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    Value investors

    There appears to be an overwhelming body of evidence that dictates that a value bias to ones investment approach should produce superior results over time. At Seed Investments we spend a lot of time assessing different asset managers on behalf of our clients.

    This includes some roadshows, presentations etc and as with company’s splashing out when the have a good story to tell, often these are the managers to avoid.

    But we go along, and hear what they have to say and what their view of value management is.

    This morning we spent some time with a relatively new fund manager. Yes a value manager. Time will tell which style of value will outperform because what is so fascinating with the various so called value managers is how their portfolios can differ markedly from one to another.

    One would imagine that all value managers would tend to end up with similar portfolios, but this is not the case.

    One of the reasons I believe is how each manager defines their view of value. Then it’s a matter of what methodology do they use to first filter and then construct their portfolio weightings.

    There are many methods used to try and define value.

    The reason that a value bias works over time is because sentiment plays such a large part in the valuation of shares, that investors move prices from having too pessimistic an outlook, to the other extreme of being too optimistic.

    One metric that is used is to “reverse engineer” the current price and ask the question, “What growth rate is this price implying”. Naturally higher valued shares (i.e. low earnings yields) will imply higher rates of future growth to justify their low yields.

    The question a value manager will ask himself, is “is this implied growth rate achievable, or is the price demanding too much of a premium”.

    Conversely, a deeply discounted share may be trading on a much higher earnings yield and thus implying a low future growth rate. Again where too much pessimism has been built into such a valuation, it may just have the necessary cushion to make it attractive to a value investor.

    Seed Investments consults to high net worth investors. Please mail me on ian@seedinvestments.co.za for a copy of our value proposition.


    Ian de Lange

    Permalink2007-07-31, 21:10:35, by ian Email , Leave a comment

    Global market turmoil

    Its interesting to see how sentiment changes so quickly. At the close of business on Friday, Bloomberg estimated that $2,1 trillion was wiped off global company valuations after the dramatic price declines.

    Many large investors have and will see this as a buying opportunity.

    According to Bloomberg data, the decline in prices puts US shares at their cheapest valuations in 16 years based on 15,4 times estimated profits.

    This is why many large institutional type investors will see any price decline as a possibly buying opportunity. Monday opening saw global markets trade up as investors took advantage of lower prices

    In the longer term, underlying company fundamentals will drive prices, but over any reasonable period of time, investor sentiment plays a very big part in company valuations.

    This investor sentiment has been fairly positive, but not overly exuberant over the last few years, coming off a very low base post 2001.

    It’s at extremes in sentiment that investors really need to worry. I think that the biggest indicator of potential problems is the interest rates. It’s off the US Treasury that all risk assets are priced.

    The 10 year US Treasury yield has been trading at below 5%. Currently at around 4,78%. This recently spiked through the 5% level.

    But more interesting is the spread on global corporate bonds. This is where global money has been searching out additional returns and driving the difference between corporate and treasury yields to low levels.

    In the past few weeks investors have been net sellers and it’s been described as a stampede of animals from the watering hole at the sniff of danger.

    Barclays Capital described the sell off as the fastest sell off in seven years.

    A Bloomberg report described it as pure fear, ``It's fear of the unknown, fear of hedge funds unwinding, fear of knock-on effects of the sub prime meltdown.”


    Lower prices brings in the potential for value and today, UBS strategist, John Orford put out a research report which said that because of the relative underperformance of SA equities against other emerging market equities, these are now trading at a 14% discount, which he described as a sizable valuation gap.

    The rand sold down to 7.13/US dollar. This is a function of a "flight to safety" as global money moves out of emerging market currencies.

    Overall market was up at the index level, but still more shares ending down than up.

    For investors requiring strategic investment planning, don’t hesitate to contact us. E-mail me on ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-07-30, 21:06:37, by ian Email , Leave a comment

    Do You Keep All Your Eggs in One Basket?

    Diversifying merely for the sake of it can harm returns.

    Diversification is a powerful tool when it comes to managing your money and risk.

    These are two seemingly contradictory terms, yet depending on your personal situation either one of them will apply to you. The key is to understand your situation, and realise which camp you fall into, and then act appropriately. You also need to realise that you will in all likelihood move between camps at some stage in your life.

    Diversification is essentially a risk management tool, and as such the more one diversifies the lower the risk (and hence return expectations). One also needs to realise that some risks can be diversified (reduced) without affecting expected return, while others will have an impact on your returns. Diversification comes in many different levels; from making sure all your wealth isn’t tied up in a single share, to ensuring that you are diversified across asset classes, and even across world regions.

    First the argument for not diversifying. If you are young and own, or are a shareholder, in a company then there is a strong argument towards putting all your resources into your company to ensure its success. Bill Gates put all his eggs in one basket, and look at where he is now. Less chronicled, however, are those start ups that failed. They also put all of their eggs in one basket, but dropped the basket along the road to success. Deciding whether to be an employer or employee often comes down to one’s personality, with not many people prepared to be entrepreneurs (something this country needs more of).

    Investors who are closing in on retirement, and have the majority of their wealth locked into the company that they work for/own should look closely at whether they should be diversifying. Those whose wealth is linked to a listed company have the fortune in that it is relatively simple to dispose of their shares. It is the private business owners who typically have the tougher call to make.

    “How are you going to decrease your exposure?”, “Have you trained/recruited employees who will be able to take a meaningful stake in the company?” “Will your child/relative take over from the family business?” and, “How will you ensure that you get sufficiently compensated?” are all questions one typically needs to ask. This process generally takes longer than anticipated, and many business owners are caught off guard when they decide they want to retire.

