XML Feeds

What is RSS?


Top Rated

    Daily Market Update

    The JSE closed up 0.34% at 28171 with value traded at R8.43 billion. Advances led declines 203 to 162. Mining closed down 0.18% at 33717, while Industrials were up 0.99% at 24485 and financials ended the day up 0.12% at 25732.

    The best performing sectors of the day were Development Capital up 4.2% at 1191, Diamonds Mining up 2.7% at 631 and Beverages Index up 2% at 57515, while the worst were Platinum Mining down 2.5% at 104, Gold Mining down 0.9% at 2867 and Automobiles & Parts Index down 0.7% at 2957.

    There were 24 new 12 month highs today, including Petmin which closed up 10.4% at 170, PSG up 8.2% at 3050 and Sycom up 5% at 2204.

    Of the major stocks Goldfields ended down 0.95% at 12801, Sasol was up just 0.05% at 24411, Anglo was up 1.12% at 37697, MTN ended up 0.92% at 10375, while Angloplat lost 3.78% at 114501.

    Biggest gainers of the day where Petmin up 10.39% at 170, PSG up 8.16% at 3050 and Eland up 6,7% to R110, while some of the losing shares included Village down 15.44% at 115 and Telemastr off 14.29% at 300

    The Dow was up 0.1% at 13138.90 and the S&P 500 unchanged 0% at 1494.77 a few moments ago.

    Gold was up 1% at $ 679.75/oz

    The rand was last trading at R 7.03 to the dollar, R 14.05 to the pound and R 9.60 to the Euro.

    Permalink2007-04-30, 18:30:24, by ian Email , Leave a comment

    Private equity buyers start to sell

    One market commentator noted today that PE used to stand for price earnings ratio, now, it’s also standing for private equity. So what is this private equity and what is the reason for it getting so big in recent years.

    In its simplest form, private equity is a consortium of capital that instead of buying say 5% of the share capital of a company, it buys out 100% of the shares. In this way they own it privatively (i.e. not together with other shareholders, on a listed exchange).

    The boom in recent years has been driven by 2 things. Firstly the liquidity bubble, which needs to find a home, and secondly the low cost of debt, which allows private equity capital the ability to gear up, in itself further boosting liquidity.

    Global investors have sustained a very high appetite for risk in a global market where yields and hence expected returns low.

    Private equity firms have benefited from investor appetite for riskier and riskier deals. They have had no problem raising fresh capital and like a man with a hammer, where every problem looks like a nail, a private equity firm has plenty of capital that needs a home.

    Just a month ago however the large US private equity firm, Blackstone announced that it was looking at a listing on the New York Stock Exchange. This will take it from a limited partnership structure to a listed company.

    Now why would one of the world’s largest private equity firms, want to take itself public. Its somewhat ironic, but speaks to the state of the market. I think it’s the smart money looking to make the best deal. The principals that currently own the business know the appetite for their type of business, and if there is such appetite, why not take full advantage.

    A figure of $25 billion as a valuation of this business has been bandied around, but this could be on the low side given the appetite. Remember whenever a company is listed, despite all the fantastic reasons for doing so put forward, the current owners are selling out a chunk.

    In a case like this, where Blackstone’s business is to do valuations, a potential buyer must understand that it’s the sellers that know a lot more than he does. It may be a case of the smart money getting out while it can and the dumb money overpaying.

    That’s all for now.

    Have a great long weekend

    Kind regards

    Ian de Lange

    Permalink2007-04-26, 20:04:37, by ian Email , Leave a comment

    The Yale Endowment model continued

    I briefly touched on the Yale Endowment model yesterday. It’s an interesting model and I will discuss more aspects today.

    The endowment only has an allocation of 11,6% to domestic (i.e. US) equities, but it says “The need to provide resources for current operations as well as preserve purchasing power of assets dictates investing for higher returns, causing the Endowment to be biased toward equity.

    It goes on to say “In addition, the University’s vulnerability to inflation further directs the endowment away from fixed income and toward equity instruments.”

    So despite the fact that it only owns 11,6% in US equities it has a low tolerance for fixed income assets, i.e. bonds and wants the real returns that equity provides.

    To lower volatility and downside risk though it diversifies and this is where its model has deviates from a traditional balanced pension fund.

    It goes on to say, “Hence 96% of the Endowment is targeted for investment in assets expected to produce equity like returns, through holdings in domestic and international securities, real assets and private equity.”

    At the end of its last financial year it had the following asset allocation:

    Absolute return --- 23,3%
    Domestic Equity --- 11,6%
    Fixed income ---3,8%
    Foreign equity --- 14,6%
    Private equity --- 16,4%
    Real Assets --- 27,8%
    Cash --- 2,5%

    So it’s really an allocation to 5 main distinct asset classes. Bonds and cash have very low weightings.

