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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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    The Argument for Property

    Property is an asset class that most people seem to have an opinion about! Specific experience with property is usually the major determinant in how it’s viewed, and it’s almost impossible to change someone’s thinking...

    As multi managers at Seed, part of our job is to determine whether to over or underweight the various asset classes – listed property included – using a variety of indicators to help us determine the intrinsic value of each asset class. It is also interesting to compare our views to those of other asset managers.

    For a while now, larger managers have generally been negative on the prospects of listed property going forward, citing excellent multiyear performance coupled with low yields (and a low reference bond yield) and poor growth prospects relative to history. While we agree to a certain degree with this sentiment, we couldn’t help but dig a little deeper.

    An asset manager with R200bn in asset allocation mandates (this is the case with at least a couple of managers, but could very well be the case for a few more) that wants to make a sizeable investment into local property (i.e. a 10% position) would need to purchase more than 10% of the local property market! Listed property’s total market capitalisation sits at just over R180bn, so by virtue of their significant assets under management, the local property market becomes largely un-investable to the major asset managers. Seed has just over R1bn of assets under management, and we are therefore able to make a significant investment into all asset classes should they show value (including listed property).

    In the case of listed property we do agree that there are risks, particularly if interest rates start to creep up and/or bond yields start to climb, but feel that the opportunities available to investors currently outweigh the negatives. When looking at the yield relative to history, investors are currently receiving slightly in excess of the average yield over the past 9 years (since inception of the SA Listed Property Index – J253). The expectations for growth in yield are much lower than they were in the early 2000’s, but in a low yield environment we are happy with an above inflation initial yield coupled with increases in line with inflation.

    Another key valuation point is the relative yield that one can earn on an asset class versus another, compared its historic relationship. The charts below show how property’s yield is currently attractive when compared to the yield one can earn on equity or bonds.

    The above charts show that while property isn’t currently a screaming buy when looking purely at valuations, it is preferable to other local assets. A further tailwind for property is the imminent implementation of REIT legislation in South Africa that will bring legislation in line with global property markets and make our property companies more attractive to foreigners. The foreign ownership percentage of property shares is currently much lower than both the local equity and bond markets, and we feel that there will be a larger demand on our property companies going forward.

    At Seed we are taking advantage of this opportunity by having a 13% allocation to property in our house view Seed Flexible Fund. This allocation has most definitely added to performance over the past year.

    For any questions on our Funds, please feel free to contact us or visit our website directly www.seedinvestments.co.za.

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-30, 14:55:09, by Mike Email , Leave a comment

    The Argument for Property

    Property is an asset class that most people seem to have an opinion about! Specific experience with property is usually the major determinant in how it’s viewed, and it’s almost impossible to change someone’s thinking...

    As multi managers at Seed, part of our job is to determine whether to over or underweight the various asset classes – listed property included – using a variety of indicators to help us determine the intrinsic value of each asset class. It is also interesting to compare our views to those of other asset managers.

    For a while now, larger managers have generally been negative on the prospects of listed property going forward, citing excellent multiyear performance coupled with low yields (and a low reference bond yield) and poor growth prospects relative to history. While we agree to a certain degree with this sentiment, we couldn’t help but dig a little deeper.

    An asset manager with R200bn in asset allocation mandates (this is the case with at least a couple of managers, but could very well be the case for a few more) that wants to make a sizeable investment into local property (i.e. a 10% position) would need to purchase more than 10% of the local property market! Listed property’s total market capitalisation sits at just over R180bn, so by virtue of their significant assets under management, the local property market becomes largely un-investable to the major asset managers. Seed has just over R1bn of assets under management, and we are therefore able to make a significant investment into all asset classes should they show value (including listed property).

    In the case of listed property we do agree that there are risks, particularly if interest rates start to creep up and/or bond yields start to climb, but feel that the opportunities available to investors currently outweigh the negatives. When looking at the yield relative to history, investors are currently receiving slightly in excess of the average yield over the past 9 years (since inception of the SA Listed Property Index – J253). The expectations for growth in yield are much lower than they were in the early 2000’s, but in a low yield environment we are happy with an above inflation initial yield coupled with increases in line with inflation.

    Another key valuation point is the relative yield that one can earn on an asset class versus another, compared its historic relationship. The charts below show how property’s yield is currently attractive when compared to the yield one can earn on equity or bonds.

