and although there are a few very good companies with which one can invest, the universe remains small. There are many sectors that remain underrepresented on the JSE that can only be accessed in a global portfolio. That doesn’t even touch on the multitude of excellent investment companies and opportunities available beyond our borders.

    We strongly believe that increasing the geographic breadth of your asset risk exposure is a wise move, all things considered. Doing so enables you to remove your exposure to SA systematic risk, though a few additional issues still need to be considered. While matching your assets and liabilities across different currencies are among the important considerations, ensuring that you have adequate diversification across asset classes should remain your primary consideration. Investing across multiple jurisdictions can also create additional considerations in the event of your death. However, with proper consultation and planning, these issues can be navigated.

    The situation we find ourselves in at the moment is rather unique, and requires level headed thinking. Disentangling yourself from SA can be an expensive exercise, and needs to be considered in broader context - SA is not the only country that has risks and challenges, political or otherwise. The Seed Team is on board with developing and managing solutions to these risks, and has been for some time.

    Looking at the big picture we recognize the influence of political risk. By its very nature, political risk is almost entirely unpredictable, and difficult to factor into our process. What we can say again, is that diversifying your assets is a good idea, as long as you have a proper plan in place and have considered the implications of selling SA assets and investing offshore.

    As we bear witness to a great exodus of cash, I think we all hope that things work out for us; the question we should ask ourselves is not “Am I hedged against the apocalypse?” but rather to look at your balance sheet and ask, “Can this be improved?”.

    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.

    Permalink2017-05-10, 09:56:28, by Mike Email , Leave a comment

    Seed Weekly - Residential Property in the Western Cape - the Best of a Bad Bunch

    South Africans like to own property. A secondary home, or even a holiday home, is no strange phenomenon in our country. The security of owning a physical asset that we can see and touch provides one with a sense of security and “wealth”. Property is personal and provides people with the ability to express their creativity and inspiration, something no other asset class can provide. Many South Africans also believe that property will always be a good investment.

    As they say, “The proof of the pudding is in the eating”. Looking at the performance of the residential property market using the FNB House Price Index, it does not paint a pretty picture.

    Graph 1 : Major 5 Regions House Price Inflation Rates (year-on-year)

    Source: FNB Property Barometer, April 2017

    The graph above, as at the end of March 2017, illustrates the slowdown in residential house prices. The Western Cape has been the darling of the residential property market since mid-2011, outperforming all of the other four major regions on a year-on-year basis. The year-on-year average house price growth for the Western Cape measured 6.2% in the first quarter of 2017. This is slower than the 7.7% rate of the previous quarter, and now considerably slower than the 10.6% multi-year high recorded in the first quarter of 2016. As illustrated in the graph above, there has been a significant decrease in residential property prices since early 2015.

    Over the last seven years, homeowners have been struggling to find any real returns from their residential properties, as house prices have hardly kept up with inflation. There has also been a significant decrease in the demand for buy-to-let properties. According to First National Bank, transactions have decreased from a peak of 25% in 2008, to below 6% in 2016. Since the beginning of 2010, the average house price for the Western Cape has risen cumulatively by 78%. That is an annualised capital growth of roughly 8.5% over the past 7 years. By comparison, the next strongest growth was in KZN, with a modest 46%, and Gauteng with 41% over the same period. This amounts to an annualised capital growth of 5.5% in KZN, and just over 5% in Gauteng. Hardly any real capital growth, outside the Western Cape, if you consider an annualised inflation rate of 5.5% over the past 7 years. Alternatively, a property tracker fund tracking the SAPY would have returned 16.5% annually over the same period.

    Graph 2 : Major 5 South African Regions House Price Increase since early-2010

    Source: FNB Property Barometer, April 2017

    As with all investments, there are also some risks to consider. Tenants paying late (or never), and an increase in interest rates, are some of the key risks that investors will need to consider before investing into a buy-to-let property. Rates and taxes have also been rising, on average way above the inflation rate per annum over the last few years.

    Higher interest rates bring me to my next point: “What will the impact of South Africa’s credit downgrade be on the residential property market?”