    The absolute return is interesting. It says that it 1990 it became the first institutional investor to pursuer absolute return strategies as a distinct asset class. It began with an allocation of 15%. Now the strategic weighting is 25%.

    These are allocations to hedge fund managers with different investment styles looking to produce returns irrespective of the market returns. Half is event driven strategies and half is value driven strategies which involves hedged positions.

    Another interesting point on its local equities allocation is that despite the fact that they recognise the US equity market to be highly efficient, they don’t invest into tracking funds but elect to pursue active management strategies, aspiring to outperform the market index by a few percentage points annually. To this end they favour value driven bottom up stock pickers.

    Well that’s all for today. We still have a few more places left at our seminar next week in Jhb and Pta. Please mail me on ian@seedinvestments.co.za for more details.

    I won’t even mention the cric…..

    Kind regards

    Ian de Lange

    Permalink2007-04-25, 18:06:06, by ian Email , Leave a comment

    The Yale Endowment investment model

    The Yale Endowment investment model makes for a fascinating study. I have just started perusing their 2006 annual report, which goes into some detail on the benefits of its diversified investment policy. This is a large investor by any means with $18 billion under management.

    The Yale Endowment contains thousands of funds from donors over the years. We will just start to touch on the investment policy that this endowment fund started to take some 20 years ago.

    The fund has had a very good 3 years returning 19,4% in 2004, 22,3% in 2005 and 22,9% in 2006.

    Its investment construction is described as being one that is structured using a combination of academic theory and informed market judgement. The theory uses statistics to look at the estimated returns and risk profiles from the various asset classes.

    Because investment management involves as much art as science, qualitative considerations also play a big role in portfolio decisions.

    The result of this process saw a dramatic shift some 20 years ago when 75% of the endowment was allocated to US stocks, bonds and cash. Today the target allocation to US specific equities is only 16%. The balance is directed at foreign equity, private equity, absolute return strategies, and real assets.

    The main reason for the very different asset allocation? Their return potential and diversifying power. The report makes the points that the new allocation model (now some 20 years old) has significantly higher expected returns with lower volatility.

    I will go into more detail on this model in future reports.

    For those investors seeking a defined investment strategy for their personal investments that takes many of the Yale endowment investment policies into account, please don’t hesitate to contact me. We will send further information on our approach. E-mail ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-04-24, 20:35:54, by ian Email , Leave a comment

    Predicting future returns

    Predicting returns from asset classes has a theoretical mathematical formula, but actual events often have a way of making a mockery of such theory – in the shorter term at least. Over the longer term there is a lot of merit in reversion the mean, and investors should be aware of some of the science.

    Looking back, one well known asset management firm detailed a useful rule for evaluating longer term investment prospects as follows:

    Expected return = initial yield plus long term growth rate.

    At the time, December 2001, the dividend yield was 2,8% and the long term real growth rate of listed company earnings was 2,6% per annum. The sum of these 2 was at that stage the prospective real return from local equities. This assumed no other changes.

    Again in 2005, the firm produced a chart showing rolling starting price to earnings from 1960 and subsequent 5 year returns. The trend is very clear, the higher the price paid (in the form of higher price to earnings multiples), the lower the subsequent 5 year return.

    The prognosis proved to be FAR too conservative.

    But still there is merit in the arguments. Today another well known boutique manger put up in a presentation the prognosis for low prospective returns based on current high prices. Again because the current dividend yield at 2,2% is far lower than the long term average the expected long term real return is a low 1,8%.

    In a paper titled, “return predictability and asset allocation strategy” in 2004, HSBC made the point that the dividend yield displays remarkably strong long term mean reverting properties.

    Again their assessment of UK equity returns from 1900 – 2002 was that lower starting dividend yields generally led to lower 5 year prospective returns and vice versa.

    Their view was that 2 main factors affect the returns, starting valuations and economic environment.

    History, albeit only a few years after these concerns has made a mockery of these low return expectations. Especially in South Africa, where the five year return from the local market has been 23,8% with the inflation around 6%. The returns over the last 3 and 4 years have been around 40% with inflation around 5%. This should actually just make an investor even more nervous, not less so.

    The ridiculously low expectations have been ridiculed, but when it comes to investing, always remember that it’s a marathon and not a sprint. Never judge short term outcomes.

    That’s all for now. We still have a few places for our investment seminar in Jhb and Pta. Please mail me on ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-04-23, 17:39:13, by ian Email , Leave a comment

    The value of Strategic Focus

    Strategic focus. Its worth a lot of money for any business. For Tiger Brands its strategic focus today was worth around R2,5 billion. That’s the increase in market cap after announcing a strategic review of its healthcare – not too bad at all, and should get some other companies looking at their own focus. Because it’s worth such a lot I think private investors should also look at this thing called strategy.