    As always, having a long term investment plan makes a lot of sense, and allows for your financial decisions to hopefully be made with less emotion to blur your judgement. If your plan is to retire in the next ten years, you need to start looking at your succession planning, or at least keep you ear to the ground to hear if there is anyone who is interested. If someone comes in with an offer for your business in five years time, you may decide that the offer is simply too good to refuse, and take early retirement. Had you not been planning you may simply have not been keeping your ear to the ground, therefore missing out on a great deal.

    Success often comes to being in the right place at the right time. If you are equipped with a map and a watch, it should make your journey a greater success.

    Have a good weekend.

    Kind regards,

    Mike Browne

    Permalink2007-07-27, 17:24:17, by Mike Email , Leave a comment

    The Impact of Higher Inflation

    With inflation numbers coming out above the Reserve Bank’s target range for the third consecutive month, many people often ask, “What is wrong with inflation?” or, “How will inflation impact me?” Inflation is a multi faceted factor, and this ‘statistic’ can be analysed and interpreted in any number of ways like most stats can.

    Just recently the retirement industry announced that they are in the process of removing investment projections from retirement policies. This will be done by early 2008. If you have ever seen one of these policy statement you will know that they typically give two inflation scenarios (high and low), and then give illustrated values at retirement for each scenario. The illustrated values under the high inflation assumptions are typically higher than under the low inflation scenario.

    Now to the untrained eye this higher value may seem more attractive, but investors must understand the real purchasing power of their investments. In a high inflation environment assets need to grow at a faster pace simply to avoid the eroding effects of inflation on their real wealth. As such the higher estimate will simply represent a higher cost of living.

    Returns are typically forecast on a real return basis (i.e. after the effects of inflation have been stripped out), and as such nominal growth will be a function of the inflation rates (two different values) and the asset mix’s expected real return (one common value).

    Inflation is generally linked fairly closely to nominal interest rates, with interest rates going up when inflation heads north. As a result, rising inflation (and consequently interest rates) is generally bad for equities as the cost of capital increases for companies (hurting profitability), and investors (who may shift to another asset class) sell out of their equity investments. The same inverse relationship (although much stronger) holds for bonds and property. It is only cash and short dated money market instruments that are protected to a certain extent.

    It is no surprise then that cash is currently an attractive risk adjusted investment. Rising inflation in no ways means that equities will lose value; it is merely a headwind which will put a dampener on growth.

    Inflation also affects the end consumer with wages tending to trail inflation, rather than being a leading indicator. This means that salary/waged employees’ earnings will increase by amounts lower than inflation (unless there’s strike action) in an upward cycle, and by a higher amount on the down cycle (as higher inflation expectations are factored into the negotiations.)

    I hope that I have brought some clarity to this issue of inflation. I have attempted to simplify some of the more fundamental relationships between inflation and the investor. As mentioned inflation numbers are highly charged, and are only a part of asset valuations, and people’s lives. However, having a grip on the dynamics should help you position yourself better in times of changing inflation.

    Have a good day.

    Kind regards,

    Mike Browne

    Permalink2007-07-26, 18:23:30, by Mike Email , Leave a comment

    value or growth investment style

    Yesterday I discussed a value and then growth styles of investment being favoured at various times in market cycles. So much is spoken about a value approach or a growth approach to investing, but just what does this mean?

    The same article by Mutooni and Muller defined various value and growth styles of investing.

    A value manager will attempt to focus on those companies that have shown growth and profits well below market averages and have therefore had declines in their prices. A value manager will essentially be looking to always buy R1 worth of value for 80c or even lower.

    Most managers don’t like themselves being boxed into one category, but different managers do tend to place greater emphasis on certain criteria. For instance.

    Some will concentrate on low price to earnings ratio companies. I.e. companies that may be experiencing depressed earnings and for this reason temporarily “out of favour” with many investors.

    Contrarian investors may focus on companies that are trading at low prices to book values or indeed low prices to their tangible book value. Again investing in the hope that earnings pick up or something sparks the company to start generating a higher return on assets – boosting the value.

    Some value managers concentrate more on higher yielding shares. I.e. companies trading at above average dividend yields, knowing that over time, while the company may be downright boring, a steady receipt of dividends reduces investment risk.

    Such value investors believe that not paying up for an asset is the one surest way to produce superior returns over time.

    This may be true, but at times growth style investing comes into its own. A growth investor will be prepared to invest into a company with above average growth prospects. Not only invest, but invest at higher prices, i.e. pay up for the opportunity of greater growth.

    The commodity bought and sold in the equities market is earnings growth and investors will be prepared to pay up more for those companies that can demonstrate relative strong growth prospects.

    The trick for all investors – whether value or growth or a combination – is not to overpay.

    Today neither growth nor value produced results. The market was dedidedly down with the JSE falling 485 points to 29105.

    That’s all for now.

    Kind regards

    Ian de Lange

    Permalink2007-07-25, 20:10:36, by ian Email , Leave a comment

    Timing Investment Strategies

    Many studies have been performed on which investment style produces the best results. i.e. is it value or is it growth. This can be further split between large capitalisation shares and small capitalisation shares. Results often depend on the period of the study, the particular market and then sometimes also on the researchers themselves.

    A recent study that I came across in the Investment Analysts Journal by Mutooni and Muller, attempted to investigate whether it was profitable to time between the various strategies on the JSE.

    Some interesting points came out of the in depth article.

    Because of various factors influencing prices and then market behaviour, a growth investment strategy sometimes outperforms that of value.

    Five clear turning points between the small cap styles were evident from the 1986 data.

    . from Dec 1986 – Dec 1989 small cap value outperformed small cap growth

    . – Dec 1992 small cap growth outperformed

    . – March 1994 small cap value

    . – Nov 1998 small cap growth.