    The above charts show that while property isn’t currently a screaming buy when looking purely at valuations, it is preferable to other local assets. A further tailwind for property is the imminent implementation of REIT legislation in South Africa that will bring legislation in line with global property markets and make our property companies more attractive to foreigners. The foreign ownership percentage of property shares is currently much lower than both the local equity and bond markets, and we feel that there will be a larger demand on our property companies going forward.

    At Seed we are taking advantage of this opportunity by having a 13% allocation to property in our house view Seed Flexible Fund. This allocation has most definitely added to performance over the past year.

    For any questions on our Funds, please feel free to contact us or visit our website directly www.seedinvestments.co.za.

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-30, 11:52:41, by Mike Email , Leave a comment

    The Argument for Property

    Property is an asset class that most people seem to have an opinion about! Specific experience with property is usually the major determinant in how it’s viewed, and it’s almost impossible to change someone’s thinking...

    As multi managers at Seed, part of our job is to determine whether to over or underweight the various asset classes – listed property included – using a variety of indicators to help us determine the intrinsic value of each asset class. It is also interesting to compare our views to those of other asset managers.

    For a while now, larger managers have generally been negative on the prospects of listed property going forward, citing excellent multiyear performance coupled with low yields (and a low reference bond yield) and poor growth prospects relative to history. While we agree to a certain degree with this sentiment, we couldn’t help but dig a little deeper.

    An asset manager with R200bn in asset allocation mandates (this is the case with at least a couple of managers, but could very well be the case for a few more) that wants to make a sizeable investment into local property (i.e. a 10% position) would need to purchase more than 10% of the local property market! Listed property’s total market capitalisation sits at just over R180bn, so by virtue of their significant assets under management, the local property market becomes largely un-investable to the major asset managers. Seed has just over R1bn of assets under management, and we are therefore able to make a significant investment into all asset classes should they show value (including listed property).

    In the case of listed property we do agree that there are risks, particularly if interest rates start to creep up and/or bond yields start to climb, but feel that the opportunities available to investors currently outweigh the negatives. When looking at the yield relative to history, investors are currently receiving slightly in excess of the average yield over the past 9 years (since inception of the SA Listed Property Index – J253). The expectations for growth in yield are much lower than they were in the early 2000’s, but in a low yield environment we are happy with an above inflation initial yield coupled with increases in line with inflation.

    Another key valuation point is the relative yield that one can earn on an asset class versus another, compared its historic relationship. The charts below show how property’s yield is currently attractive when compared to the yield one can earn on equity or bonds.

    The above charts show that while property isn’t currently a screaming buy when looking purely at valuations, it is preferable to other local assets. A further tailwind for property is the imminent implementation of REIT legislation in South Africa that will bring legislation in line with global property markets and make our property companies more attractive to foreigners. The foreign ownership percentage of property shares is currently much lower than both the local equity and bond markets, and we feel that there will be a larger demand on our property companies going forward.

    At Seed we are taking advantage of this opportunity by having a 13% allocation to property in our house view Seed Flexible Fund. This allocation has most definitely added to performance over the past year.

    For any questions on our Funds, please feel free to contact us or visit our website directly www.seedinvestments.co.za.

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-30, 11:15:56, by Mike Email , Leave a comment

    Retirement and the Perfect Storm

    At the best of times Retirement planning tends to be a stressful exercise, over the last couple of years successful Retirement has become nearly impossible for most individuals in South Africa.

    There are a number of reasons for this and these various factors have combined to create “The Perfect Storm” for South African Pensioners and Financial Advisors.

    Let us have a look at the factors:

    Retiring Earlier

    There has been a tendency for a lot of South Africans to take early retirement, we won’t go into the various reasons for that now, but 20 years ago most people retired at the age of 65. It is now not uncommon for people to take early retirement packages at the age of 55, this extra ten years in retirement and ten years less of saving puts a huge strain on retirement capital.

    Retirees living longer

    It is a well-known fact that, with the advances in nutrition and medical sciences, people are living longer. This means that people are often in retirement for a period longer than their working careers.

    Low Interest Rates

    Because real interest rates are negative i.e. below inflation, retirees need to invest in “Higher Risk Assets”. Whilst these assets offer the prospect of real returns, they are a lot more volatile than cash and this volatility adds to the many concerns already experienced by pensioners.