    As we are entering unchartered territory, we are not completely sure what to expect. However, one of the key risks of a credit downgrade, which can have a significant impact on the property market, is higher interest rates. With a potential increase in interest rates, investors will also have to deal with increased mortgage payments going forward.

    Some will reason that the average house price index is not a true reflection of the property market segments, as suburbs on the Atlantic Seaboard in Cape Town, or Westcliff in Johannesburg, have seen annualised house price growth in double digits since 2010. This is certainly true, though these properties are the exceptions to the general property market in South Africa. It will require some thorough research to identify the right area to buy in and determine which types of properties are in demand to uncover these gems.

    Property allocation is essential to a well-diversified portfolio, but taking the risks and returns into account, I would much rather place my allocation in listed property than residential property.

    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.

    Permalink2017-05-03, 12:12:04, by Mike Email , Leave a comment

    Seed Weekly - An Epic Retirement

    My recent experience of completing the Cape Epic has highlighted a number of parallels between the journey to complete the Epic and the journey to retire comfortably. The first similarity is that both endeavours require a detailed plan. When planning for the Epic, we had to plan training programs, nutrition programs, assess our goals, hire support for the race and plan our strategy. When planning your retirement, it is imperative that both Husband and Wife have the same goals and expectations regarding retirement. Lifestyle risk is probably one of the most important risks that we face at retirement. Lifestyle risk is the risk that we will not be able to start at or maintain the lifestyle that we are accustomed to when we reach retirement. Unfortunately, lifestyle risk is affected by a number of factors some people start saving too late, some people don’t save enough and sometimes people don’t have high enough investment returns. All of these factors have an influence in how comfortably we can retire.

    Retirement, like the Epic, also can have a longevity risk in the Epic if you take too long, you run out of time and they cut off your number board, in retirement, whilst less dramatic, out-living your capital can have disastrous consequences, this risk has been exacerbated by the number of people taking early retirement and a general increase in life expectancy.

    One of the biggest risks in the Epic was the effect of accumulated exhaustion forcing you to abandon or make a stupid mistake. In retirement, the enemy is inflation and the accumulative effects of inflation over a long time (remember that a number of people are in retirement in excess of 30 years).

    In life like in the Epic, unexpected things happen and we need to prepare as much as possible, but sometimes we just need to roll with the punches. If you have prepared properly you can overcome a number of unexpected problems. As seen with the recent cabinet reshuffle, life will throw us many curve balls - we need to have a plan that will roll with these punches and ensure the best possible chance of reaching our goal of a comfortable retirement.

    Kind regards,

    Barry Hugo

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

    Permalink2017-04-28, 10:46:02, by Mike Email , Leave a comment

    Seed Weekly - An Epic Retirement

    My recent experience of completing the Cape Epic has highlighted a number of parallels between the journey to complete the Epic and the journey to retire comfortably. The first similarity is that both endeavours require a detailed plan. When planning for the Epic, we had to plan training programs, nutrition programs, assess our goals, hire support for the race and plan our strategy. When planning your retirement, it is imperative that both Husband and Wife have the same goals and expectations regarding retirement. Lifestyle risk is probably one of the most important risks that we face at retirement. Lifestyle risk is the risk that we will not be able to start at or maintain the lifestyle that we are accustomed to when we reach retirement. Unfortunately, lifestyle risk is affected by a number of factors some people start saving too late, some people don’t save enough and sometimes people don’t have high enough investment returns. All of these factors have an influence in how comfortably we can retire.

    Retirement, like the Epic, also can have a longevity risk in the Epic if you take too long, you run out of time and they cut off your number board, in retirement, whilst less dramatic, out-living your capital can have disastrous consequences, this risk has been exacerbated by the number of people taking early retirement and a general increase in life expectancy.

    One of the biggest risks in the Epic was the effect of accumulated exhaustion forcing you to abandon or make a stupid mistake. In retirement, the enemy is inflation and the accumulative effects of inflation over a long time (remember that a number of people are in retirement in excess of 30 years).