    . – Dec 2002 small cap value

    . from Aug 2003 – date, value again reasserted.

    An investor who was able to switch between these styles would have outperformed a straight buy and hold strategy.

    The study also looked at large cap growth and large cap value shares and the possible timing.

    The results were impressive with 5 switches over this period outperforming the JSE All Share index by 14% per annum.

    I know, backtesting is one thing - its have prediction ability that will count for this type of switching between styles. The study also attempted to construct a predictive model. This was less than perfect hindsight, but was still able to outperform the JSE All Share index.

    It’s an interesting study. In the next report, I will define a value and growth investment strategy.

    Kind regards

    Ian de Lange

    Permalink2007-07-24, 20:01:59, by ian Email , Leave a comment

    What is your biggest long term risk?

    Investing is not only about return, but also about risk. The familiar adage is higher return equates to taking on higher risk. But what exactly is risk and is this really correct? What about taking on shorter term risk to lower longer term risk.

    Investment academics have tried to define risk as standard deviation, which is essentially volatility of a return around a mean.

    Because certain investment classes, such as equities have a higher volatility, they are naturally seen has having a higher risk, when compared to say a low risk money market account.

    But is this really a good measure of the risk that most investors face?

    No, not really. The biggest risk that investors face is what we term actuarial risk. Lets not get too smart – this is really the clever way of calculating the longer term risk that the accumulated pool of funds that you are building up, will be insufficient in order to meet your retirement needs, i.e. will you be able to afford housing, medical, food, gifts for grandchildren, and that annual overseas holiday into your retirement?

    This longer term risk of a possible shortfall in accumulated savings is often a far BIGGER risk than the shorter term risk of prices move up and down.

    The type of comments and questions that I hear are along the lines of “this JSE has amazed me. Just the other day the index was at 20 000, now touching 30 000 – it’s too expensive for me.”

    “Ian, I have some capital in the money market. I know its not earning much, but I am worried about this stock market, and so I will just wait a bit. What do you think?”


    “I am not taking money overseas at this exchange rate.”

    The real question should be along the lines of “This is how much capital I have at this point in time, I am retiring in 2 years (5 years or 15 years), what should I do to MINIMISE my longer term risk?”

    Quality decisions start with quality questions. Be sure to ask the right questions in order to minimise your longer term risk.

    Hope that this gives some food for thought.

    Kind regards

    Ian de Lange


    Permalink2007-07-23, 19:58:12, by ian Email , Leave a comment

    Pooling versus segregated funds

    At the end of June the value of all assets held by local unit trusts went through the R620 billion level. Its been a huge growth industry – I remember when I first started looking at these numbers, the total value made it through the R30 billion level. Admittedly it was a few years back.

    In the quarter to June, net inflows into funds was half of that R30 billion at R14,9 billion.

    The total number of funds also jumped up slightly to 771 from 765.

    Many investors baulk at investing into a pooled fund, such as a unit trust, preferring to maintain their own or managed segregated portfolios.

    Very often investors have an incorrect perception of pooled funds. Often this flawed perception, believes pooling to automatically produce lower returns, for no other reason that the investors segregated portfolio will be aggregated with other investors.

    Its interesting also that while many fund managers run both segregated portfolios as well as pooled investments, its not a given that the segregated funds will outperform.

    In one specific instance we analysed the returns of a fund manger’s pooled unit trust against the performance of one of his segregated portfolios. Over a 3 year period the relatively large segregated portfolio underperformed the pooled unit trust. While this is not always a given, its worth looking at some points.

    . many fund managers spend more time on their more public unit trust funds as opposed to their segregated funds.

    . A big consideration is that lack of tax on all trading within a pooled unit trust. This frees up the manager to act when necessary, without any hindrance of tax concerns. This is a large hindrance for segregated portfolios, where each transaction triggers a possible capital gains tax event.

    . the larger pooled funds negotiate their fees down with stockbrokers. Where a private client may pay 0,5% brokerage, pooled funds pay 0,1% and lower.

    Some of the negatives that we always look out for include large in and outflows into a fund. This can be detrimental to the existing investors into a fund.

    Another possible hindrance to future performance is the size of a pooled fund. Larger funds have a smaller universe of available opportunities.

    Investors must always keep an open mind and not be hindererd by emotions.

    The JSE had a good underpin today, hovering just below that 30 000 level.

    Have a great weekend.

    Calling all investors in Bloemfontein. We are having an investment presentation on the 6th August. Please mail helena@seedinvestments.co.za if you would like to attend.

    Kind regards

    Ian de Lange

    Permalink2007-07-20, 17:33:55, by ian Email , Leave a comment

    Chinese economy storms ahead

    Bloomberg reported today that the Chinese economy grew at its fastest pace in 12 years in the second quarter of the year. Growth as measured by gross domestic product grew by 11,9% per annum. Chinese government has been trying to cool the economy but this growth now exceeded estimates of 23 economists.

    Inflation around the world is ticking up and China is no exception. It climbed to 4,4% in June -way above the 3% target set.

    For many years China kept its currency pegged to the US dollar – running it at 8,28 Yuan to the US dollar. Many countries, especially the US, complained that the currency was being unfairly undervalued – which naturally favoured Chinese exporters.

    On the 21 July 2005 (I remember the date – it happened to be my birthday), China scrapped the peg and wow allowed the currency to revalue up by 2,1% to 8,11 to the USD.

    Still it did not allow free floating and has continued to manage the exchange rate in a very narrow band.

    Now almost exactly 2 years later the currency has traded to its highest level since the depegging - 7,5615 to the US dollar.

    The artificial currency rate and the foreign exchange controls on nationals have produced a hot house effect on its local stock market, with the average company in the benchmark Shanghai’s CSI 300 index at triple the price to earnings ratios of the MSCI Emerging Markets index.