    Today Tiger brands announced that it had completed a strategic review of its healthcare business. When one thinks of Tiger Brands you don’t typically think healthcare, but the company owns Adcock Ingram, which has various pharmaceutical and hospital products in its range.

    The conclusion of the strategic review is for Tiger to concentrate on its core fast moving consumer goods (FMCG) operations and divest of most of its healthcare business. Although the Adcock Ingram business is well positioned for growth it’s a different business to the FMCG and Tiger Brands recognises that it wants to be a focused FMCG business.

    Tiger brands was originally known as Tiger Oats and it itself was unbundled from CG Smith in the Barloworld stable.

    In 1999 Tiger Oats bought out minorities in the business that it now wants to separate out.

    In 2000 it changed its name to Tiger Brands to reflect its core business of owning and managing top brands. These include such staples as Tastic rice, All Gold, Fattis and Monis etc.

    Over the years Tiger brands has been focusing and divesting. In the past it owned Oceana Fishing, now Oceana Group.

    Until a couple of years ago, Tiger Brands owned Spar, which it unbundled to shareholders. This has risen from around R20 in 2004 to its current R51.

    Tiger Brands shareholders gained an additional R2,5 billion today as the price jumped over the R200 level to 20040c, giving it a market cap of R34 billion.

    Over the years the increasing focus has been worth millions.

    With companies, as with so many things in life, focus is very important. Businesses that are focused on a core, develop the necessary expertise and economies of scale to offer customers better value. Customers that receive better value tend to remain loyal. A company with loyal customers providing a valuable service or product at the right price in itself becomes more valuable to the owners. This is exactly what we have seen with Tiger Brands over the years.

    This focus comes about by taking the time out and looking at the strategy, not by being busy in the trenches. The role of the board of directors is to do define the strategy and then to ensure that the strategy is implemented. Over time they will be measured by how successful they are in defining and implementing a strategy.

    Because strategy is potentially worth such a lot, we at Seed have been spending a lot of time on this as well. Our focus though is setting out the investment strategy for private clients and then ensuring that this is implemented properly. Strategy is defining the long term objective. While ALL investors need it and some believe that they have one, most don’t. Again it’s a matter of setting aside the time and making sure that its done properly and systematically.

    We are in Jhb and Pta at the beginning of May for a couple of one-hour seminars and will have a top rated fund manager speaking. We have a few places left. Please mail me for details if you would like to make this.

    Have a great weekend

    Kind regards

    Ian de Lange

    Permalink2007-04-20, 18:23:49, by ian Email , Leave a comment

    don't interrupt the person doing

    On my way home I spotted the billboard with the Bernard Shaw quote or was it the Chinese proverb saying, “The person who says that it cannot be done should not interrupt the person doing it.” I got to thinking that this is very relevant for those who believe that it’s impossible for investors to beat a benchmark such as the JSE All Share index.

    There are those portfolio managers that can and do beat this benchmark and on a consistent basis. Let’s be clear it’s not very easy. The reason that it’s not easy is that by and large the market is fairly efficient. By that information is quickly and efficiently factored into valuations.

    But this is not always true and it’s not true for selected shares and selected markets at various times. Astute investors have a process to always weigh up the valuations against the prices, and committing when they have higher conviction levels.

    Over the last few years the South African stock market benchmark, the FTSE/JSE All Share Index has been on an absolute tear. The bar has been set extremely high and only the best have been able to clear the hurdle.

    For the 12 months to the end of March the index gained 37,4% and over the last 3 years the annual total return was 40,6%. Taking into account some of the market dip to March 2003, the 5 years return is dragged down to an annualised 23,6%. Still not too shabby at all.

    Because the index has a high exposure to the resource heavyweights like Anglos and Billiton, when they move up sharply, like they have, their effect on the index is material, making it very difficult for a portfolio to outperform. Over any longer period, this weighting is neutralised.

    So those doing the interrupting should look to see who is doing it.

    Well looking at the Alexander Forbes Manager Watch to the end of March, it is clear that some managers are beating the index. Depending on the period of measurement. The last 12 months have been tough, the average manager has underperformed that hurdle by 1%.

    Over 3 years, despite the 40,6%, the average manager outperformed by 2% per annum, with that sector not hugging the benchmark outperforming by 3,1%. Over the longer more normalised period, the average manager outperformed by 6%, with those not benchmark hugging outperforming by almost 10% per annum.