    The second concern on low interest rates is that it is more difficult to achieve higher returns in a low interest rate environment. This factor has been exacerbated by the fact that very few people are on defined benefit retirement funds so most retirees now carry the investment risk. On a defined benefit pension fund the investment risk sits with the employer.

    Even people purchasing guarantees at these low rates are at risk. They are exposed to huge uncertainty going forward should we see later large inflation increases because they have been locked into these low rates.

    Different Inflation Rates

    Whilst the official South African inflation rate has remained under control, most individuals have seen huge inflationary pressure on their cost of living. Eskom, petrol prices and medical expenses are just a few of the normal day to day expenses which have seen increases way in excess of the official inflation rates. This erodes the purchasing power of the retirees’ future income.

    Starting families later

    In the 60’s it was common place for couples to start their families in their early twenties, lately it is not uncommon to see forty year olds bleary eyed from the effects of late night “pajama drills”. This means that your average 60 year old often still has children who are financially dependent.

    As you can see, this lethal cocktail of factors has made a secure retirement a reality for only a select few. “What can be done about this?” I hear you ask. Firstly, remember no matter how frustrating your job is, no matter how irritating useless or incompetent your boss is, a bad day at the office is a lot better than having insufficient retirement capital and spending your “golden years” under the breadline. So, always try and work for as long as possible. Working longer has a double benefit on your retirement savings, firstly you are saving for longer and your capital has more time to grow and secondly you are drawing down on your capital for a shorter period of time. The chart below illustrates the effects of retiring at 55 versus 65 in real terms (i.e. after the impact of inflation).

    The second way to get around it is obviously to start saving early enough; unfortunately this cannot be rectified like it was in the “good old days” where people were able to “buy back” years of service.

    Most importantly, one needs to have a plan, the plan should include when you are planning to retire, how much income you need to retire with, what capital do you have at the moment and what returns are required to achieve all of these goals. If you timeously start with this plan and constantly assess your progress, you could be one of the select few spending your golden years above the bread line.

    Kind regards,

    Barry Hugo

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-23, 12:21:58, by Mike Email , Leave a comment

    Japanese aggressive monetary policy

    Seed Investments have a brand new website! Feel free to go and have a look by clicking here. Here you will be able to find more information of Seed Investments and also be able to access our fund fact sheets and monthly market overviews.

    Japan is the latest country to embark on aggressive expansion of its money supply. In the last few months the bold monetary policy initiative from the newly installed prime Minister of Japan, translated into an immediate depreciation of the yen versus the US dollar and at the same time a huge uptick in Japanese share prices.

    In the 1970’s Japan experienced high monetary growth. This led to a major bubble in the property and stock market, culminating in the Nikkei 225 index reaching 38 900 in late 1989. Then the Bank of Japan put on the brakes in order to reign in the monetary supply. The stock market and property bubble burst and the economy went into recession. The stock market index went into a long term decline from its peak to an eventual low of 7055 in March 2009. At its peak, the Japanese share market comprised 45% of the MSCI World index. It has now fallen to just 8%.

    The Japanese economy has been in general recession over the last two decades, despite the fact that the Bank of Japan ran a zero interest rate policy for much of this time. This is possibly because prices have been in decline and therefore real interest rates were actually too high – i.e. monetary policy was actually tight throughout most of this period, leading to a strong currency. Price deflation and a strong currency encouraged high savings, low investment and in turn on-going deflation.

    Renowned economist Milton Friedman said this in a speech in 2000, “As far as Japan is concerned, the situation is very clear...They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy. Bold monetary policy achieved through the cooperation of the government and the Bank of Japan will be indispensable for breaking away from deflation and the appreciating yen.”

    Following years of half-hearted attempts to stimulate the weak economy, the new leadership has taken up on Friedman’s recommendation. The new Japanese Prime Minister, Shinzo Abe, together with new leader of the Bank of Japan announced sweeping economic and monetary easing policies - now termed as Abenomics. “Bold monetary policy achieved through the cooperation of the government and the Bank of Japan will be indispensable for breaking away from deflation and the appreciating yen.” -Prime Minister Shinzo Abe, January 11, 2013.

    While high inflation is a problem for any economy, even more so is deflation. Japan has been in a deflation scenario for two decades and this latest plan is essentially an attempt to break the back of deflation in the economy.