    This index tracks the Yuan denominated A shares listed on China’s two exchanges.

    In order to cool the economy, its is widely expected that the central bank will have to once again raise its one year interest rate from 6,57%.

    Chinese foreign reserves have jumped up to USD 1,33 trillion up $131 billion since March.

    In the light of this phenomenal growth, economists have no option but to upgrade outlook.

    At this stage there is no stopping this China effect.

    Kind regards

    Ian de Lange

    Permalink2007-07-19, 21:12:31, by ian Email , Leave a comment

    Are you a confident Investor?

    Investing is so fascinating because it’s just as much about people and their emotions as it is about the raw numbers. The raw numbers will always be an important ingredient, but before a company can print out its annual results, the people driving that business have strategised, introduced new customers, and generated the sales.

    At the same time successful investing, which demands a clear understanding of the raw detail, also demands a level headed emotional approach.

    People’s emotions can and do affect their long term investment success. There are lots of studies on this concluding that most humans are just not wired properly for sound investing.

    Sure over the shorter period – and especially over the past 4 years – everyone’s an expert. Just look around and see how many people are becoming property developers for one.

    A big factor that can undermine long term out performance is overconfidence in ones ability. Confidence is an important ingredient to anyone’s makeup – it produces motivation, energy, persistence etc.

    But when it comes to investing, this same confidence often starts to morph into wildly overconfident and in an area where one would expect capabilities to be tempered over time based on hard facts, this often is not the case.

    Why is this you ask?

    Well we tend to downplay or even forget our failures while exaggerating successes. Even more so with investing, past successes are attributed to ones own wisdom, hard work, and excellent ability.

    It’s no surprise then that a 4 year equity bull market increases investor’s wisdom, ratchets up their IQ and turns ordinary investors into super asset allocators and exceptionally talented stock pickers.

    But is this all bad?

    Well confidence is very good for all of life’s pursuits, but misplaced confidence can be dangerous, often leading to:

    1. Investors not spending enough time on long term planning. Why should they, they have been making so much money buying and selling property and shares.

    2. Investors believing that they are now above average stockpickers (despite the absence of a structured and detailed process both for buying and for selling)

    3. concentration risk. And why not – the specific asset class such as property or construction shares etc has produced phenomenal results.

    Let’s be frank, even the professional money managers can suffer from the consequences of being overconfident.

    What we look for is confidence in ability to properly value companies relative to trading prices and confidence in an investment process, but at the same time humility to know that just when everything is looking rosy – it can come back extremely quickly.

    It’s critical that ALL investors have a sound investment process.

    If you are winging it, and its working out well becomes of the super markets, but you know that it may not be sustainable, then work hard to put processes and plans in place. Get advice on this and work with the best people that you can find.

    Kind regards

    Ian de Lange

    PS: We have updated our quarterly market report of 16 pages – mail me if you would like a copy of this.

    Permalink2007-07-18, 18:03:20, by ian Email , Leave a comment

    Market Update

    Europe markets fell back on the day, but the US continues up with all 3 main indices up again today. The local market came under some pressure, down around 1% across the board. Big volumes were traded at R11,5 billion.

    AECI announced that it’s selling its paint (decorate coatings) business, Dulux. It’s selling to ICI plc for R745m in cash and it’s expected to be concluded by October 2007. It looks like a relatively clean deal for AECI.

    AECI other business is African explosives, Chemserve, and Sans Fibres. In addition it also owns large tracts of land, which it has also been selling down. It does not see Dulux as one of its main businesses. The sale will increase net asset value by 18% from 2333c to 2749c

    The share price fell just 25c to 8350c

    It has been in a strong upward move for some time now.

    It gives a clear indication that there is still demand for quality assets. This is a good business in the current strong building and construction environment. In the results to December, AECI announced that Dulux had increased volume growth by 10% and operating profit by 19%.

    The deal won’t have any effect on headline EPS.

    Over the last 12 months and increasingly so, many previous conglomerate type companies have been forced to look at maximising returns on equity and capital.

    A focus for all businesses is vital.

    That’s all for now

    Kind regards

    Ian de Lange

    Permalink2007-07-17, 20:49:39, by ian Email , Leave a comment

    Who are these People?

    Some time back Nedbank ran a series of adverts that came out with the question, “Who are these people?” Discussing with potential clients it never ceases to amaze me how many are willing to place funds with dubious schemes or companies without doing any homework not only on the investment or investment product itself, but on the people behind the business.

    All businesses have people in place.

    This begins at the basic level in business, at the company level from co-shareholders, to executive directors, non executive directors, management and the rest of the employees.

    Then companies produce products and in the case of financial businesses, investment products or services. Again there is no such thing as a sound investment or investment product without someone behind the investment.

    Anyone parting with funds should and must do the necessary due diligence to find out who they are actually dealing with.

    Granted it can get extremely difficult as companies get larger and larger and the executive decision makers hide themselves behind layers of call centre staff, junior, senior, middle management, PR companies etc.

    At a fund manager interview a few weeks back, one of the comments raised was, “we would not invest into company XYZ – we don’t trust the management.”

    Investors must make an assessment of the quality of the people behind the business they are going to deal with or invest into.

    Make some assessment of the:





    Of management. They need to be in positions where they are serving their customers, clients, and co investors and not taking advantage.

    Granted it’s not always that easy – but it’s very important.

    That’s all for now.

    Kind regards

    Ian de Lange

    Permalink2007-07-16, 20:46:36, by ian Email , Leave a comment

    Why Investors Under Perform

    I was reading an article earlier today by Nic Andrew of Nedgroup Investments, and he quoted a popular study done in the US. The study essentially looked at the return that investors achieved, when compared to the actual funds that they were investing into. They found that there is significant under performance by investors when contrasted to the underlying fund.

