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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 - The Value of Good Advice

    Placing a value on good advice is never a straightforward calculation to make. There are, however, several areas in which good advice can prove to add tremendous value.

    1. Retirement planning

    This is generally the 1st step where advice can add value and lays the groundwork for most of the work that follows. We use a variety of tools and methods to make an informed recommendation to our clients. Having an idea (without being able to see what the future holds) of what is needed to reach your objectives removes much uncertainty. A typical retirement plan will have reference to the estimated asset level compared to the level required over time with a graph detailing the recommended composition of the portfolio in the future:

    2. Investment consulting, asset allocation & portfolio risk

    Once the above has been done, and we know what objectives we need to reach, it is time to decide on the best way to get there. This step generally involves analysing which vehicles will be best suited to your needs, the amount of risk allowed in the portfolio and also a general medium-long term outlook of the manner in which the portfolio will be managed. One of the more important parts of this step is the discussion to be had regarding the risk in the portfolio and the suitability thereof to the client. We place great emphasis on ensuring the level of risk in portfolios reflect the needs of the client.

    Your personalised investment plan will always be broken down between strategies and asset classes.

    3. Manager selection

    Once an appropriate investment strategy has been established, and it is known what the recommended asset allocation needs to be, the manager of the underlying asset classes needs to be appointed. At Seed we are very fortunate to have a great team of researchers and investment professionals whose full time job it is to do research on the best investment options available to our clients. The allocation to the chosen managers and asset classes are done mostly in our funds. This allows for a very efficient management of client portfolios as the manager allocation within the portfolios and the asset class exposure is continuously managed and monitored.

    4. Risk/insurance consulting

    We have recently embarked on increasing the offering to our clients by adding risk consulting to our stable of services. This allows us to assist clients in the servicing of risk needs including life insurance, income protection, key person insurance, buy-sell agreements and contingent liability cover. We look forward to assisting our clients in this regard going forward.

    5. Succession & estate planning

    Although Seed doesn’t perform this service directly we use the expertise of a well-respected firm specialising in estate and succession planning. We are trained to recognise gaps in the existing structure and could recommend the action steps needed to ensure your affairs are in order.

    6. Qualitative

    The last point relates to the fact that it offers tremendous peace of mind knowing that someone you know and trust is looking after your financial portfolio and is acting in your best interest. We spend considerable effort in the alignment of our business interests to that of our clients and believe that fostering personal relationships with our clients goes a long way to ensure trust is built up and maintained. This qualitative factor is a non-negotiable for us.

    At Seed we have refocused our efforts on ensuring that our clients are afforded a level of service second to none, we encourage you to watch this space closely as we re-develop our service offering over the next few months.

    Kind regards,

    Stefan Keeve

    021 914 4966

    Permalink2015-02-24, 10:14:42, by Mike Email , Leave a comment

    Seed Weekly - Investing Offshore

    When the rand weakens to levels not seen for years, like it has over the past few months, clients/investors often start to ask whether they should send more of their hard earned investments offshore, to protect from further weakness. This is especially true if backed by political turbulence (as experienced last week). The chart below shows the ZAR/USD exchange rate over the past 30 years, we are now near the lows of 2001.

    It is interesting to note that despite the continued rand weakness since mid 2011 the rand is still some way off, when adjusting the currency for the difference in inflation between South Africa and the US, to the levels that we saw in 2001 and 2008.

    Economic theory dictates that a currency should depreciate relative to another currency if the country experiences higher inflation, known as Purchasing Power Parity, in order for it to remain at ‘fair value’. As South Africa has higher inflation than the US, it is normal for the currency to gradually weaken versus the USD over time. The chart below shows the ZAR vs the USD and the fair value exchange rate over the past 30 years. Note that we are currently on the cusp of being 1 standard deviation away from fair value, compared to 2001 and 2008 when we exceeded this level.

    At the height of the currency panic, ending in 2001, many investors took their capital offshore and invested into developed equities. This, on the basis that developed market stock exchanges (the US in particular) had done extremely well in the 90’s and also that the rand was a ‘one way bet’. It is scary to note that some 13 years later an investor that made this decision has still not recouped their capital in real terms (inflation adjusted), is some way off cash returns and has been left in the dust when compared to local equity (all adjusted for currency movements). The chart below shows the performance of various assets over this period.

    It is always best for investors to remain rational and invest looking forward, rather than based on what’s happened in the rear view mirror. In this regard Seed, and most South African asset managers, have been overweight global assets for the last few years to take advantage of the possibility of the currency moving from a strong to weak level, based partially on the fact that the rand was relatively too strong.

    It is important to note that we are unable to predict the future, and therefore spend little time looking into crystal balls. We rather spend our time looking at valuations and assessing probabilities of investment outcomes based on the current information at hand. We then build diversified portfolios that are able to withstand the eventuality of multiple scenarios. It is also important to note that there are differences when compared to the end of 2001, mainly that global equities currently offer much better prospects of returns, due to better valuations when compared to the height of the Tech Bubble.

    Seed Funds remain overweight global assets, but we are close to the point where the risks of significant currency strengthening outweigh the risks of a currency blow out. As/if we reach this point our Funds will be incrementally adjusted to take advantage of the opportunity presented (i.e. repatriating investments, or hedging out currency exposure). We believe that investing is a probability vocation; in this regard we continually seek to get the odds in our favour and size our investments appropriately.

    Take care,

    Mike Browne

    021 914 4966

    Permalink2015-02-17, 09:14:59, by Mike Email , Leave a comment

    Seed Weekly - Endowment Policies?

    Endowment Policies?