    In life like in the Epic, unexpected things happen and we need to prepare as much as possible, but sometimes we just need to roll with the punches. If you have prepared properly you can overcome a number of unexpected problems. As seen with the recent cabinet reshuffle, life will throw us many curve balls - we need to have a plan that will roll with these punches and ensure the best possible chance of reaching our goal of a comfortable retirement.

    Kind regards,

    Barry Hugo

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

    Permalink2017-04-28, 10:45:08, by Mike Email , Leave a comment

    Seed Weekly - An Epic Retirement

    My recent experience of completing the Cape Epic has highlighted a number of parallels between the journey to complete the Epic and the journey to retire comfortably. The first similarity is that both endeavours require a detailed plan. When planning for the Epic, we had to plan training programs, nutrition programs, assess our goals, hire support for the race and plan our strategy. When planning your retirement, it is imperative that both Husband and Wife have the same goals and expectations regarding retirement. Lifestyle risk is probably one of the most important risks that we face at retirement. Lifestyle risk is the risk that we will not be able to start at or maintain the lifestyle that we are accustomed to when we reach retirement. Unfortunately, lifestyle risk is affected by a number of factors some people start saving too late, some people don’t save enough and sometimes people don’t have high enough investment returns. All of these factors have an influence in how comfortably we can retire.

    Retirement, like the Epic, also can have a longevity risk in the Epic if you take too long, you run out of time and they cut off your number board, in retirement, whilst less dramatic, out-living your capital can have disastrous consequences, this risk has been exacerbated by the number of people taking early retirement and a general increase in life expectancy.

    One of the biggest risks in the Epic was the effect of accumulated exhaustion forcing you to abandon or make a stupid mistake. In retirement, the enemy is inflation and the accumulative effects of inflation over a long time (remember that a number of people are in retirement in excess of 30 years).

    In life like in the Epic, unexpected things happen and we need to prepare as much as possible, but sometimes we just need to roll with the punches. If you have prepared properly you can overcome a number of unexpected problems. As seen with the recent cabinet reshuffle, life will throw us many curve balls - we need to have a plan that will roll with these punches and ensure the best possible chance of reaching our goal of a comfortable retirement.

    Kind regards,

    Barry Hugo

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

    Permalink2017-04-28, 10:44:59, by Mike Email , Leave a comment

    Seed Weekly - Investment Choices

    The answer is, “It depends, but probably a Balanced Fund…”

    Over the past few years, South African investors have generally been disappointed with their investment returns – and rightly so. Asset class performance has been lacklustre across the board and investors would have needed to do something ‘special’ (read – risky) in order to generate satisfactory returns. As such, many investors now want to put their investment savings into cash or cash like investments. The line of thinking is that cash is low risk (i.e. low chance of losing capital) and will provide returns in line or close to what balanced funds have delivered over the last couple of years.

    While cash/very low risk investments do have their place in a portfolio, especially where an investor has a short term savings goal, it is important to ensure that the overall portfolio allocation matches the investor’s investment requirements. For most investors, the bulk of their investments will typically be used to service their income needs in retirement, these investors will therefore have an investment horizon of 5 years plus on the bulk of their assets (even most investors IN retirement will require their savings to last longer than 5 years).

    It is therefore interesting to stress test how a ‘5 year horizon strategy’ would have performed over the 2008/9 financial crisis/market crash, which is widely acknowledged as one of the most severe of all time, versus cash. For the purpose of this exercise I have taken the performance of the four largest (most popular) balanced funds in South Africa (funds that sit in the ASISA South Africa Multi Asset category) over the full range of 5 year periods that incorporated the market crash (i.e. 31 May 2008 – 28 February 2009) and compared their performance to what an investor would have received from cash (in both cases before any tax effects – which generally has a greater impact on cash). For completeness sake, this incorporates rolling 5 year periods from 28 February 2004 – 28 February 2009 to 31 May 2008 – 31 May 2013.

