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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 Horizon

    When investing, it is imperative to match your investment strategy with your investment horizon. Investors who are able to accurately match these two (and who can refrain from acting on emotion in the interim) will increase the probability of their investment experience matching their investment goals.

    For the purpose of this report, I have used the local stock market (ALSI) since 1960 (i.e. just over 55 years) to display how an investor’s experience would range depending on their starting point and investment horizon.

    Interestingly, ‘investors’ (more like speculators) with a one day horizon will only generate a positive return just over 50% of the time, which means that the odds of success aren’t very high! As investors take a longer horizon, their probability of success increases and the variability of their returns decreases. In the below analysis I have loosely defined ‘success’ as a positive return. Inflation and dividend reinvestment haven’t been taken into account as their long term history is not readily available. These factors would influence the end result, but the broad concept would remain unchanged.

    The chart below displays the historic probability of generating a positive return over various time periods on the ALSI. Simplistically, based on this chart, one should have an investment horizon of at least 3 years in order to be confident of generating a positive return ‘most’ of the time (i.e. nearly 90% of the time).

    While the above chart shows how often one would generate positive and negative returns, it does not quantify the range of investment returns received. For investment periods of 1 year and longer I have looked at the possible range of annual returns an investor would have received in the chart below.

    Naturally, the variability in returns reduces as one’s investment horizon increases. Here it is interesting to note that while a 3 year investment horizon would have generated a positive return 88% of the time, an investor that got their timing wrong would have experienced a return of -18% pa over the 3 year period! From the above chart it would seem wise to have an investment horizon of at least 5 years when investing into local equities.

    By overlaying a simple valuation metric (market PE ratio) for an investor with a 5 year investment horizon, the return experience can be greatly enhanced. By investing when the market was cheap (lowest 25% of PE observations) an investor was not only able to improve their average return by 8% per annum but also greatly improve their ‘worst case scenario’. Likewise, investors who invested when the market was expensive (high PE) both lowered their average return and increased the probability of generating a negative return. The chart below shows the investor experience over the entire period, low PE, normal PE, and high PE scenarios.

    At Seed we view investing as a process of continuously improving the probability of generating satisfactory returns. We therefore ensure that there is a match between the assets and investment horizons of our various Funds. We further attempt to improve our probability of success by taking valuations into account in our investment process. In this regard, with the ALSI PE a shade under 20, our multi asset unit trusts (Seed Flexible and Seed Absolute Return) currently have extremely low weightings to local equity (relative to their long term averages).

    Take care,

    Mike Browne

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

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.


    Permalink2015-10-27, 18:16:46, by Mike Email , Leave a comment

    Seed Weekly - CPI in Investment Benchmarking

    It is easy to determine that investing is important, but with all the choices available, it becomes a more arduous task deciding how or with who to invest. A simplistic way of solving this problem is to look for a product that “performs very well” thereby protecting and growing your wealth. Trying to determine what performs well requires comparisons and such comparisons require an appropriate benchmark. Typically, a good investment benchmark should be unambiguous (specific with a stipulated way of measurement that is quantifiable) and investable (thus replicable or trackable). The fact that a good benchmark is investable would naturally exclude the Consumer Price Index (CPI) as benchmark. Why is it then that we commonly come across CPI benchmarks? What is the case for CPI benchmarks?

    CPI Inflation is an important concept that investors need to be cognisant of. CPI is a monthly data set of price changes in goods and services purchased by consumers. Due to inflation, R100 in your pocket 25 years ago, is now worth roughly R16 because of the erosion effect of inflation on purchasing power. Put differently, for you to be able to buy the same amount of goods that you bought with R100 twenty-five years ago, you would need to have R601 in your pocket today, a compounded growth rate of roughly 7.2% per annum. It is in light of this that your investment at the very least, should maintain the purchasing power of its assets. Therefore, it becomes important to track investment performance against a CPI target, making that a break-even level of performance.

    The chart above depicts the performance of the average equity manager as represented by the sector average of the ASISA SA Equity General category relative to the All Share Index and SA CPI. As can be seen, the average equity manager moves in line with the index as expected with periods of outperformance and underperformance. It makes sense to use the index in this case to benchmark the performance of the equity manager, where you would expect skill to be the determining factor for outperformance. However, there are also periods where the average manager and the index do not do as well as inflation. As an investor, it is important to know that whilst your investment may be beating its respective benchmark, is it also maintaining the purchasing power of the assets.

    Consider a 5 year investment period from 2007 to 2012. The markets were depressed during the global financial crisis. The average equity manager closely tracked the performance of the FTSE/JSE All Share Index, whilst the Multi-Asset High Equity category which is expected to offer better capital protection did slightly better. However, it can be noted that over the same period, an investment at the rate of inflation would have done much better. This suggests that an investment can do better than its benchmark whilst the purchasing power of its assets is actually being eroded, which is why it’s important to look at CPI. In addition, it is important to focus on long term investing, because with sufficient time, good investments tend to recover and eventually outperform the CPI target as per historical numbers.