    You may be confused as to why there is any difference between the returns? Surely they should be the same, or at least very similar?

    Well the answer is that investors generally don’t buy and hold one unit trust. The investor possibly looks in the newspaper to see which the best performing fund over the past 3 years (for example) is, ensures that they are a reputable investment house, and then makes the investment into that fund. As is the case with all funds, there will be goods times, and there will be bad times. Managers tend to exhibit more skills in some areas than others, whether it’s in bull markets or bears, small caps or large caps, financials or resources, and as such they tend to outperform when their area of expertise is doing well, and under perform when their area of proficiency is out of favour with the general investor.

    When the investor’s chosen fund starts to go through a period of poor returns, there is concern as to whether the manager is just going through a ‘rough’ patch, or whether he has lost his ‘touch’. If this period extends longer than the investor can bear, then the investor will pull his money out of the fund, and invest in the latest ‘hot manager’. Even if the manager does continue to outperform the market, but the market goes through a period of negative returns, then the investor might pull his money to park in the safety of cash, in the attempt to wait until the market turns up again. This is primarily where returns are ‘lost’. An old investing cliché goes along the lines of “It’s not about timing the market, it’s about time in the market”.

    As mentioned in previous articles having the foresight to draw up an investment plan (or having one drawn up for you), and having the discipline to stick to it will benefit you. The more confident that you are that your plan is based on solid fundamentals and is robust enough to weather all market cycles, the more comfortable you will be in riding out those periods of under performance (and there WILL be times when you do worse than your benchmark). It all boils down to being educated about your investments, and making rational, unemotional investment decisions.

    When thinking about investments it is generally advisable to think long term. Try and eliminate as much of the noise that’s around, it is hard as there is plenty of it, but those investors who can filter out the unnecessary ‘information’ are the ones who will prosper. In the internet age there is no shortage of data that is readily available. One needs to filter this and pull out the relevant news (which is easier said than done!), and then only act on the pertinent facts. When watching/reading/listening to the financial news one is constantly bombarded with new highs, or new lows, on closer inspection it is often a one week high, or possibly a one month low. These ploys are all designed to “sell newspapers”; the problem is when investors act on this ‘news’ without doing their own information gathering. If a share/index hits a new high yesterday, and then goes one tick higher today (reaching a new high) is that really newsworthy?

    On that note the ALSI closed at a new high, and traded above 30,000 for the first time :D

    Have a good weekend,

    Mike Browne

    Permalink2007-07-13, 17:01:10, by Mike Email , Leave a comment

    Look Mom no hands !

    “Shares are doing so well now, surely its better to pick a few companies that I know well, hold them and I will outperform these so called professionals?. Besides they charge fees which I can avoid.”


    ‘“My portfolio has outperformed the average fund manager over the last 2 years, and so why use anyone’s services?”

    These are some of the remarks I often hear.

    In many cases it’s very true.

    Private investors have many advantages over professionally managed portfolios. And in many cases these investors are using these advantages and coming out on top.

    Far too often however it’s for a period of time - consistency of performance and sustainability of an investment process is lacking.
    If 80% of the boastful private investors were truthful they would also remember the down months or down periods and not only the winners.

    It’s a natural human tendency to highlight winners and forget the losing periods.

    On the other hand professional fund managers’ track records are always in the public domain, through good and bad periods – no chance of selective memory there.

    It’s all too easy in the boom periods. We had someone come to see us a few months back and told how he was trading in the late 1990’s when the IT and financial shares were running hard. In no time he had turned a small starting capital into R1m, but the markets turned and he lost it all.

    Yes he outperformed the professionals over that short period of time, but its all about consistency and sustainability.

    Slowly but ever so surely we are seeing signs of that same boom period again. By all means take full advantage, but make sure that the bulk of your investment funds are part of a robust investment plan.

    In good times the complacency sets in. Astute investors will recognise this and set the plans for future years.

    We had a very good investment presentation in Cape Town this morning. If you are a private investor looking at retirement planning into the near future or indeed already retired, then don’t miss one of the following

    Seed Investment Consultants is holding presentations for private investors at the following centres:

    Somerset West: 17 July
    Bloemfontein: 6 August
    Johannesburg: 7 August

    Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Kind regards

    Ian de Lange


    Permalink2007-07-12, 19:17:53, by ian Email , Leave a comment

    One Up on Wall Street

    Peter Lynch wrote a bestseller One Up on Wall Street in the early 1990’s. He was a long standing portfolio manager of the Fidelity Magellan Fund, which was a top performing fund under his leadership from May 1977 to May 1990. He came out with some very good advice for investors.

    I bought the book a few years back and so interesting to re-read some of the comments and points made – always relevant

    In the last few reports we have been noting the exceptional performance produced by the local market over the years and so it was stood out when he started one chapter saying:

    “I’ve heard people say that they’d be satisfied with a 25 or 30 percent annual return from the stock market! Satisfied? At that rate they’d soon own half the country along with the Japanese and the Bass brothers… In certain years you’ll make your 30%, but there will be other years when you’ll only make 2%, or perhaps you’ll lose 20…. [remember this is US where long run average returns are around 12% and compounded annual returns from 1926 – 2001 was 10,7%]

    If you expect to make 30% year after year, you’re more likely to get frustrated at stocks for defying you, and your impatience may cause you to abandon your investments at precisely the wrong moment.

    .. It’s only by sticking to a strategy through good years and bad that you’ll maximise your long term gains.”

    I noted some of his main pointers :

    . sometimes in the next month, year, or three years, the market will decline sharply.

    . to come out ahead you don’t have to be right all the time, or even a majority of the time.

    . stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail.

    . there is always something to worry about.

    His last point is a reference to the fact that investors will always find the negatives but should again rather stick to their investment plan and strategy for long term success.

    He took a pragmatic view and approach to investing and he performed well.

    That’s all for now

    Kind regards

    Ian de Lange

    Seed Investments is an authorised financial services provider. Email me for an updated copy of our value proposition.

    Permalink2007-07-11, 21:01:46, by ian Email , Leave a comment

    Interest rates and the US Dollar

    The US dollar continues to come under pressure against most major currencies. Today it fell to a new low against the Euro trading at $1.3708 in mid-morning trading. The Euro has been strong, setting new records against some of its major counterparts this week, including the weaker yen.

    The currency has weakened as the interest rate differentials between it and the major currencies has narrowed with the ECB, Bank of England and also Bank of Canada all announcing interest rate hikes recently.

    Today the Chairman of the Federal Reserve, Ben Bernanke, will be discussing inflation. The market will be looking for any signs of a slow down in inflation and the outlook for future interest rates in the US.

    The Bank of Canada raised its key interest rate on Tuesday. This is the first time in more than a year. The rates were hiked by just 0,25% to 4,5%.

    Its inflation is running above the 2% target and so rates had to be hiked.

    The Canadian Dollar also made a fresh 30 year high against the US Dollar this week.

    This has been happening around the globe – i.e. inflation picking up and central banks having to raise rates.

    Hikes in interest rates are negative for growth assets such as equities, but because the rates have been hiked in small increments and because central banks are still fairly accommodative, the markets have mostly ignored the hikes.

    The big question is whether the recent inflation hikes are temporary or the start of a sustained inflationary increase. If the latter, central banks are going to have to get really serious about raising rates.

    European and US equity markets were trading down.

    The JSE closed off 0,89% with Financials up 1,1%

    That’s all for today.

    We at Seed Investments (an authorised financial services provider) provide investment planning and investment management services to selected clients. Please don’t hesitate to contact me for more information on our services.

    Kind regards

    Ian de Lange

    Permalink2007-07-10, 18:18:17, by ian Email , Leave a comment

    A distorted view of long term returns?

    Three years of 45% returns on the JSE has distorted investor’s mindset as to what type of returns the JSE has delivered over the last 10 years and longer.

    A question to last week report asked the following “I am surprised to read in this article that in the last 10 years listed equities would have only given 17%, surely 31% is more accurate?”

    Given the one, two, three and even 5 years of strong growth upwards in share prices, one would be forgiven in your thinking that 30% plus for the JSE is the normal annual return.

    But the 10 year return is 17,6%

    The last 12 months have produced a return of 37% for the JSE All Share index. On a compounded basis, the JSE All Share index has produced 45,2% over 2 years and 44,9% over 3 years.

    However looking back a bit further, through the more volatile late 1990’s, the average compounded return is 17,6%. Not too dramatic, but very decent when compared to the 6,5% annual inflation rate over the same period.

    A good value manager would attempt to add alpha to the benchmark return. While difficult a value bias tends to do this over time.

    Equity prices are still moving up for a number of the reasons. One is positive earnings surprises. In the first quarter of the year Bloomberg reported that US companies in the S&P 500 index grew their earnings by 10,3%, more than triple the analysts forecasts.

    This has been the same theme locally for a few years now. Positive earnings from companies boosting prices and then providing further impetus as outlooks into future years are boosted.

    Another factor boosting prices is simple supply and demand. Supply has been reducing as companies are being taken private and through large scale merger and acquisition activity.

    Monday saw the JSE up 1,7% to 29714. The heavyweight mining companies continue to push up to new highs with Anglo touching 46799c and Billiton 21601c.

    Its always important to put plans in place, but with the mindset now “expecting” 30% plus from the JSE each year as a matter of course, this now needs higher priority.

    An investment strategy won’t remove the volatility from global market prices, but rather attempts to plan a course of action through the noise.

    Finally, Seed Investment Consultants is holding presentations for private investors at the following centres:

    Somerset West: 17 July
    Bloemfontein: 6 August
    Johannesburg: 7 August
    Please mail helena@seedinvestments.co.za for further details if you would like to attend.


    Ian de Lange

    Permalink2007-07-09, 21:02:33, by ian Email , Leave a comment

    The clouds are gathering

    As I am writing this I notice the clouds gathering momentum outside. That only signals one thing; another cold front on the way. As usual, it is sunny during the week and raining over weekends. You may think that is dreadful, maybe not.

    Last night I read an article in the Business Day confirming a study where the relationship between stock market performances and sunny days (in the particular capitals) were statistically tested. The researcher found some statistical significance between these two. The reasoning behind it (the researcher mentions) is that the sunnier and more glorious the day is the happier the investors are and the better they think companies will do in the coming months. This will translate into larger profits and in the end higher share prices.

    Using Google one can easily find research material that argues the opposite. However, interesting points about this are:

    1. Investors are becoming more aware about psychological reasons why the stock market goes up and down. This is the normal fear and greed story where people run to the market (but too late) when the market has risen and run away (but too late again) when it has already fallen. In order to reduce this “behavioral risk” you could do the following:
    a. Have a long term plan in place. Unless it is on paper it is not a plan. I refer to an investment strategic plan.
    b. Secondly, make slight changes to your long term strategic plan as apposed to drastic emotional decisions.
    c. Thirdly, do act quickly within your set (and written) parameters if one asset is over or under valued in your view.
    d. Ensure that you research properly and have a clear understanding what you are investing in and what the risks are of the instrument.