    When looking at all of the rolling 5 year periods it is evident that these managers have done really well versus cash (STEFI Call). Two managers managed to outperform cash in all rolling periods and the other two outperformed cash 98% of the time (even the average manager outperformed nearly 70% of the time). The chart below illustrates this fact. It is also interesting to note that even with the market crash as part of the observation period these funds in some cases were able to deliver returns in excess of 15% pa and in most cases in excess of 10% pa.

    Source: Morningstar 18 April 2017

    While it is all good and well to look at the performance after the full period and recognise that it would be a good idea to remain invested through the market stress, it is a much different story in the heat of the moment, i.e. during the market turmoil. I have therefore taken each of the above rolling 5 year returns and shown their return path. This chart (below) gives some sense of the range (208 possibilities) of investor experiences along the way to getting a 5 year annual return of slightly less than cash to a return in excess of 20% pa by investing in a balanced fund.

    Source: Morningstar 18 April 2017

    To simplify, I have then taken the best, worst, and the middle (median) return from the above and compared these to the same range for cash. As can be seen below, in the worst case scenario an investor into a balanced fund could have experienced a drawdown of 20% over a period of nearly 1.5 years, still been negative after nearly 2.5 years, and only overtaken the worst cash experience right at the end of the 5 year period! More realistically, the average fund investor would have generated a return some 4% pa better than the average cash investor, despite investing through the 2008/9 crash! It is also evident that an investor with a shorter investment horizon (i.e. 1 year or 3 years) should probably be investing into a lower risk option – potentially even cash!

    Source: Morningstar 18 April 2017

    A bell doesn’t ring at the top of the market, and no one has a crystal ball. For MOST investors it therefore makes sense to match their investment strategy (should ideally be invested into a well-diversified multi asset Fund) with their investment horizon and REMAIN invested through the various market cycles. As has been shown, the opportunity cost of giving up strong returns by moving to cash is generally MUCH higher than the cost of being invested at the worst possible time.

    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.

    Permalink2017-04-19, 13:04:57, by Mike Email , Leave a comment

    Seed Weekly - First Quarter 2017 Update - Multi-Asset Funds

    The year started on a positive note for investors with assets positive over the first quarter, albeit through volatile markets. Local politics again was a major talking point, particularly at the end of the quarter when the cabinet reshuffle led to a fallout and subsequently a credit ratings downgrade to sub-investment grade.

    Ian covered the implications of the credit ratings downgrade for investors in his article last week (view article), and further discussed the importance of Multi-Asset Funds in such times. These funds offer diversification benefits through exposure to different asset classes, which helps to soften the blow in volatile markets. Part of our philosophy is managing risk and, as such, Multi-Asset Funds are a key area of focus for Seed.

    Asset Class Performance First Quarter 2017

    Figure 1: Local Asset Class Performance

    Source: Morningstar Direct (11 April 2017)

    In spite of the elevated risk levels within the markets, investors enjoyed a fairly good start to the year with the various asset classes ending positive. The politics-induced turmoil at the end of March was not enough to counter the gains over the quarter. Equity was the top performing asset class, the FTSE/JSE All Share Index gaining 3.8% over the quarter. Listed property had the weakest quarter while bonds fared better, benefiting from Emerging Market flows, although understandably slumping at the end of March on politics.

    Seed Balanced Fund

    Fund Launch : 04 June 2010

    Our flagship fund, the Seed Balanced Fund, had a good quarter delivering top quartile (Top 25%) performance relative to peers in the ASISA South African Multi-Asset High Equity category. Figure 2 below illustrates that on a rolling 3-year basis, the Fund has protected capital and outperformed the average of the peer group all of the time since inception (46 out of 46 times). The rolling outperformance has been consistent with the Fund ranking in the top half of the funds 91% of the time, and top quartile 63% of the time. The long-term outperformance is a result of running a diversified portfolio comprising carefully selected uncorrelated strategies which complement each other well.