    Using CPI as a target allows an investor to determine whether their investments are at a minimum, maintaining their purchasing power. Equally, this target emphasizes investment diversification of its assets as with the multi-asset portfolios which offer better capital protection. Diversification contributes towards inflationary risk protection. Therefore, incorporating an inflation target objective is deemed appropriate when defining investment objectives holistically.

    While past performance is not an indication of future returns, our rigorous investment process combined with investment experience allows us to make prudent investment decisions in order to protect against the negative impacts of inflation.

    Kind Regards,

    Tawanda Mushore

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

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.


    Permalink2015-10-22, 09:22:37, by Mike Email , Leave a comment

    Seed Weekly - Imperial Holdings Ltd

    Imperial holdings Ltd is an international group of companies listed under the Industrial sector on the JSE. The Group has a market capitalisation of around R 37bn and operates across different areas of transportation and mobility, both locally and abroad.

    Imperial started out as a single Chrysler car dealership in downtown Johannesburg in 1948, and in 1973 became a Toyota dealership. Truck and car rentals were added to the Group’s offering in 1975 and 1979 respectively and, up to 1999, various transport companies were acquired to form the backbone of Imperial’s logistics business today. In 1996 the Group diversified into vehicle-related financial services, with the establishment of Imperial Bank and Regent Life Assurance. Imperial Bank was subsequently sold to Nedbank in two tranches. In 2008, the Group unbundled its leasing and capital equipment division as JSE-listed Eqstra.

    Imperial Holdings Ltd is not a conglomerate that operates in disparate sectors or industries, but focusses completely on three major areas of mobility:

      1.Consumer and industrial logistics

    This division includes traditional logistics services in SA across almost every industry, as well as more comprehensive route-to-market solutions in the rest of Africa. Warehousing, inland waterway shipping and container port management is offered in Europe and South America.

      2.Vehicle import, distribution, dealerships, retail, rental and aftermarket parts

    This unit imports and distributes passenger and commercial vehicles through 126 owned dealerships in SA and 6 in Australia, with brands including Hyundai, Kia, Renault, Mitsubishi, Tata, Daihatsu and Bentley. The group operates the largest network of franchised dealerships in SA, as well as the largest pre-owned network.

      3.Vehicle-related financial services

    Imperial provides motor-related, value-added insurance products via its Regent brand. Around a third of the insurance business originates through Imperial dealerships, with the rest through other partnerships and call centres. Given that a large, fast-growing portion of Regent’s revenue and profits are no longer related to Imperial’s core business, Imperial is in the process of selling Regent to the Hollard Insurance Group.

    Latest Results
    Imperial recently released its results for the financial year ended 30 June 2015, and despite the weak rand and pressure on SA consumers the Group managed to recover somewhat from a very poor first half of the year.

    Revenue grew by 7% to R 110.5bn, while operating profit increased by only 1%. Headline EPS remained stable, while core EPS dropped by 3%. However, cash flow from operating activities increased by 68% and the final dividend also grew 6% to 445 CPS.

    The graph below illustrates the financial performance across all three major divisions of the group, and although revenue increased across the board, operating profit in the Vehicles division fell dramatically, with import costs increasing significantly and sales numbers staying stable. Operating margins have been squeezed down to 5.4% from 7.3% last year.

    Management does not expect the current headwinds facing SA consumers and SA businesses to change markedly in the short term, and single digit growth in revenue and operating profit is expected for the 2016 financial year. A faster recovery in the German economy would improve matters for Imperial, as would an oil price recovery for its operations in Nigeria, while further rand weakness can add further pressure to its margins.

    Imperial is currently held at a 2.5% weight in the Seed Equity Fund, with the share’s good Dividend Yield and Earnings Yield earning it a place in the Value portfolio.

    Kind Regards,

    Cor van Deventer

    Sources: imperial.co.za, moneyweb.co.za

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

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.


    Permalink2015-10-20, 14:01:02, by Mike Email , Leave a comment

    Seed Weekly - Biases

    We are all biased.

    No-one can claim that they are not biased to some degree. Even the paragon of today’s rational investor is biased. The best we can do is to acknowledge this and do our best to be aware of our biases when we make decisions.

    Biases can be broadly broken into 2 categories, emotional and cognitive. Let’s start with the latter.

    Cognitive Biases

    Cognitive biases stem from errors in the way we process and remember the information we use to make decisions. If the information is not ‘stored’ or processed correctly we tend to make decisions that would not necessarily be regarded as rational or optimal. Cognitive biases can be further broken down onto several more specific sub categories. We will only look at a couple of the more common ones.

    Confirmation bias - the tendency for individuals to selectively notice and process information that confirms their pre-existing beliefs while disregarding information that doesn’t.

    • An example of confirmation bias is when a person believes share X is poised for high growth going forward and a news article is published with a mixed review of share X. The person reading the article will disregard the negative information and only remember the positives, thereby reinforcing their belief that the share will grow.

    Anchoring and adjustment bias - assigning too much importance to original information.

    • E.g. A person sees a share is priced at R 100 the first time they encounter the share and uses this as an anchor going forward. Any subsequent adjustments to the share price are based on the original price of R 100. This completely disregards whether the price of R 100 was a fair price for the share in the first place.