    So is it possible? Yes. Is it easy? No. The question I always ask to any private investor is this "Are you tracking your performance monthly, quarterly, annually every five years?" No one should lose out even on 3% per annum compounded. As I have mentioned, it can amount to a massive difference at retirement.

    I am coming up to Jhb and Pta in the first week in May. We are having a one hour seminar with a top rated fund manager chatting and then a discussion on investment strategy. We have some spaces left. Please let me know if you would like to make this, and I will mail you details. You can mail me on ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-04-19, 20:17:37, by ian Email , Leave a comment

    Is there a bias in your investment process?

    I noted one of the most common mistakes mentioned by US fund manager, Ken Fisher, is that of overconfidence in one’s investing skills. For most pursuits, confidence in a vital ingredient. This common mistake for many self directed investors is natural, but is the result of an emotional attachment to the process, which often introduces a biased approach.

    Because no one is immune to bias, it’s vital to create an environment that removes the emotional element.

    “What do you mean Ian?. Its good to be close to your investments.” I hear you say.

    Well let me put it this way. How many investors hold onto a share for one of the following reasons?

    . their grandfather bought it for them when they were born, and there is just no way that they can sell the share.

    . “Sell my AA shares. No way. I put in 35 years of blood and tears into the company. I know it inside out. I will NEVER sell these shares that I have accumulated.”

    . “But I bought these at R35, I can’t sell them now at R30 and incur a loss. I must wait until they recover first.”

    . “I will have a CGT liability if I sell. I just hate paying SARS any more than I have to.”

    I continue to be surprised how many investors have such an emotional attachment to a particular share or portfolio of shares.

    Do they monthly, quarterly or even annually assess their holdings against the total universe of investments. Very very seldom. More often than not this type of process is not comfortable. Perhaps they would rather not know that they can achieve better results.

    These are the types of biases that set in. It’s very understandable and we all suffer from, but I am more and more convinced that each investor MUST maximise the potential outcome for the portfolio that they have. The compounding effect of additional gains could possibly mean the difference between drawing down R45 000 or R55 000 a month in retirement.

    The only solution, whether you do it yourself or whether you use an investment consultant, is to get rid of those biases and working on a defined investment process. This is not a once off exercise, but a systematic process.

    I am up in Jhb and Pretoria at the beginning of May. We are having a seminar with a top fund manager and then also briefly running through defining an investment strategy. Please mail me for more details if you are interested in attending.

    Kind regards

    Ian de Lange

    Permalink2007-04-18, 20:14:46, by ian Email , Leave a comment

    Don't be fooled

    Are investors being fooled by randomness? Do they pay far too little attention to consequences of decisions? Do they underestimate the effect of a random event? This is the contention of author Nassim Taleb, in his book “Fooled by Randomness”. It’s a very interesting concept and one which ALL investors should pay attention to.

    Trying to understand random events, their probability and importantly their effect is crucial for investors and traders alike. As he notes, most times investors don’t pay attention to it – until it’s too late.

    What he’s talking about is nothing more than risk management. I remember reading interview after interview that Jack Schwagger had in his best seller books – Interviews with top Traders. Time and time again the one constant that came through from each successful trader, was that of risk management. Each one had risk management tools and they knew never to deviate from them.

    These included strict stop losses, money management, diversification of portfolio etc. These top traders understood the impact of a random type event, even though the probability may be low. Preserving their capital, they could continue to trade - ignoring risks they stood the chance of completely wiping out.

    Its interesting how risk can increase following a good period. Taleb makes the point that some people who have succeeded, may have succeeded due to luck or lucky events. Now they deem themselves skilled as investors, and while they focus more and more on returns, they increasingly underestimate the potential volatility or risk.

    Some of his tips are useful:

    . Don’t only concentrate on highly visible success examples. There may be many examples of failure that you have not or don’t see.

    . Don’t let survivorship bias fool you into giving a survivor too much credit. For example looking at the universe of current small and mid caps on the JSE’s, don’t forget how many slipped off the radar screen from say 1998.

    . It isn’t always the estimate or forecast that matters as much as the level of confidence in that opinion.

    Hmm, you say. All very well, but how do I really achieve this with my investments. Yes, a complete strategy that looks at and defines risk is vital. More and more I am seeing that investors are NOT truly maximising their investments. Too often it’s a bit here and a bit there, hoping for the best with no benchmarking and constant tracking etc. It is my belief that its crucial to absolutely maximise every single aspect at all times.

    Oh and while I was going on about risk management, the JSE climbed another 127 points to a new high at ………….. 28 506.

    Contact me if you want to discuss your strategy.

    Kind regards

    Ian de Lange

    Permalink2007-04-17, 17:38:32, by ian Email , Leave a comment

    Are there now fewer opportunities for investors?