    Figure 2: Seed Balanced Fund 1 Year Rolling Performance relative to Peers

    Source: Morningstar Direct (11 April 2017)

    Seed Stable Fund

    Fund Launch : 09 January 2012

    Over the quarter, the Seed Stable Fund also delivered top quartile performance relative to peers. Figure 3 below illustrates that on a 1 year rolling basis, the Fund has outperformed the average of the peer group 86% of the time (42 out of 49 times). The Fund has protected capital well and ranked in the top half of funds within the ASISA South African Multi-Asset Low Equity category 82% of the time, and 59% in the top quartile. The Fund has also benefitted from carefully selected uncorrelated strategies to manage risk and deliver outperformance.

    Figure 3: Seed Stable Fund 1 Year Rolling Performance relative to Peers

    Source: Morningstar Direct (11 April 2017)

    A long term multi-asset strategy is essential for investors, especially in volatile times when risk is elevated. There are numerous Multi-Asset categories to choose from, and this is a key area of focus for us. We express our best ideas in our portfolios which comprise appropriate uncorrelated strategies, blended together to minimise the risk while optimising returns for investors.

    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.

    Permalink2017-04-12, 09:35:30, by Mike Email , Leave a comment

    Seed Weekly - Downgrade of South Africa’s Foreign Currency Rating

    Click here to download printable version

    On Monday, rating agency S&P Global downgraded its rating of South Africa’s long term foreign currency debt to sub-investment grade, commonly known as junk. The rating is now at a BB+. They also have a negative outlook, which means that on their upcoming reviews there is the possibility of a further notch downgrade.

    The local currency rating was lowered one notch to BBB-, which is one notch above sub-investment grade.This also is on a negative outlook. We can expect other rating agencies, i.e. Moody’s and Fitch, to follow suit with ratings downgrades.

    What does this mean?

    Essentially, a downgrade in the rating is an assessment of the increased risk in government being able to meet its fiscal and growth targets, given what S&P described as “policy continuity risk”.

    Any borrower who has a substandard credit record can expect to be charged a higher interest rate on borrowings. The same rationale extends to the South African government and all state-owned enterprises. The increased risk, as quantified by a rating agency, ultimately means that investors (i.e. lenders) will demand an additional premium (i.e. higher interest rate).

    Bond yields on government bonds have been pricing in this additional risk for some time, but on Tuesday morning, the R186 government bond, having closed at a yield of 9% on Monday, fell to a yield of around 9.2% before edging back to around, and indeed below, the 9% level.

    The currency also fell from around R13.50/USD at 5pm to over R13.70/USD, strengthening back again in late Tuesday to around R13.55/USD.

    In the short term and indeed over the longer term, the mere fact that government has a weaker rating on its debt is a negative for the economy as a whole because the cost of its debt is higher. This additional cost is ultimately paid by taxpayers.

    What does this mean for investors in multi managed, multi asset funds?

    We believe that given the level of uncertainty, one of the best options for all investors to consider is a balanced fund. Outlined below is a table reflecting the various asset classes in which the Seed Stable and the Seed Balanced are invested.

    Column 2 indicates the overweight or underweight position of the fund. Column 3 indicates the short-term performance (positive, neutral or negative) of Monday’s downgrade decision on these asset classes for local investors.

    Source : Seed Investments – 5 April 2017

    Some further considerations

    The table above reflects that despite the downgrade on the rating, this is not negative for all asset classes. Naturally, as the currency weakens, the result is positive for global investments, range hedge local equities, gold etc.

    While the higher cost of debt is negative for taxpayers, for investors the additional interest rate incurred by government on its debt at times more than compensates for the additional risk, and where this is the case, investors would be wise to take advantage. Such was the case for the whole of 2016, where investors in government debt enjoyed a 15.4% gain on their investment. At the same time, foreign investors received a gain as the local currency appreciated from the exceptionally weak January 2016 level.

    Conclusion

    Investors have typically done well over the past 3, 5 and even 10 years by investing into a balanced fund, such as the Seed Balanced Fund or a multi asset lower equity fund, such as Seed Stable Fund, which exposes the investor to a range of asset classes.

    The same is likely to be true in volatile times that we are facing at present.

    Kind regards,

    Ian de Lange

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

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    Permalink2017-04-06, 10:54:01, by Mike Email , Leave a comment

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