    Emotional Biases

    Cognitive biases, in general, are easier to correct than emotional biases. Emotional biases stem from intuition or impulse and as you can imagine it is a tall order to try and change the way you feel about something. As with cognitive biases there are a large variety identified and we will only look at the more common/problematic ones.

    Loss aversion - one of the more common emotional biases. People with this bias tend to experience losses more acutely than gains. If, for instance, a client is presented with a 10% gain they would not experience the same amount of satisfaction as the pain they will experience when presented with a 10% loss. This is a common bias as it is routine for people to accept lower returns in exchange for a lower risk of losses.

    • As this is a very broad bias present in most individuals the example will not cover all the different permutations.
    • If an individual forgoes 4% in potential returns in order to ensure that a 1% possible loss is avoided the person can be said to be loss averse.

    Endowment bias - the bias of overvaluing an asset just because it is already owned. This is particularly true in the case of inheritance. If you inherit an asset it is common to attach a sentimental premium to the asset. The correct action is always to ask yourself what you would do if this asset was received as cash. If your answer would be to buy the asset at its current price then you are right to hold, but if you wouldn’t necessarily pay as much to buy the asset you are holding it may be time to consider your options. The same line of thinking can be applied to any of your assets.

    The above biases all lead people to make decisions that might not be considered rational or optimal. It is not necessarily bad to have these biases as it is a normal part of being human. What is important though, is to be aware of your biases and to know whether it is affecting your investment decision making in a negative way.

    Kind Regards,

    Stefan Keeve

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

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.


    Permalink2015-10-15, 16:44:45, by Mike Email , Leave a comment

    Seed Weekly - Resilient Property Fund

    Resilient Property Income Fund, along with Growthpoint, Redefine and Hyprop, is one of the heavyweights in our local property index, with a market capitalisation of R44bn and an index weight of 9.1%.


    Resilient was established and registered in June 2002, and listed on the JSE later that same year as a property holding company able to hold properties directly or via listed or unlisted securities. Its focus has always been on regional malls situated in non-metropolitan areas, where shoppers’ potential disposable income can grow quickly from a low base and competition from other developers is less. Past interests in listed funds include Shops for Africa, Acucap and Ambit. The Group was also involved with the establishment and listing of New Europe Properties, with exposure to Romania, Slovakia and Serbia, on the LSE and the JSE. Resilient listed a portfolio of their B-grade properties in 2009 under the Fortress Income Fund.

    Property Portfolio

    The group’s direct portfolio includes 26 properties with 1 million square meters of gross lettable area, as well as developments in Nigeria and 6 vacant plots for development in SA. The Group’s portfolio of local regional malls include interests in Jubilee Mall, Irene Village Mall, Boardwalk Inkwazi Shopping Centre and Brits Mall. When evaluating target investments, criteria includes the presence of at least three national anchor tenants and 70% of the lettable area occupied by major national retail groups.

    The table below illustrates the geographical spread of assets and the comparable sales growth for the 2015 Financial Year:

    In terms of listed assets, the Group currently holds four different counters at a total fair value of R 13.5bn, with Rockcastle and Nepi providing some global exposure. The group remains committed to global diversification into markets with high growth expectations, and the board has committed R4bn to the development of malls in Nigeria through Resilient Africa, a joint venture with Shoprite. As at June 2015, 28.5% of the Group’s total assets were offshore, and management aims to increase this further to 35%. The average annualised property yield on the entire portfolio is 7.6%, while the weighted average rental escalation is 7.1% for 2016, around 1% above medium-term inflation.

    Tenant and Lease Expiry Profile

    The graph below illustrates the percentage of gross rentals attributable to each of the national tenant groups. It is clear that Resilient is highly dependent on the success of retail groups Edgars, Foschini and Pep for its rental income.

    The tenant profile determines the reliability of the Group’s future rental income stream, and the aim is to have as many A-grade tenants, which include large retail groups, large listed companies and the government, as possible. B-grade tenants include smaller retailers, franchisees and professional firms. C-grade tenants, of which Resilient has around 580, are the remaining smaller businesses.

    From the table below, it is clear that Resilient’s exposure to A-grade tenants are high in terms of both rentable area and gross rental income.

    Any property management company has to manage its lease expiry profile in order to ensure that leases do not all expiry in a single year but are staggered into the near future. Resilient receives 18% of its gross rentals from longer term leases expiring after June 2020, which will be favourable should annual rental escalations come under pressure.


    Resilient’s performance will depend on the stability of its rental income and the ability to keep vacancies at the current low levels, which in turn depends on the success of its tenants, especially Edgars, Foschini and Pep. Load shedding, resulting in reduced trading hours, continues to hamper profits for these retailers, as does the weaker rand for those importing goods from overseas.

    Resilient is currently the largest property holding in the Seed Equity Fund at 3.1%, with its strong share price performance over the past year earning it a place in the Momentum portfolio.

    Kind regards,

    Cor van Deventer

    Sources: resilient.co.za, moneyweb.co.za

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

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.


    Permalink2015-10-06, 14:21:52, by Mike Email , Leave a comment