    There is a lot of money chasing selected companies on the JSE. And when some of these well known, well respected companies are bought out, the available cash moves to the other limited opportunity set. This is what happened on Monday. There was some speculation that shareholders would win a vote against the Edcon buyout.

    But just over 80% voted for the sale of the company to a consortium led by Bain Capital. The buyout was pitched at R46/ share.

    The foreigners were the most outspoken against the price, saying that it was far too low. And perhaps they may be right. Judging by the level of interest by foreigners in local shares, they have clearly seen value.

    The level of interest can be seen from one of the very popular index tracking funds, the iShares range. Foreigners can easily buy into the selected emerging market countries, or indeed into the basket of emerging markets by buying into the iShares Emerging Markets index fund.

    This fund is large at $15,7 billion, and with just over 10% allocated to SA, that’s $1,5 billion into SA companies from one fund.

    As shareholders of Edcon today voted in favour of the buyout, so other retailing shares moved up in tandem with the firmer market. We saw R1,3 billion traded in Edcon as the share price traded up to 4545c

    Foschini gained 2,1% to 7251c

    Mr Price up 1,35% to R30

    Truworths up 4,3% to R39

    Global markets were strong, and the JSE up on very good volumes to a new high. These are not easy times for investors. Excellent where you have been invested, but very difficult for those investors that are close to, or just into retirement and largely in cash. Although such investors should have had an appropriate asset allocation plan, this very seldom happens. Retirees now have the investment risk and that is why it’s very important to have the correct investment strategy in place.

    Yes I know its far easier discussing these issues than putting them into practice. But with the correct tools, a clearly defined investment strategy is not only possible, but very achievable for ALL investors.

    For investors in JHB or PTA. If you are close to or even into retirement, and want to ensure that you have a clearly defined investment strategy, then e-mail me. We are having a small seminar at the beginning of May to discuss exactly this.

    e-mail me on ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-04-16, 17:57:48, by ian Email , Leave a comment

    Weekly market Wrap

    What has become almost customary now, is the JSE All Share index powering up to new highs. The 4 year run in terms of both duration and quantum has been almost unsurpassed. Coming from a low base, momentum picked up speed as the underlying economy changed gears.

    Interest rates were kept unchanged which is positive for consumers. The Reserve bank remains concerned with credit extension but sees some slowdown. Inflation remains in check for the time being, but higher food and oil prices could impact this into the next couple of months

    Reuters reported that the PIC, the Public Investment Corporation, will vote against the proposed buyout offer for Edcon on Monday. Bain Capital is heading the buyout offer.

    A 75% vote for the buyout is required from shareholders. It’s a widely held share, with the PIC holding almost 3%. Another 3% is held by Templeton Asset Management and they are also not wild about the offer at R46 a share.

    The price fell but recovered and ended down 1% to 4440c.

    The possibility of shareholders voting against this bid also saw the rand fall back. No bid means no foreign capital coming in to buy the shares. The rand was last trading at R7,20/dollar, R14,28/pound and R9,72/euro.

    The week also saw a buyout offer for Goldfields, which turned out to be a hoax. US news and financial information service, Bloomberg ran a story on an imminent buyout form US financier. It pushed the price up dramatically, but quickly turned out to be a hoax.

    Goldfields released a sens announcement clearly denying any possible buyout. But the damage was done as some insiders clearly used the hoax for advantage. The price spiked up to over R150, falling back again and now closing at R142. This is a R92,5 billion company and so this type of price spike would have dearly cost some buyers.

    The oil price hovered up to around $70/barrel. It’s moved up steadily on increases in demand and refinery problems. The higher

    The JSE All Share index gained 1,1% to 28132. All the main indices closed up on excellent volumes of R11,5 billion. At this level the historical price to earnings is 16 times and the Dividend Yield is 2,2%.

    That’s all for now. Have a great weekend.

    Kind regards

    Ian de Lange

    Permalink2007-04-13, 17:48:25, by ian Email , Leave a comment

    Do interest rate announcements make any difference?

    Thursday afternoon saw the always much anticipated Reserve Bank announcement on interest rates. Institutional investors always try and look ahead to what the likely outcome will be, so as not to get caught off guard. In the US, the forewarning process is so advanced that on the given day of the announcement it’s almost a non event.

    As was widely expected they left rates unchanged at 9%

    Unlike the US Federal reserve, the local Reserve Bank does not have a mandate to target a growth rate. They only have a mandate to target a certain inflation and keep within a relative tight band of 3% - 6%.

