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    The JSE ends the month on a positive note

    The US has a comfort range for inflation at 1% - 2%. In August US inflation came in at an annualised 1,8%. This appears low given the weak dollar, and propensity for US consumers to import from China. Also the higher oil price and other commodity prices.

    The JSE ends the month up around 4,8%.

    Nevertheless, the US monetary authorities appear less concerned with inflation moving up as they are with growth and keeping the banking system intact.

    New listing, Blue Financial Services released interims to end of August – just making the 3 month deadline. The numbers were good with profit after tax up 160% to R19,7m. Headline EPS rose 112% to 5,3c. The share trades on a market cap of almost R2 billion, i.e. a PE of around 40 times. It’s expensive.

    At the end of September 2 investment houses had bought into the company. But so far they have been rewarded. The price has moved up from 150c at listing to 422c now.

    Top Fix came out with results even later – releasing their annual results to June. Profit for the year dropped relative to the proforma June 2006 from R16,1m to R8,4m as expenses escalated. This was against a forecast of R19,9m.

    The company listed on the JSE’s Alt X on 6 December 2006. The price at 265c now trades at a trailing multiple of 55 times – they do say in the report that they are looking to at least achieve the pre listing forecast of 13,5c for the 2008 year – putting it on a forward PE of 20 times - it still looks expensive to me.

    MTN released a detailed update of their third quarter subscriber numbers. In total across their 3 main regions, subscribers are up 12% on the quarter to 54,1million. SA and region is down slightly in contribution from 35% to 33%. West and central Africa at 48%, from 47% and Middle East up to 20% from 17%.

    The share price has been a strong mover this year, reaching new highs. Today it was up 1,45% to 12580c.

    There was speculation that China Mobile is in talks, but so far MTN has not released a cautionary statement, expect for the ongoing discussions with Telkom.

    The rand remained firmer against a weaker dollar as the greenback came under more pressure ahead of the interest rate announcement in the US. It was last at R6,55/dollar and R9,46/euro.

    A number of shares traded up at new highs as enthusiasm for shares has not waned.

    More listings ahead. KayDav Group is expected to list Mid November. It trades s Kayreed Trading, started in 1977, initially selling a range of building materials, boards, laminates, etc. Also Davidson’s a distributor of boards in Ottery Cape Town.

    Investors should consider new listings, but look at the pricing that they are coming on. As time progresses so quality of new listings will decline. Its starting to look like 1998 again, but in a different sector.

    Before allocating funds to riskier new listings, ALL investors should have a proper Investment Strategy in place. Contact me if you wish to discuss your investment planning.

    Kind regards

    Ian de Lange

    Permalink2007-10-31, 17:09:30, by ian Email , Leave a comment

    Will the US cut interest rates again?

    Locally Trevor Manuel released the Medium Term Budget Policy Statement, colloquially known as the mini budget. I don’t think that this however had any real impact on the local JSE, which ended up just 33 points to 31244. A balanced day with shares ending up equalling those falling.

    Globally all eyes are back on the US federal reserve to see if they drop interest rates again, but this time by a possible 0,25% as opposed to the last surprise 0,5%. Their concern is a slowing economy onset by the debt crisis.

    US markets are trading down slightly at the opening. The Dow and S&P500 are off around 0,5%.

    UK’s FTSE100 index is off 0,7%

    Asia ended stronger. Shanghai up 2,6% and the Hong Kong Hang Seng up a further 51 points to 31638.

    The US dollar has been slightly firmer ahead of the announcement later today


    PPC released their annual results to September 2007. Revenue was up 19% to R5,6 billion and headline EPS up 16% to 263c. Cash generation was lower at 8% to R2,2 billion. A final dividend of 166c up from 110c and a special dividend of 61c (down from 77c) was declared.

    The company is generous in its dividend payout with the target dividend cover in a range from 1,2 times to 1,5 times.

    The group’s big project is its expansion called the Batsweldi in Dwaalboom with commissioning planned for 2nd quarter 2008. The cash flow for the next year is forecast at R607m.

    The company has been running at maximum capacity and indeed had to supplement sales in certain areas with imported from China. With higher logistics costs and also higher maintenance due to high utilisation, costs ran high and this impacted on profit margins.

    The share price gained 1,38% to 4790c. It’s trading on a PE ratio of 18,2 times. Not cheap.