    The deflation environment has hampered business growth and according to BCA Research, the total amount of corporate profits today is essentially the same as 20 year ago, compared to the US, which is up 5 times. See chart below.

    Source : BCA Research

    The announcement sparked a depreciation in the yen against the USD from around 83 yen to its current 98 yen to the dollar. BCA Research estimates that this decline should translate into about a 35% increase in corporate profits for Japanese companies. The announcements led to a sharp uptick in prices with the Nikkei 225 index up from around 9 000 in November to the current level of around 13200.

    The Japanese Nikkei 225 index

    Will bold monetary policy work?

    While the announcement of the impending monetary supply has proved positive for Japan, there is a growing degree of scepticism globally that the large scale aggressive monetary policy that the US, Europe and now Japan have embarked upon will lead to possible disastrous consequences.
    So far it has had the exact intended result in Japan and should it prove to be sustainable, maybe just maybe Japanese companies may prove to be global winners.

    Kind regards

    Ian de Lange
    Seed Investments

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-17, 11:29:19, by Mike Email , Leave a comment

    Bidvest – Proudly Diversified and Ever Expanding

    The Bidvest Group Ltd is an international services, trading and distribution company proudly rooted in South Africa. Brian Joffe, renowned entrepreneur and current Chief Executive, launched the empire in 1988 with the acquisition of Chipkins Catering Supplies.

    Whilst many of the JSE’s large conglomerates have been unbundling assets and concentrating on their core business activities, Bidvest has maintained a steady stream of acquisitions and has managed to create added value for their shareholders by bundling assets together.

    The Group consists of four divisions, namely Corporate, South Africa, Foodservice and Namibia.

    Bidvest Corporate houses the Group’s investments and provides strategic direction, risk management and corporate finance to the Group. Bidvest South Africa has 10 units, including Automotive (McCarthy and Burchmore’s), Financial Services (Bidvest Bank and Rennies Foreign Exchange), Industrial (Yamaha products in SA) and Office (Waltons). Bidvest Foodservice is spread across Europe, Asia Pacific and Southern Africa and includes Seafood Holdings in the UK, Deli Meals in Chile and Crown National in SA. The Namibia division houses Fishing and Commercial units, operating mainly in the marine industry.

    The key to much of Bidvest’s success is their decentralised management strategy, which means that each underlying business is run individually. In most instances Bidvest owns 100% of its underlying companies, but the original management team or founding entrepreneur is encouraged to remain in charge of the purchased business. As a result, most companies in the Bidvest group have management teams that are experienced leaders in their field and can react quickly to changes in their industry.

    Interim Results

    Bidvest has recently released a set of decent interim results for the six months ended 31 December 2012. Revenue has increased by 11.9% to R75.4 billion, with trading profit up 8.3%. Normalised Headline Earnings Per Share has increased by an impressive 18.2%, and the interim dividend per share increased by 15.7% to 324 cents.

    Bidvest South Africa has achieved a “pleasing result in a difficult trading environment”. The division has reported an 8% increase in revenue and a 12.8% increase in trading profit, with the trading margin running at 5.96%. Significant increases in operating profits were reported by the Automotive (+34.9%), Services (+28.5%) and Travel & Aviation (+27.1%) units, while the Office (-7.4%) and Paper (-5.8%) units reported notable decreases.

    The Bidvest Foodservice unit reported a good quality result out of Australia, New Zealand and Greater China, with Singapore and Netherlands detracting from the results. The UK operation has regained some momentum and the South African results are encouraging to management. Revenue has increased by 16.6% for the entire unit, whilst trading profit has increased by 9.4%.

    Bidvest Namibia has reported a 34% increase in revenue, but a 20.7% decrease in trading profit from an exceptionally high base. Much of the decline can be attributed to the Fishing unit, where a 25% reduction in quota allocation and entry of foreign competitors has hurt profitability.

    Source: Bidvest.co.za

    Prospects and acquisitions in progress

    While the current economic environment remains challenging for Bidvest on all fronts, management remains focussed on delivering organic growth and seeking out opportunities to make additional acquisitions. With its strong cash-generative ability, the company remains poised to act quickly if needed without turning to debt financing.

    Continued expansion into Africa is on management’s agenda, as well as a focus on improved customer service and ongoing cost control.