    Inflation has been relatively tame, with the CPI-X (i.e. inflation stripping out interest cost of mortgage bonds) dipping down to 4,9% in February from 5,3% in February. Food cost and energy cost increases remain the biggest culprit to inflation, because if these had been excluded says the governor, then inflation would be running at 4%.

    The higher inflation for food (mostly due to the higher maize and wheat prices) and the higher inflation on petrol, was offset by deflation in clothing by 7,9%, footwear by 11% and furniture by 2,8%.

    The outlook sees inflation hitting over 6% this year due to the much larger recent price hikes in petrol. Thereafter it will come down, but not by much.

    Despite the governor’s earlier concerns on credit spending by SA consumers, where 12 months growth in bank loans and advances has grown by around 27% since Nov 2006 and which he describes as “uncomfortably high levels”, he does not feel that this is justification enough for a rate hike.

    Finweek reported that today’s decision was probably already sealed by Mbeki in February at the State of the Nation speech. The report noted Mbeki’s support for a possible increase in raising banks cash reserve requirements. This is an effective way of reducing liquidity in the economy without having to raise rates, which is less political palatable.

    The Reserve Bank governor’s conclusion was very tame compared to his far more concerned remarks in February, where he was ready to push up rates as and when required.

    So as noted in our quarterly newsletter, most governments around the world are peaking with their interest rate cycle. Some like Japan are still behind, but that’s an altogether different case.

    Remember while we watch interest rates together with many other economic factors, we know that these are not the issues that have the importance so many believe them to have.

    In fact one of the most impressive things to come from the Reserve Bank is the quality and detail of their quarterly bulletin.

    Irrespective of interest rates being hiked up or pushed down, investors need to get back into control of their own investments and longer term strategic plan. It’s understandable that most don’t like to do this – often procrastinating on the mundane issues. But in the longer term having a well documented investment strategy, together with systemised monthly and quarterly reports summarising all your investments, will go a long way to helping achieve financial goals.

    If you have a plethora of investments all over the place and need to get back into control, please mail me. We can advise on an appropriate investment strategy.

    Kind regards

    Ian de Lange

    Permalink2007-04-12, 17:16:21, by ian Email , Leave a comment

    Assets in buckets

    “But Ian, you’re telling me that your view is underweight local equities, but if I look at your recommended asset allocation, its 45% into local equities. Surely I can’t buy at these levels. The market has risen so steeply. I can’t afford to put money into the stockmarket now. What if I lose money?”

    This is sometimes the comment from a new client. The missing point is that many investors look at tranches of funds in isolation, and not at the bigger picture of their total asset allocation. By compartmentalising their funds, naturally a certain portion of funds by itself will be far more risky than other portions.

    In this case the client may require or only need a lower risk portfolio structure, but already have 80% of total wealth invested into property and bonds etc, necessitating a higher allocation to equities bringing it up to say 25% of total as an example.

    So then is there a place for buckets of investments? Irrepressible web site, The Motley Fool thinks so.

    Their view which makes a lot of sense is:

    Bucket A is your emergency fund, which is cash set aside in a money market account or similar type of account.

    Bucket B is your savings that you will need within the next three to five years for extraordinary, but foreseeable, expenses. University fees, new car etc.

    Bucket C is your long-term savings (money you won't need for at least three years, preferably much longer).

    It’s the total of your long term savings that must be looked at holistically. This is where it’s important to set an appropriate strategy and make sure that your asset allocation is appropriate for expected returns and importantly for the risks. If this is done properly, then you don’t need to be too concerned that on Tuesday the market rose to a new high, but on Wednesday it was down 0,85%.

    This is part of the process of moving back into the control seat with your investments.

    All the very best

    Ian de Lange

    Permalink2007-04-11, 20:23:31, by ian Email , Leave a comment

    The place where buyers and sellers meet

    It looks like investors came back on Tuesday after the long Easter weekend all fired up. It definitely was not the cricket that got them going. Maybe it’s just the traditional up leg to May. Whatever it was buyers were again stronger than sellers and were happy to pay up for companies.

    Remember a stockmarket is nothing more than exactly that - a market where stocks are bought or sold. Buyers and sellers come together and meet at certain prices where both feel comfortable.

    The seller of shares must be satisfied that he received the best price that he could; while the buyer is clearly happy to part with cash at the price he paid. The electronic version now is just a far more efficient method of bringing buyers and sellers together. A physical floor, on which the JSE and all other bourses traded, was not as efficient at price discovery as the electronic systems. In theory it also levels the playing field for all investors.

    The New York Stock Exchange is the last major stock exchange in the world that is still floor based, all others have moved to electronic trading. The floor system is known as open outcry, and while it has some advantages for large orders, the inevitable move has been to electronic trading.

