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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 - How much is enough? (Take 2)

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

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

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

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

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

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

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

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

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

    Kind regards,

    Barry Hugo

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

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

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

    Seed Weekly - Do the work stay your course

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

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

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

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

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

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

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

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

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

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

    Kind regards,

    Tawanda Mushore

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

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

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

    Seed Weekly - Dearest of Precious Metals

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

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

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

    Physical Gold

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

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

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

    Gold ETF/ETNs

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

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

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

    Mining Companies

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

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

    Emerging Market Tracker

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

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

    Kind regards,

    Stefan Keeve

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

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

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

    Seed Weekly - Dearest of Precious Metals

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

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

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

    Physical Gold

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

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

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

    Gold ETF/ETNs

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

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

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

    Mining Companies

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

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

    Emerging Market Tracker

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

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

    Kind regards,

    Stefan Keeve

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

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

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

    Seed Weekly - How active is our active share?

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

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

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

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

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

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

    Kind regards,

    Stephan van der Merwe

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

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

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