    African Bank (ABIL) issued a trading update saying that its annual results for the 12 months to end of September should be approximately 20% higher than the 223,3c per share generated for the 2006 year. The price traded at a new high today of3590c, before closing down 20c to R35

    After the market close, stockbrokerage BJM saying that its basic earnings are expected to drop by 65% to R27,2m. But included in last years was the same of shares in the JSE, which boosted profits. So while this will be down, headline EPS is expected to go up 30% in the interim to R27,2m from R21m.

    BJM together certain other shares have been in a bull market as direct recipients of the strong run in share prices. The share ended up 3% to 515c. That’s on a price multiple of 8,3 times. Assuming normalised earnings of R50m, then the forward PE is around 10 times – very simplistically.

    The JSE Ltd traded at a new high of 8550c, up 2,5% on the day.

    That’s all for today.

    Kind regards

    Ian de Lange

    Permalink2007-10-30, 17:37:25, by ian Email , Leave a comment

    Oil goes up

    Petro China is going to list on the Shanghai exchange in November. It is the second largest company in the world by market capitalisation and with the oil price trending toward the $100/barrel, there is unlikely to be a shortage of demand in a market that is already in bubble territory.

    Shares listed on mainland China sell at far higher prices than their listings in Hong Kong. Bloomberg reported that the expected $8,9 billion share sale, has already had a massive oversubscription.

    Buffett saw the opportunity in 2003, bought into the company and has recently sold out before the listing, but in the period generating an 11 fold profit. Petro China listed in Hong Kong in 2000 and has already moved up 78% this year.

    The company is on a massive expansion drive, looking to extend refining and production capacity. The share has had a material impact on the Hang Seng index which gained a further 3,89% to 31586 today.

    According to Wikipedia, The Shanghai Stock Exchange has a market cap of nearly $2,38 billion, making it the fifth biggest in the world. It actually has a long history with the market for securities trading in Shanghai beginning in the late 1860’s. The operation of the stock exchange came to a halt at the onset of WWII and the after the communist revolution took place. It was established again in 1990.

    The Shanghai exchange gained 2,8% to 5748

    The price of oil remains on the up, with Brent crude for December delivery moving through $90/barrel – the highest since trading began in 1988. December delivery rose to over $93/barrel. The trend is now for the $100/barrel and with production problems in Mexico with 600 000 barrels halted, the problem is exacerbated.

    Also ongoing tension and violence in the Middle East between Kurds and Turkey help drive the price higher.

    Locally Sasol gained a further 151c or 0,46% to 33050c. The share trades on a historical PE of 13times and a consensus forward of 11,1 times and remains a consensus Buy.

    Kind regards

    Ian de Lange

    Permalink2007-10-29, 21:25:03, by ian Email , Leave a comment

    More Chinese?

    Yesterday Standard Bank announced its China deal. Today speculation in the market was a possible further investment into MTN by China Mobile. This led MTN shares up 5,5% to new highs today. The Hang Seng index shot to a new record today at 30 562 this morning up 50% this year and an indication of the wealth created and looking for global investments.

    Parallels are starting to be drawn against the Chinese market of late and the Japanese bubble market into the 1980’s, when on 29 Dec 1989, it reached a high of 38957. Now at 16 505.

    The Hang Seng index is a market cap weighting of 40 companies listed on the Hong Kong Stock Exchange. Its base amount was 100 on 31 July 1964, passed 10 000 level in Dec 1993, 20 000 in December 2006 and today set a new high at 30 562.

    The Chinese and related Hong Kong market appear to be in bubble territory – surging at an unbelievable pace with shares trading on very high multiples of 40 and 50 and more. I listened to an interview with Warren Buffett yesterday about his sale of Petro China recently. It has surged 76% this year. Berkshire paid $488 million and they were worth $3,3 billion at the end of 2006.

    Its market cap has risen to now being the second biggest in the world after Mobile Exxon. The company plans to list on the Shanghai exchange in early November and will be one of the biggest IPO’s ever. China and Hong Kong have been running dual listed with restrictions. The mainland China A shares have typically traded at a massive premium to the Hong Kong listed H shares

    The Chinese CSI300 index – which tracks the 300 A shares listed in Shanghai or Shenzen stock exchanges - has risen over 300% over the last 12 months.

    China Mobile is a big company by any standards. It is the largest mobile phone operator in China and when ranked in terms of subscribers, the biggest in the world, with around 350 million subscribers signing up at a rate of 5m a month.