    While the frenzy on floor trading was palpable and at times possibly led to markets overheating, this does not necessarily mean that the electronic bourses result in cold, calculating investors who will never take prices to beyond the true value. Perhaps even more so now, with availability so widespread and the sheer “noise” factor that I spoke about, everyone was a piece of the action.

    Looking at the list of shares trading up to new high today, most of them are large cap solid companies, and not your small caps. It gives an indication of the type of buyer.

    Included were Anglo at R394, Billiton at 16750c, Implats at 23824c, Bell at 3795c, Abil at 3385c, Basil Read at 2350c, PPC at 47350c, Telkom at R179 and Sanlam at 2139c etc.

    We have produced our updated quarterly report, and look at emerging markets. If you would like a copy of this, please e-mail me on ian@seedinvestments.co.za

    Kind regards


    Permalink2007-04-10, 18:25:56, by ian Email , Leave a comment

    Is a process necessary?

    Yesterday I mentioned investor and entrepreneur, William ‘O Neil. He advocates an investment process for investors, and this is something that I fully endorse. It’s also something that Jack Schwager, author of Interviews with Top Traders discovered. Each successful trader had a different system, but the commonality was defining it and sticking to it.

    ‘O Neil advocates 12 main points when buying a share and it struck me how many of his points – just solid fundamental aspects – are currently present on the JSE with many shares.

    Some of these main characteristics that he looks for in an investment include:

    . faster earnings growth in recent quarter (half yearly results in the case SA shares)
    . yearly earnings increases of at least 25% in each of the past 3 years.
    . profit margins at new highs.
    . a return on equity (ROE) of at least 15% (possibly 20% in SA)
    . cash flow increasing more than reported earnings.
    . relative strength of at least 90%. This is share price strength against the market
    . shares being acquired by the institutions.
    . the company making share buy backs.

    Many local shares have these and other solid fundamental and technical characteristics. This is why local and offshore funds continue to buy and support the upward price trends.

    The ability to stick to an investment process is that element that will be tested at some point. Most investors will not have the ability to follow through in the tough times.

    For traders part of the process must be risk management, which is typically some form of stop loss system.

    Longer term investors may not need a stop loss strategy, but a defined asset allocation plan.

    Think about your process and work on defining it.

    I trust that you have a blessed Easter. Enjoy the cricket.

    Kind regards

    Ian de Lange

    Permalink2007-04-05, 17:57:21, by ian Email , Leave a comment

    All stocks are bad

    All stocks are bad unless they go up. This is one of the views taken by US money manager, William O Neil. He founded Investors Business Daily, a rival newspaper to the Wall Street Journal in the US. Like almost all successful money managers, he has a set of rules for investing.

    What is very important for all investors is that they have a defined set of rules or a defined investment process. The set of rules and processes more than often not differs from investor to investor, and from manager to manager. So it’s not necessarily the actual rules or processes that are important, it’s having the rules in the first place and adhering to these rules.

    Then even more importantly, is when markets suddenly display some volatility, that investors have the fortitude not to second guess their own rules. In his book, The Successful Investor, ‘O Neil makes it clear that to be an investor you must have enormous dedication, discipline, emotional fortitude and humility, together with a strategy.

    Over the last few years it’s just been too easy. What dedication, what discipline what emotional fortitude you will ask. Humility, it’s not for us. But it’s when least expected, that the market will buck its trend, and shake out the “this is too easy” investor. The ones with the discipline of a defined process will have greater fortitude.

    ‘O Neil has 7 factors that he looks for, which he gave the acronym CANSLIM.

    These are:

    • Current quarterly earnings. Strong increases
    • Annual earnings. Strong over 3 years
    • New. Something new that will get investors excited
    • Supply and Demand. Look at changes in volumes
    • Leader or laggard. Invest in the best in a sector.
    • Institutions. Penny shares are fine, but the larger cap shares will have institutional following
    • Market direction. The price trend should be up, not down.

    He is somewhat of a momentum investor, but looks at the fundamentals, including companies with strong cash flows. Tomorrow I will discuss some of the characteristics that he looks for in shares, and the similarity to many JSE shares currently.

    We come across many investors who have been investing without a plan. Sure plenty will do well, but it’s the “investors” that have taken too big a bet on one sector or one share, or those with funds, endowments, RA’s etc all over the place. Many times they would rather make no decision than some decision to consolidate, but mostly they don’t have an overriding plan and process for their investment habits.

    We would sincerely like to see this change in as many investors’ lives as possible - whether you use us at Seed or not to help you with this. You can define your own investment process, or make sure that your advisor is doing this for you – you are paying remember. Importantly get it done, because investing is not always going to be as easy as it has been over the last 4 years.