    2. Secondly, what is also interesting is the fact how information is so readily available to most of us. Again, one has to decide on what type of information you are going to react on and which not. I had the privilege of visiting a fund manager of Capital International in London last year. He was of the opinion that he was better off in London (trading US stocks) than in New York just because of the fact that he had less news and information coming to him on a daily basis. He actually had time to think. This is also evident of Warren Buffett.

    So rainy days or not, let us rather think more and by so doing make better long term decisions.

    Market Wrap:
    - JSE ALSI up nicely 2.85% for the week and closed above 29 000.
    - Listed Property also up 2.5% for the week
    - ZAR/USD just over R7 to the dollar again
    - Brent crude oil at $76 and nearing to the all time high of $80

    Finally, Seed Investment Consultants is holding presentations for private investors at the following centres:
    Somerset West: 17 July
    Bloemfontein: 6 August
    Johannesburg: 7 August
    Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Enjoy your weekend and may the Boks do it for us.


    Vincent Heys

    Permalink2007-07-06, 16:56:16, by vince Email , Leave a comment

    Absolute Return Funds

    Over the past couple of years a lot has been written about absolute return funds. What is an absolute return fund? Locally absolute return funds are also known as targeted return funds. In Europe the term “Absolute Return Funds” includes both targeted return funds and hedge funds. Let’s look at targeted return (or absolute return) funds in the local context in more detail.

    When you compare return and risk characteristics of equity funds then you can easily group them in three or four classes and compare them relative to each other. The reason for that is because they all have more or less the same mandate to manage the assets i.e. investing in shares listed on the JSE with a comparable benchmark.

    With absolute return funds it is very different. Firstly, there is now specific benchmark that you can compare all the absolute return funds against. Secondly, the mandates of these funds allow the managers to be very flexible in the investment decisions they make. Therefore, dependent on the fund’s mandate, the manager can be invested in equities or not invested in equities. He can buy futures or short futures etc. So the manager will manage the assets based on his/her internal mandate and philosophy. As an investor you need to be clear what the manager’s mandate and investment philosophy is. Investment philosophy in this context refers to the overall set of principles or strategies that guide a manager. Examples include capital protection, mean reversion etc.

    If one goes through all 45 targeted return (or absolute return) unit trusts available to individuals then you can also possibly group them into four or five broad investment strategies. By strategy I mean the techniques the manager employ to manage the assets that really compliments his/her investment philosophy. Possible strategies include:
    - Quantitative Strategic Asset Allocation
    - Tactical Asset Allocation and Market Timing
    - Bottom-up Stock Selection
    - Derivative Based Hedging

    Most absolute return funds employ more than one of these strategies when managing the underlying assets.

    It is therefore totally irrelevant to compare a Blue Bay Visio Actinio fund with say a PeregrineQuant Inflation plus fund because the strategies they employ to manage the assets are totally different.

    The challenge for us as investors is to understand what strategies they use and whether it makes sense to manage assets in that way in the current and future market conditions.

    Seed Investment Consultants is holding presentations for private investors at the following centres:
    Somerset West: 17 July
    Bloemfontein: 6 August
    Johannesburg: 7 August
    Please mail helena@seedinvestments.co.za for further details if you would like to attend.


    Vincent Heys

    Permalink2007-07-05, 17:57:06, by vince Email , Leave a comment

    More on returns…

    News normally comes to us in forms of short, medium and long term importance. Different people make decisions based on different news flows. Some people will react to news snippets like today where, Blackstone and KKR announced yet again major private equity deals. Others will make decisions based on expectations that the Bank of England and the European Central Bank will yet again raise their rates while others will only look at the very long information flow. Because of the amount of information we all have available, thanks to the internet, one potentially needs to decide what you base your investment decisions on. So, let us look at some medium term (6 months) and longer term data (10 years) and see what conclusions we can come to.

    Regarding the returns for the last six months:

    The JSE ALSI produced a return of 14.1% for US investors and 11.7% for European investors for the first six months of 2007. This is broadly in line with the MSCI Emerging Market index that produced 17.7%. The only difference is that the Alsi slowed down the last quarter where as the MSCI EM did exceptionally well (15.1% for the last quarter).

    Emerging Markets:
    Some of the other emerging markets’ year-to-date returns are: Brazil (36%), China (21%), Turkey (32%) and South Korea (21%). The only country producing a negative year-to-date return is Russia with -2.5%.

    Develop Markets:
    The develop markets also did very well the first six of the year. Germany produced (24%), France (15%), UK (11%) and US Dow Jones (9%). The Japanese Nikkei index lagged with a dismal return of 1.6% for the 6 months.

    Gold returned 2% for the six months while silver would have lost you 4%. Silver came down 7.5% during June. Palladium and Platinum as we so well know produced excellent returns of 12% respectively in USD terms. Some of the other interesting ones to note are Copper up by 21% and Zinc down -23%. Zing was done 10% during June while Nickel was down 30%.

    Based on the above information one should have been invested (sarcastically) in Brazil, Turkey and Germany and should have bought Copper along the way. One should have avoided Japan, Russia and gold coins.

    If we look a bit longer, say the last 10 years in the SA market then the following is also interesting.

    Listed equities would have given you 17% whereas listed property 27%. Private equity (based on some larger entities) returned also between 25% and 35% over a ten year period. Bonds produced 14.5% and cash 11.5%. Inflation (CPIX) was surprisingly low at 6.5%.

    So, based on this information you should have been invested in say property and private equity only. This would have secured a real return of 20% per annum!

    It is just interesting to look at these. As a good friend of mine said: “If only I have tomorrow’s newspaper today.” One obviously needs to look at a range of other criteria when making decisions. The challenge with having all this information available is to integrate the information into the decision making process you decided to follow.