    It is also the largest company now listed on the Hong Kong stock exchange and according to wikipedia, the largest company registered in Hong Kong. Today’s rumour that the company may make a bid for some or all of MTN has a lot of merit. MTN has expanded substantially beyond SA borders. With big operations into Africa, especially in Nigeria and also into Iran, again, like with Standard Bank, a tie up with a large and growing

    MTN is a large SA company with a market cap of R237 billion ($36,5 bn), trades on an historical PE of 20,5 times with a profit after tax of R12 billion for the last full year to December 2006. At June this had increased to R6,3 billion for the 6 months.

    The company has 3 main geographic areas, Southern Africa, West and Central Africa and Middle East and North Africa. West Africa is currently the biggest earning generator.

    Its going to be interesting to see how this develops. Are South African companies still targets for foreign multinationals with plenty of capital and ability to raise cash? Perhaps so.

    Investors with their investment strategy in place, have not been worried as the nominal price on the market increase. For investors that are concerned that they are perhaps not maximising opportunities, feel free to contact me.

    Have a great weekend and enjoy the Currie Cup final – our office has a bias to the …… Cheetahs.


    Ian de Lange

    Permalink2007-10-26, 16:45:11, by ian Email , Leave a comment

    Here come the Chinese

    Today saw a big proposed deal on the JSE, as China’s largest bank, Industrial and Commercial Bank of China Limited (now known as ICBC) announces an acquisition of 20% into local Standard Bank. The effect was a gain in SBK to 11540c, up almost 4% with the Financial index up 2,7%.

    In today’s global markets, as corporate merger and activity produces bigger conglomerates, so the banks that service the multinationals are forced to grow. Not only that, but the inevitable progression is for all company’s to get more and more efficient. Investors demand growing earnings and high returns on assets and equity. Growth by acquisition is a strategy that many companies adopt.

    The proposed R36,7 billion (USD5,5billion) investment into Standard Bank will be ICBC’s most substantial investment outside of China.

    State controlled ICBC was established in 1 Jan 1984 and listed on the Shanghai Stock exchange and the stock exchange of Hong Kong in Oct 2006. It is the largest Chinese bank with 2,5m corporate customers and 180m personal banking customers. It has total assets of USD 1,1 trillion and a combined market capitalisation of R319 billion as the price has surged 45% in Hong Kong this year.

    Standard Bank sees benefits such as:

    • Strategic partnership with little existing overlap
    • Strategic support to African business
    • Improves risk profile of the bank
    • Bolstering the Tier 1 capital

    Clearly China has been moving into Africa in a large way over the last few years looking for opportunities, especially on the mining front. Having a banking partner that understands and is already represented into Africa makes a lot of sense.

    China is moving out, as multinationals set up shop there. Citigroup and HSBC are setting up branches in China according to Bloomberg.

    Trade between China and Africa is swelling up 40% to $55,5 billion in 2006. According to the Standard presentation, exports from Africa to China have grown at 43% compounded growth since 2001, from $4,5bn to $26,9bn in 2006.

    Standard Bank has a long history, founded in 1962 as a subsidiary of Standard Bank of London (subsequently Standard Chartered Bank plc). It had roots starting in 1862 formed as Standard Bank of British South Africa. It was established in 1969 as Standard Bank Investment Corporation and listed in 1970. Standard Chartered sold its 39% stake in 1987.

    Banks have been trading on fairly low multiples of earnings as investors have generally favoured the diversified mining shares, Anglo and Billiton as well as construction shares.

    Shareholders in banks benefited today as Standard Bank gained almost 4%, Absa up 4,3%, Firstrand up 4,5% and RMBH up 3,6%. A good day for investors in banks.


    Ian de Lange

    Permalink2007-10-25, 18:28:09, by ian Email , Leave a comment

    performance from property

    A point of discussion that comes up often in conversation is the question of how much should an investor allocate to property. Many investors have achieved exceptional performance results from property, especially more recently and so have a strong bias to want to overweight property exposure in their total asset allocation.

    There is absolutely no doubt that property investment and property development have made many investors exceptionally wealthy. Property as an investment class has certain characteristics that lend it to very good returns. Property developers are really businessmen with property as stock in trade as opposed to an investor. A developer would, in various formats, acquire a large piece of property, subdivide or build, and then on sell the smaller packages at a mark up.

    In recent years with the sheer escalation in demand for newly developed property, most developers saw their margins increase sharply, with no shortage of customers for their product.

    But what are the main characteristics that make property a great investment. Well the first is that the income return from a property investment (commercial property) is normally 2/3 of the total return. I.e. the rental income yield is the largest component of the total return. Secondly rental income is a lot more stable than more volatile company profits. This is a function of the leases in place. The stronger and longer the lease, the greater the value of the property. Contrary to popular belief, property is not a sound investment because it comprises bricks and mortar – it’s the lease that determines the strength.