    A very recent development making headlines is Bidvest’s intended purchase of 60% of Adcock Ingram, an offer which now tends to become hostile after various objections from the Adcock board on technical points. This development is in contrast to Bidvest’s long history of friendly acquisitions, and it could be difficult to retain Adcock’s management team if the offer eventually succeeds. It is said that the current offer of $675m is at a premium of 10% over Adcock’s closing price, but about 20% below Adcock’s intrinsic value as calculated by Thomson Reuters StarMine. Although Adcock has significantly underperformed local rivals over the past year, its management claims that investments in new infrastructure and global distribution partnerships have set it up for a major turnaround. As a result, the timing of the offer is perfect from Bidvest’s side but seen as extremely “opportunistic” by the Adcock board.

    Source: Sharenet.co.za

    Current Valuation

    The Bidvest share price has climbed steadily over the past 12 months, increasing by 28% and reaching an all-time high of R 247.85 along the way. The share currently trades on a PE of about 16 times and a Dividend Yield of 2.9%, which is on par with the total market.

    A complex conglomerate such as Bidvest is very difficult to value, and investors have to decide if adding the struggling Adcock to the Bidvest portfolio can unleash the pharmaceutical’s potential and add further value to the ever expanding Group.

    Kind regards,

    Cor van Deventer

    Sources: www.bidvest.co.za
    www.moneyweb.co.za
    www.sharenet.co.za

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-09, 14:19:20, by Mike Email , Leave a comment

    The Basics of Bonds

    Bonds play an important role in investments but, as an asset class, are often misunderstood by retail investors. While they can provide an attractive yield pickup (when compared to cash and equities) there are some risks that investors need to be aware of.

    Yield Curve

    There is often mention of the bond yield curve.

    What is this, and what does it mean?

    The yield curve is basically a ‘best fit’ line that shows the annual return that you will receive for investing into a bond with a given maturity date on the condition that you reinvest interest coupons at current rates.

    The chart above shows the current yield curve for South African government bonds. The yield curve is currently upward sloping (i.e. investors receive higher yields for taking a longer view) which is normal. It makes sense that investors would generally demand a higher return in exchange for longer terms on their investment (loan to the government). Inverted yield curves (i.e. long term yields below short term yields) are usually an indication that a recession is approaching, or that the economy is in recession. In this environment investors expect that inflation will fall and are therefore willing to accept lower nominal returns in the future, in the expectation that the real return they receive will be sufficient to compensate for the risks involved.

    Risks

    Bonds are often thought of no or low risk assets. This is only true for certain bonds, and then also only certain definitions of risks.

    What are the major risks that bond holders face?

    One of the biggest risks for bonds is inflation. As a normal bond essentially promises you a fixed nominal return over a fixed period, any unexpected inflation will eat away at your real (after inflation) return. An example is where an investor buys a 20 year bond yielding 8% (current case in South Africa – see chart above). This investment should, at current inflation, deliver a real return slightly in excess of 2% - which isn’t great, but is at least positive. The risk for this investor is that inflation averages 10% over this period. In this case the investor still receives 8% pa, but will lose purchasing power over the investment period. Conversely, should inflation fall and average 3% over this period, the investor will be rewarded (in real terms).

    Default risk is also an important risk, especially for bonds linked to companies (credit bonds). A credit manager made quite a rather poignant statement at a recent meeting, “the probability of a company defaulting increases to 1 (i.e. 100%) as you lengthen the time horizon” – i.e. all companies will eventually default on their obligation given enough time. Investors need to be aware of this risk and ensure that they are being sufficiently compensated for the risk of default. Countries where the government has the ability to print more money and is struggling to pay their debt, will typically speed up the printing press to cover their obligations – governments therefore seldom default on their local currency obligations, but can default where the issue is denominated in another currency (i.e. South Africa issuing USD denominated bonds). Increased money supply typically leads to increased inflation (which affects the purchasing power of your fixed investment) and can lead to hyperinflation (most recently seen in Zimbabwe earlier in this century).

    Bonds have their time and place in investment portfolios, but as with other asset classes can either be cheap or expensive – relative to other assets or relative to history. At Seed we believe that locally and globally bonds are currently very expensive as nominal yields are close to all time lows and the real yields are insufficient to compensate for the low starting yield. We therefore have a very low weighting to traditional bonds across our portfolios.

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2013-04-02, 11:11:45, by Mike Email , Leave a comment