    Using endowment policies as an investment vehicle is usually one of my most difficult “sells” as a Wealth Manager. The moment a client hears the word “endowment”, the hairs on the back of his neck tend to rise and the fight or flight syndrome kicks in. Unfortunately, this reaction is not totally unjustified. Endowment policies have a legacy of high total costs (especially in terms of commission), vague returns and conditions, and front end loading of costs. Quite often in the “good old days” of twenty year endowment policies, the first year of premiums disappeared in costs.

    Given all of the above, and the fact that I don’t charge initial fees or use any investment products that charge initial investment fees, why on earth would I be suggesting that clients use endowments? The fact is that things have changed. We now have “endowment wrappers” with no upfront costs and transparent costs and returns. They are mainly housed on the various unit trust platforms. When the investment holder is a Trust and the investment objective is long term growth, the use of an Endowment becomes a “no brainer”.

    Endowments are often marketed as tax free investments by unscrupulous or ill-informed advisors, this is incorrect. They are, however, often tax efficient vehicles especially when the investor is a Trust.

    Below is a comparison of the current tax treatment of endowments and discretionary investments in a trust, which clearly shows the tax advantages of an endowment:

    Below is an illustration in the differences in tax paid by a Trust on a R 25m discretionary investment on the one hand, and through an endowment wrapper on the other. In this case the platform charged no extra fee for housing the investment in the endowment wrapper. Returns are assumed at 10% pa (6% capital + 2% income + 2% net dividend).

    As can be seen, the discretionary investment has a much higher tax burden, which results in a much lower after tax return. In this instance the discretionary investor’s net investment after 5 years would be just over R 37m (8.2% pa), while the endowment’s net investment after 5 years would be just over R 39m (9.3% pa).

    There are restrictions when using the endowment in that you are only allowed one withdrawal in the first five years and that withdrawal is restricted to the contributions plus 5% per annum growth (some companies also allow an interest free loan). But endowments have the added advantage that the taxes are paid by the wrapper so income does not need to be included in the Trust’s tax return. This means that nasty income tax surprises are avoided.

    So when your wealth manager wants to use an endowment wrapper to house your investments hear him out. If, however, returns are opaque and costs are difficult to explain and understand think carefully.

    Kind regards,

    Barry Hugo

    021 914 4966

    Permalink2015-02-10, 11:55:53, by Mike Email , Leave a comment

    2015 trading and investing workshops

    2015 trading and investing workshops

    Our 2015 course and workshop dates are now available. Do not miss out on this fantastic opportunity to learn and improve your trading and investing. There are 3 courses currently being offered:

    1. Introduction to the Markets – A seminar perfect for the beginner or the investor who has just started trading.
    2. Forex Trading – A seminar that revolves around cycle and technical analysis and it will focus on trading forex for an additional income.
    3. Our Professional Trading and Investing seminar, which goes into the depths of Index CFD Trading, PowerStocks trading strategies and tips and techniques which will teach you to trade like a professional.

    If you want to brush up on your trading skills or refer a friend who is trading in the market, this is the perfect time do that. Seats are limited, so book yours here now: http://www.sharenet.co.za/v3/events/

    Permalink2015-02-09, 10:08:44, by Natalie Email , Leave a comment

    Seed Weekly - Hedge fund managers throwing their hats into the ring

    Hedge fund managers throwing their hats into the ring

    Globally hedge funds have a bad stigma around them, and unfortunately our local hedge funds have been painted with the same brush. While hedge funds aren’t currently regulated in South Africa, the fund managers are. Over the past year the FSB and Treasury have been working together in bringing hedge funds in under collective investment schemes regulation.

    Hedge fund managers like Visio Capital and 36ONE Asset Management have both been managing unit trusts for close to 10 years with great success. The graph below shows the cumulative investment growth of the Visio BCI Actinio and 36One Met Flexible Opportunity funds. While both of the funds are in the ASISA Flexible sector, they are typically fully invested into equities.

    Over this period both funds comfortably outperformed the All Share Index and the Average General Equity fund. Both fund managers build their portfolios from the bottom up by doing fundamental research on the underlying companies.

    Some of the other hedge fund managers that have been making name for the last couple of years are Fairtree, Laurium, Bateleur and Tower. Sanlam has approached Capricorn, Matrix and Kaizen to manage some of the Sanlam Select funds on their behalf. Below is the trailing performance of the funds compared to their peers.

    Source: Morningstar Direct

    Does a hedge fund manager bring something different to table compared to a traditional fund manager?

    Firstly, good hedge fund managers aren’t content with an analyst or broker report. They are not afraid to do the hard work of valuing a company themselves. They are not afraid to get on a plane or bus to go visit the company sites. They don’t only meet with the company’s management, but also meet with their competitors and suppliers. They try to understand the full value chain and where in the chain the company fits in. They do deep, thorough fundamental research on the companies.

    Secondly they are used to shorting (selling) a company. A long only unit trust manager is typically only focused on finding good companies. A hedge fund manager isn’t only focused on finding good companies, they are also experienced in searching for bad companies. Therefore, they know which companies to avoid.

    Thirdly, hedge fund managers are able to understand and use options in protecting capital and reducing the volatility of their funds. Not all of the hedge fund managers make use of options, but those who do know how to use them in the most cost effective way to enhance the return of their funds.

    So do hedge fund managers bring something different to the table? In my opinion, yes. Their different return profiles blend well with other managers during the portfolio construction process. We make use of hedge fund managers to manage long- only strategies in the Seed Absolute Return and Seed Flexible funds.

    Kind regards

    Gerbrandt Kruger

    021 914 4966

    Permalink2015-02-03, 12:54:54, by Mike Email , Leave a comment