    Investors use these two components, i.e. the higher and more stable income stream from the property to then apply gearing to their own capital. The more stable income stream together with the tax deductibility of the interest expense against the rental income, lends the investment to using gearing. If the after tax return on the property investment is greater than the after tax return of the cost of debt, then the gearing will enhance the investor’s return on equity.

    Naturally then the returns on geared equity in a property over the last 5 years stand out. The annual after tax returns calculated by JP Morgan for listed property:

    • over 20 years – 13,2%
    • over 15 years – 13,7%
    • over 10 years – 20,4%
    • over 5 years – 26,3%

    The strong gains from property from 2000 – 2005 resulted in a superior performance from property over the last few years. This has slowed into 2007, as higher interest rates have started to slowly apply pressure.

    At the same time average residential property price increases calculated by Absa from 1980 spent much of the mid 1980’s to late 1990’s underperforming inflation. In nominal terms prices moved up, but remained very subdued when compared with inflation.

    As interest rates came down sharply from the 1998 spike, so residential property prices moved up sharply from 1999 through to date, with growth starting to slow more recently. Price increases moved ahead of long term inflation spiking up sharply over the last 3- 4 years. Inflation from 1980 to end of 2006 went from a base of 100 to 1363. Property went from 100 to a level of 2766.

    Just as investors in a company will achieve a superior performance if they buy as cheap as possible, so an investor in a property should expect lower returns as initial yields trend down. The starting yield on which a property is acquired is the single biggest determinator of the final annual return generated. In times of lower starting yields and interest rates having moved up, 5 year compounded returns are unlikely to be in the order of 20% let alone 26%.

    It’s a fascinating asset class and should comprise a portion of your asset allocation.


    Ian de Lange

    Permalink2007-10-24, 21:22:07, by ian Email , Leave a comment

    Optimising Your Portfolio Strategy

    Much investment literature is dedicated to how important it is to have a long time horizon when investing in ‘risky assets’ such as shares. Much time is also spent explaining why it is imperative to have at least a portion of your portfolio invested in shares. If you have read this report for long enough you have probably heard us say that over the long term cash is your riskiest asset class.

    In investments, much like any industry, there are many different types of risks that can hamstring your performance. As an investor you need to identify which risks are the ones that are the most pertinent, and then focus on ensuring that you invest in such a way that you minimise the probability of being negatively affected by these risks. Over one day an investment into shares is a risky proposition, but investing for the longer term brings about different risks.

    When the media focuses on the markets their time perspective is often on the extreme short term, usually what has happened on that day, this introduces the risk that investors who are trying to keep educated and informed start to focus on these short term numbers. Short term share performance doesn’t look that impressive, especially when you only look at the direction of the movement. On a sample, starting from 1985 and ending today, of 5 628 days it is hard to believe (to me at least) that on 46% of those days the ALSI finished in negative territory! If you compared the fact that the market was down on 46% of the days with the fact that on 100% of the days the money market went up it would appear to be a no brainer between the two investments. It is the other 53% of the days that more than compensate for this variance (1% of the days were flat).

    Short term risk of losing capital (by investing in shares) needs to be contrasted with the longer term risk of not having a sufficient asset base to fund your post retirement consumption.

    If one takes a 1 year time horizon (over the last 22 years) then there is still a 24% chance that you will end up with a negative return, the odds shorten to 5% over 3 years, and 0.5% over 5 years! Over the last 22 years there hasn’t been any negative rolling 10 year return, with the minimum 10 year return being 72% (compounded 5.52% per annum) and a maximum return of 18.6% per annum. All of these returns exclude the effect of dividends which typically increase returns by a couple percent a year.

    Obviously not everyone has the luxury of a ten year horizon before your capital is required, and this is where you need to optimise the shorter term downside risk with the longer term asset growth risk.

    If you are uncertain as to how you are able to optimise your portfolio strategy given your short and longer term needs then email info@seedinvestments.co.za and we can hopefully assist you.

    Have a good evening!

    Kind regards,

    Mike Browne

    Permalink2007-10-23, 18:12:41, by Mike Email , Leave a comment

    changing the way indices are constructed

    Professor Jeremy Siegel, well known US investment advisor and author, wrote a paper called The ‘Noisy Market’ Hypothesis which discussed the thinking on fundamentally weighted indices. These have been in the news lately where managers are launching various styles of newly constructed indices.