    Seed Investment Consultants is holding presentations for private investors at the following centres:
    Cape Town: 12 July
    Somerset West: 17 July
    Bloemfontein: 6 August
    Johannesburg: 7 August

    Please mail helena@seedinvestments.co.za for further details if you would like to attend.


    Vincent Heys

    Permalink2007-07-04, 18:18:37, by vince Email , Leave a comment

    Strategic Asset Allocation

    Following on from where Vincent left off yesterday, it is important to ensure that you are constantly monitoring your overall asset allocation when looking at your investments. Research has shown that your portfolio’s asset allocation is very important, so much so that 90% of your portfolio’s performance can be explained by the asset allocation. Yes, 90%!

    It therefore comes as no surprise when we say that your overall asset allocation is very important when you make your investment decisions. What makes this decision even more difficult is the fact that research has also shown that timing the market is rarely a successful strategy.

    What do you do then?

    You need a robust strategy that will stand the test of time. If you have done your research, and one asset class is clearly ‘cheaper’ than another, then it makes sense to slightly tilt your portfolio to contain more of the cheaper asset. The key (as always) is to avoid making rash decisions to either buy into or sell out of a certain asset class (or share for that matter) based on the ‘latest news’.

    A prime example of possibly getting caught out was last year in the listed property market. Property, as I am sure most of you are aware, has done really well over the last 5 or so years, however in the second quarter of last year when the Reserve Bank started to hike interest rates, property fell out of bed! In the matter of a month and a half (from mid May until the end of June), property lost 25%! Now an investor who had panicked and sold his property holdings would have been hurt, not only by the loss of capital, but also by the fact that in the 12 months since that property sell off, listed property has increased by some 51%. Property has now fallen by over 10% since May this year. Will this be another 25% sell of, or will property recover again?

    This is where a strategy will help ease the pain. Realising what your optimal asset allocation is will allow you to understand the potential risk and return payoffs that accompany your portfolio.

    As mentioned yesterday we are currently seeing large diversions in the returns of different asset classes, as well as the underlying fund managers. Taking a gamble on one asset class can pay off, but the risks often aren’t worth taking. Making sure that you know where your strategic allocation should be, and then tweaking around with the allocation in the search for higher returns is the more prudent approach. Remember: It is almost impossible to consistently time the market correctly.

    Benjamin Graham, the father of value investing, and Warren Buffett’s mentor, used to advocate investing in a specific ratio of shares and bonds, and then rebalancing your portfolio once a year to the predetermined ratio, in this way selling out of the asset class that has shown price appreciation, and buying into the asset that is cheaper than the year before. By doing it once a year you minimise trading costs, and allow for some momentum to accrue to those appreciating assets.

    It makes sense to buy low and sell high in this fashion, but it is often difficult to implement. Just ask anyone who took money offshore at the end of 2001 when the rand was spirally out of control, emotion almost always triumphs over sound investment ideals when you lack a strategy to follow (it is even difficult to stick to your strategy sometimes, but if you have faith in the work done to create the strategy, then it should be easier to follow).

    Seed Investment Consultants is holding presentations on “The Importance of an Investment Strategy” for private investors at the following centres:
    Cape Town: 12 July
    Somerset West: 17 July
    Bloemfontein: 6 August
    Johannesburg: 7 August

    Please mail helena@seedinvestments.co.za for further details if you would like to attend.

    Here’s to getting your asset allocation correct, and staying true to your optimal investment strategy. Have a good evening.

    Kind regards,

    Mike Browne

    Permalink2007-07-03, 17:30:24, by Mike Email , Leave a comment

    The long and the short of the last month’s returns:

    During June 07 we saw significantly different levels of returns between the different indices.

    JSE All Share Index:
    It is down 0.94% for the month but up 15.1% for the year-to-date (i.e. 6 months). Interestingly, the Alsi produced effectively no returns (except some volatility) during the last 2 ½ months. Is this a trend going forward or are we just waiting for the earnings figures to catch up with valuations.

    The Resources Index:
    It is up 0.8% for the month and also significantly up 23% for the year-to-date.

    The Industrial Index:
    It is down 1.2% for the month but up 9.5% for the year-to-date.

    The Financial Index:
    It is down 4.2% for the month but only up 2% for the year-to-date.

    Listed Property Index:
    It is down 3.7% for the month but up 12.8% for the year-to-date.

    ZAR/USD is down 1.2% for the month but flat year-to-date and is currently sitting below R7 to the dollar.

    CPIX was lower at 6.4% and the CPI came in at 6.9% year-on-year. This potentially calls for another rate increase. However, some commentators are of the view that this might be the peak.

    All Bond Index (ALBI):
    Investing in the ALBI would have cost you 2.1% for the month and would also have lost you 0.06% for the year-to-date.

    So, all in all, it was a very interesting month. Being in cash would have been the best investment during June compared to the broader indices and secondly in resources. One notices the dispersion of returns year-to-date between the different asset classes. Financials have not beaten the ALBI by much year-to-date. We will also see large variations in returns declared by the different unit trusts and hedge funds over the coming week. More about that later this week.

    After a each month and specially after each quarter, it is good to reflect how your investments have done and to consider whether you are correctly exposed to the different asset classes relative to your long term strategy.

    Some of the questions to ask are, should you take more profit on local equities and sell it to the ever increasing foreign buyers, should you in turn increase your offshore exposure and reduce local bonds further. Cash always remains an appealing option during market volatilities. But, it should always be compared against your long term strategy.

    That is all for today.

    Seed Investment Consultants is holding a presentation on Investment Strategy and planning for private investors in Cape Town and Somerset West at the beginning of July. Please mail helena@seedinvestments.co.za for further details if you would like to attend.


    Vincent Heys

    Permalink2007-07-02, 17:53:28, by vince Email , Leave a comment