    For a summary on how we approach planning, please mail me on ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Seed Investment Consultants is a registered FSP

    Permalink2007-04-04, 17:42:09, by ian Email , Leave a comment

    Private Equity bringing a company onto the market?

    In a booming market one tell tale sign is new companies listing. And this is exactly what we are seeing, each week is brining new companies to the bourse. The combination of liquidity looking for places to invest and the high prices that investors are prepared to pay, is an absolute paradise for sellers (promoters) of these companies. Today Kelly Group listed.

    Now here is a company that is being brought to the market by Brait, the largest private equity player in South Africa. But wait aren’t they supposed to be the ones buying out companies from the market?

    This group is the parent of a number of subsidiaries, previously known as Logical Options Staffing, the assets of which were acquired by Brait in April 2001 for R616m according to the prospectus.

    Brait was instrumental in re-strategising the group, introducing BEE and selling a stake to management.

    As a whole the group operates in various segments of the employment market from flexible staffing, permanent recruitment, executive search, outsourced and managed staffing, contact centre (call centres), response handling, to consulting and payroll administration.

    Kelly owns a number of brands including PAG. It’s interesting that PAG itself was listed on the JSE. This is the entity that Jannie Mouton bought into and restyled it into the PSG group.

    The placement was hugely successful with the group placing some 38,6m shares at R9 a share for R347m Brait also sold out 3,9m of its shareholding. This brings the market cap to over R900.

    In an interesting move, the directors acquired shares on the market or part of the placing, ranging from R151 000, to R18m, with ceo, Granville Wilson acquiring R18 worth and chairman Moss Ngoasheng also R18m.

    The listing cost R10,8m.

    2006 profit on a consolidated basis before interest and tax was R78,2m. The company was heavily geared when Brait took it over (that’s what private equity does) and so gearing costs came in at R52m and tax at R11,5m leaving a profit of R14,7m. Capital raised will be used to retire loans. It’s a strong cash flow generating company.

    It’s going to interesting to see how this develops. Some companies are being taken off the market, but with many more looking to list at this favourable time. We saw it all in 1998/1999. So far the quality has been better, but should the market continue up, quality of new companies will decline.

    That’s all for today. Remember as investment consultants we try to keep an eye on key developments like new listings and what this conveys to us of the level of value.

    Kind regards

    Ian de Lange

    Permalink2007-04-03, 19:56:53, by ian Email , Leave a comment

    Benjamin Graham on Asset Allocation

    Benjamin Graham, known as the father of value investing advocated a minimum of 25% and a maximum allocation of 75% to equities, with the balance in bonds. This was a simple asset allocation strategy. His basis for increasing or decreasing the allocation to equities was based on an assessment of value.

    He articulated in his book, the Intelligent Investor, that sound practice would be to reduce exposure to common stocks (shares) below 50% when in the judgement of the investor, the market has become dangerously high.

    He then went on to say, “These copybook maxims have always been easy to enunciate and always difficult to follow – because they go against that very human nature which produces the excesses of bull and bear markets. It is almost a contradiction in terms to suggest as a feasible policy for the average stockowner that he lighten his holdings when the market advances beyond a certain point and add to them after a corresponding decline.

    At the time of the update to his book in 1972, following the 1969 crash, he was advocating not more than 50%, but definitely not less than 50% for the defensive investor (at that time based on valuations).

    A traditional rule of thumb, to which we do not subscribe to, looks at age to determine asset allocation, but this is far too simplistic. A young investor may have a high savings rate and therefore in a position to allocate 100% to equities (probably advisable), but looking to allocate a 15% down payment on a new house in 8 months time when he marries. Most investors would understand that it’s probably best to reduce risk dramatically with this portion of funds, lest the marriage start off on some rocky ground.

    His grandfather, 15 years into retirement, with an income requirement of R20 000 per month, no debt and a R23m total asset base, could possibly afford to retain all in the equity market, disregarding any volatility that the market threw at him.

    What has not been tested for a long time is investors’ ability to tolerate downside volatility. Risk premiums have reduced and as investors have gotten more and more comfortable taking on risk, so their expectation is that the probability of future risk is low.

    This is where asset allocation comes in. For most investors, though it’s somewhere between 25% and 100%. This starts to become more important for those heading into maximum capital accumulation years – 40 / 45 years plus ahead of retirement.

    Astute investors watch the stampede of the herd to ascertain the opposite direction that they should be moving int. As I said on Friday, now is the time for more calculated planning. We have a value proposition for you if you are heading into your maximum accumulation years or heading into retirement.

    Mail me on ian@seedinvestments.co.za and we will mail you a copy.

    Kind regards


    Permalink2007-04-02, 20:23:38, by ian Email , Leave a comment