    To date the world has largely had capitalisation weighted indexation. Most indices around the world track their markets by way of weighting shares based on their market capitalisations. Thus a company with a market cap of R2 billion has a far greater weighting in a portfolio compared to a company with a R500m market capitalisation. Any price movement on the former share price will be exaggerated 4 times when compared to the price movement of the latter share.

    It’s the very reason that the Anglos and Billiton have such an impact on the index. Only one of the world’s widely followed indices does not construct using market cap weighting, i.e. the US's Dow Jones index, which is a simple average weighting of the top 30 shares on the New York Stock exchange.

    In recent years a lot of work has been done on constructing an index that is not weighted according to the mere size of a company, but on a fundamental criteria. The logic is sound. In the standard index construction, a company that has experienced no change in fundamentals, but a 10% increase in share price, will, all else being equal, have a 10% greater weighting in the index at the next rebalancing.

    The assumption for the construction of the typical indices is the “efficient market hypothesis” which assumes that at any time the price of a share represents its best, unbiased estimate of the true underlying value of the share. It does not say that the price is ALWAYs equal, but that its impossible to tell which are over or under valued and so constructing a portfolio based on market cap weightings is the best method.

    But as indexing has caught on, especially in the US as a viable alternative to active management, so cracks started to appear in the efficient market hypothesis, which therefore produced some doubt in the index as the best means to construct a portfolio.

    Research has shown that over time, the performance of two categories of shares could not be explained by the standard asset pricing mechanism of the efficient market hypothesis, namely:

    . small stocks earned an outsized return compared to their risks, and
    . stocks with low price to earnings ratios had significantly higher returns than stocks with high PE ratios.

    The current paradigm shift has and continues to move to the view that says – the price of a share is not always the best estimate of its true underlying value of the company. This is because there are a lot of other factors that come into play other than merely rational investors basing decisions on the underlying fundamentals.

    This is where fundamental indexation comes into its own, looking to create an index where the shares are weighted on underlying fundamentals and not the price. These fundamentals could be sales, profits, dividends, etc. Therefore price movements will not play a part and so over time a share with superior fundamentals will carry a higher weighting than a share with inferior fundamentals.

    There are numerous ways in which a fundamental index can be created. This can include numerous weightings on per share data (e.g. PE, EPS, DY, Cash flow per share etc), it can include one ranking criteria e.g. dividend yield, or it could be based on gross sales, revenues, cash flow and dividend etc.

    With the introduction of the new indices and the accompanying funds raises the benchmark for active management. There is not one way to construct an index and many of the new fundamentally weighted indices don’t recognise the benefits of small and mid sized companies as superior investments.

    It’s important to understand the bias of your investment portfolio and the potential for over or under performance.


    Ian de Lange

    Permalink2007-10-22, 16:25:07, by ian Email , Leave a comment

    1987 or 1995

    October 19th 1987 saw the Dow Jones drop 508 points or 22,6% on record volumes at that date. It was a huge and sudden drop on the Monday, which came known as Black Monday. Parallels are always drawn, especially on anniversary dates, but despite the fact that global markets are at nominal highs, another drop of this magnitude is unlikely. Let’s trust that following Saturday’s game it’s a green Monday

    Naturally such a drop - markets - cannot ever be ruled out. Market movements are not symmetrical, and large deviations come around far more often than statisticians would suggest. It’s the so called Black Swan theory from Nassim Taleb’s book the Black Swan. This is a large impact, hard to predict and rare event. The term came from ancient western conception that all swans were white in colour and a black swan was a metaphor for something that could not occur. That was until the 17th century discovery of black swans in Australia.

    Alan Greenspan was appointed Fed Chairman in June 1987 and not a few months later the biggest percentage crash on US markets in one day. The 1929 market crash was not that sharp.

    At the time the US Federal Reserve was tightening interest rates, now with sub prime crisis, the fed saw fit to drop rates by 0,5% and the trend is down. Current chairman, Ben Bernanke has learnt from the past master, Greenspan that in times of financial crisis, its best to increase liquidity –which acts as lubricant.

    Back in 1987 because of the extremely sharp loss, the recovery was equally quick. By the end of 1987 the Dow had recovered 11% of its loss and by the end of the following year, it was up almost 25% higher from the lows. Clearly any investor coming in after the large decline and buying did well.

    But let’s leave the market to one side on this day - it’s the eve of the rugby world cup final – Bokke against the English. What we want to emulate is the 1995 final against the All Blacks – ok not that nail bitingly close – we are looking for a convincing win – no extra time.

    Have an excellent rugby weekend


    Ian de Lange

    Permalink2007-10-19, 16:59:35, by ian Email , Leave a comment

    Some points on wealth creation

    Speaking at a presentation in Jhb last week its interesting to gauge the general investor mood. A bull market breeds enthusiasm, which in turn breeds confidence. Be careful - the market has a habit of punishing the error of misplaced confidence.

    In my discussion this last week with investors, its interesting how many new entrants to the market were relatively upbeat, while others were too cautious. Some of the best investors have a more dispassionate approach to their investments, i.e. reducing the emotional element, which often distorts and upsets rational thinking.

    When we talk to investors, their main requirements can often be distilled to:

    • Preserve my capital over time.
    • Provide for a fair real rate of return on the capital invested
    • And do so in an efficient and tax effective manner.

    Remember the father of value investing, Benjamin Graham clearly defined an investment operation as, “….. one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

    Note the first part – safety of principal and then a return. We are at the point where many “investors” are taking on higher risk with a lower probability of being adequately rewarded. Remember its fine to take on risk – just make sure that the price you pay has a high probability to adequately reward you.

    On the flip side, some of the more cautious investors that I spoke to have been concerned about the recent volatility on their investment values, preferring lower risk cash. A common investment mistake however is to equate short term volatility with long term risk.

    Placing a large portion of your funds in cash may appear to be a low risk option, but in fact over any reasonable period of time, it’s a higher risk option. Alternatively allocating funds to equities may appear a high risk option, but in fact over any reasonable period of time it’s perhaps a lower risk option.

    The answer as to how much to allocate to one or the other is not the “risk” of the asset class itself. It can only be determined after defining a strategy and then assessing the value or otherwise of the asset class.

    Wealth creation dictates setting realistic goals, using expertise, using common sense, and taking a strategic approach. Reduce the emotional roller coaster element and wealth creation becomes easier.


    Ian de Lange

    Permalink2007-10-18, 16:52:36, by ian Email , Leave a comment

    The JSE ends the day slightly up

    A positive day on the markets after a couple of declines. The JSE closed up into positive territory, gaining 0.11% to 31068. Value traded at R 10.70 billion with advances at 270 against decliners at 165. Mining closed off 0.76% at 41324, while Industrials were up 0.63% at 25655 and financials ended the day up 0.55% at 24187.

    Gold shares fell 0,64% despite bullion hovering at high levels at $757/oz. The rand was firmer at R6,82/dollar. Harmony fell1,4% to 6694c and Goldfields down 1,98% to R124.

    One of the better performing sectors of the day was Non-life Insurance Index up 3.3% at 24110. Here Santam gained 3,3% to R125, but on low volumes of 3400 shares. This is a new high.

    Oil and Gas gained as Sasol moved to a fresh high of R339, closing up 2,1% to R338. Oil remains at high levels, last trading just below $85.
    There were 14 new 12 month highs today, including Protech which closed up 8.7% at 314, Basil Read up 3.4% at 3516 and Afdawn up 3.4% at 455. Richemont gained 0,5% to 4631.

    Of the major stocks Anglo was down 1.84% at 45812, Billiton moved down 0.07% at 25501, Sasol was up 2.1% at 33800, Anglogold moved up 0.93% at 29875, Investec Plc was up 0.64% at 7230.

    Some of the top gainers included Moneyweb up 33.33% at 120 , Spanjaard up 13.33% at 425 on the release of very good results yesterday.

    The Dow was up 0.1% at 13926.92 and the S&P 500 up 0.4% at 1544.42 a few moments ago.

    Gold was up 0.1% at $ 757.25/oz

    The rand was last trading at R 6.82 to the dollar, R 13.90 to the pound and R 9.69 to the Euro.

    Kind regards

    Ian de Lange

    Permalink2007-10-17, 17:39:30, by ian Email , Leave a comment

    Productivity in South Africa

    A country’s productivity impacts directly on its growth, wealth, and by definition the general standard of living. By improving your productivity you are able to become more profitable. By quantifying various components of productivity you are able to identify key areas that need attention. To quote a well used phrase,

    “If you can’t measure it, you can’t manage it.”

    It is in this light that Productivity SA (formerly the National Productivity Institute) is tasked; not only with engaging with improving the productivity of small businesses, but also with identifying areas in South Africa’s economy where productivity can be improved, and give credit to those areas with good productivity growth is achieved. They today released statistics indicating the broad macro productivity trends in South Africa.

    I only managed to catch Moneyweb's review of the report, but it makes for interesting reading. Over the period from 1996 – 2005 the real output growth was most impressive in the transport, storage and communications (TSC) sector at an average rate of 6.5%, while finance, insurance, real estate and business services (FIREBS) sector averaged 5.3% growth. While the level of employment in the FIREBS sector also increased (by 5.2%), the TSC sector shed jobs at a rate of 3.6%. These statistics point towards the TSC sector becoming more efficient, while productivity only slightly improved in the FIREBS sector.

    Shockingly over this 10 year period mining and quarrying only increased output by an average of 0.6%. While the full effect of the commodity boom won’t be illustrated in this period (1996 – 2005) the fact that the productivity of the capital spend decreased on average 0.5% should be worrying. This shouldn’t come as a surprise to most people who even keen half an ear to current affairs. We have all heard about how mining output is struggling, and especially in the case of deep level mines, costs have sky rocketed, resulting in the capital becoming less efficient. The full effects of increased costs over the last couple years haven’t even been factored into this study.

    Another unsurprising, but disappointing, fact is that the output of electricity, gas and water (EGW) is only up an average of 0.6%. This is simply insufficient to meet the demands of a country that is growing at over 4% pa, and is targeting 6% GDP growth. How are you able to grow at these kinds of rates if you don’t have the power to do so? Surplus capacity a decade ago has now become a chronic shortage.

    An industry that remained fairly stagnant for a while is the construction sector. The related companies’ share prices track the findings of Productivity SA, with struggles up to 2004, and a subsequent explosion in output, growth, and share price. In 2004 and 2005, output grew 11.9%, capital inputs grew by 12.2%, while the underlying construction index increased a massive 41.19%pa.

    On an international comparison the rate in manufacturing growth has been impressive, but this comes off a low base, and still lags both developed and developing nations on an absolute basis.

    Remember that if everyone picked up that 1 minute lost in every hour at work, over 1 year we would be able to get almost 4 and a half day’s extra work done (or take 4 and a half days extra leave!)

    Kind regards,

    Mike Browne

    Permalink2007-10-16, 17:32:01, by Mike Email , Leave a comment

    Rugby Market Wrap

    While we are all on a high after the Springbok’s win last night I thought I would do an equity market wrap with a sporting ‘angle’.

    Clearly the notion of sport having a major impact on a country’s collective psyche is in some ways overestimated, at least in the short run. Today we saw the JSE ALSI close lower, and at last glance London’s FTSE 100 was down over 1% despite the Springbok, and English rugby teams advancing to the final of the Rugby World Cup. These movements are counter intuitive when compared to the respective rugby teams’ performances over the weekend. The New Zealand market was positive on the Monday after they were knocked out!

    There is no doubting that a big sporting success or failure can have a longer term impact on the nation. We all know of the positive effect of winning the 1995 World Cup in South Africa had on South Africa. Hopefully the Springboks can emulate the class of 1995 this weekend, and bring the Cup home.

    Let’s take a closer look at the day’s performance of some companies with close relations to rugby in South Africa, and some tongue-in-cheek possible ‘rugby’ reasons as to their price moves:

    Sasol are the Bok’s major sponsor. The share price hit a new high today of R338.75, but ended the day down 0.58%. Maybe the Sasol investors are worried that future sponsorship deals might be very costly? Or is it the fact that the executives are all going to be in Paris for the final?

    Vodacom is the self proclaimed “Greatest supporter of South African supporters”, and title sponsor of numerous rugby competitions. They also sponsor 3 of the bigger local franchises. Vodacom isn’t listed on the JSE, but forms part of the Telkom stable. Telkom was up 1.84% for the day. Does it maybe have something to do with the Cheetah’s hosting the Currie Cup final? Or maybe it is down to everyone phoning and sms’ing their loved ones in Paris?

    In line with the Sharks disappointing end to the Currie Cup was Mr Price’s share price for the day. It ended down 0.19%, but will at least live to fight another day (unlike the Sharks).

    ABSA is the official banking sponsor to SA Rugby, and title sponsor of the Currie Cup. It bucked the general down trend in Financials (the Financial Index was down 1.2%) by moving up 1.2% on the day. Is it the genius of ABSA Boktown perhaps? I haven’t been, but maybe they have some first-rate consultants signing clients up in their droves?

    Clearly bucking the trend is the old title sponsor of the Springboks, Castle (SABMiller). The share price is down 2.77% for the day. Surely everyone has still been drinking their products? Maybe the investors are upset that they aren’t getting the exposure that Sasol is getting? (More likely is the trading update that was issued this morning).

    While sport is a big business, it is apparent that it isn’t the driving factor in the markets. More importantly are the underlying company fundamentals. I would personally feel more comfortable buying SABMiller as a result of their expansion into emerging markets, rather than the fact that they have extended their sponsorship of the Proteas cricket team.

    Have a good day!

    Kind regards,

    Mike Browne

    Disclaimer: This is intended purely as an entertaining piece. While the numbers are accurate, the reasoning is solely to put a smile on your face!

    Permalink2007-10-15, 18:30:03, by Mike Email , Leave a comment

    Taking a walk back in time on the JSE

    With the Reserve Bank upping the repo rate by a further 0,5% yesterday, on the back of ongoing concern about inflation, I thought it would be an idea to look at (official) inflation data going back in time and compare this to the performance on the various asset classes.

    In the 1960’s and to early 1970’s the official inflation rate at single digits in South Africa. Into theme 1970’s (following the world oil shock) and through to early 1990’s it picked up sharply running at double digits and in the mid 1980’s almost at 20% per annum - again these are official numbers.

    While interest rates were raised, this was not aggressive enough with the economy operating on negative real interest rates. For this reason all through the high inflation era, an investment into fixed deposits, money market and bonds proved disastrous. In order to force funds into the government, they introduced prescribed investments. This forced pension funds to invest into government and semi government debt by pension funds and insurance companies.

    At the peak, 53% of pension fund portfolios – measured on a cost basis – had to be invested into so called prescribed assets. This was abolished in the late 1980’s. Chris Stals was appointed governor of the Reserve Bank and he had the task of breaking the back of inflation by reintroducing real interest rates.

    Slowly but surely, inflation came back under control. Other factors played a part, not least of which was the reintroduction of SA into the global economy post 1994. This saw opening up of international trade.

    Looking back then in those years, when SA was under immense pressure from global community, forcing the country to run a trade surplus because no funding was available on the capital account, its surprising how well the equity market performed.

    1980 was the top of the gold market. The JSE returned 32,2% for the year. Up 27% in 1982 after falling 7% in 1981. Then only slightly positive for the next couple of years before gaining 34% and 49% in 1986.

    1987 was a global down year, with the JSE ending off 7,8%. It soon raced back up 9% in 1988 and 50% in 1989.

    Since 1960 the biggest recorded gain on the JSE in one calendar year was 81,8% in 1979.

    An investment into these real assets therefore compensated for the negative real returns on bonds and cash.

    A down day on the JSE. Billiton’s market cap on the JSE has come within a whisker of that of Anglo. Today Anglo closed with a market cap of R627,8 billion and Billiton at R627,6 billion.

    Have a great weekend and enjoy the rugby. It should be excellent.

    Kind regards

    Ian de Lange

    Permalink2007-10-12, 17:15:47, by ian Email , Leave a comment

    Another Rate Hike Hurts the Market (A Bit)

    South Africa’s repo rate was raised for the seventh time in this cycle, bringing the repo rate up to 10.5%. Tito Mboweni has been mandated to keep CPIX between 3% and 6%, and it seems that as long as we’re above this band (currently at 6.3%) he’ll look to keep increasing rates.

    In his statement he acknowledged that inflation lags monetary policy, and admitted that it is a challenge to get the monetary policy timing right, considering that it is a leading (but independent) indicator. More evidence of the tough stance came in the final sentence of the Bank’s statement, “The MPC is determined to ensure that inflation returns to within the target range.” I take this statement to mean that Mboweni understands that by raising rates again he is probably doing more harm to the economy than he is helping curb inflation. He is, however, only mandated to target inflation, and he must therefore use his power to get inflation to his target band. Raising rates is his ammunition to decrease inflation, and there is currently no risk of going through the target rate floor (3%), and so the Reserve Bank is being aggressive in its approach.

    Other than food and oil prices, most indicators showed signs of moderating, with household consumption expenditure down to 5.5% in the third quarter (from 7.4% in the second quarter) being among them. Crucially though inflation expectations have increased, resulting in wage negotiations becoming more demanding. Wage increases that come in above inflation (assuming no change in productivity) put upward pressure on inflation, resulting in what is known as second round inflation.

    Markets reacted badly to the rate hike, with the ALSI dropping by 0.96% in less than 20 minutes. This is most probably as a result of expectations of the rates not changing. Sixty percent of economists polled by Bloomberg and Reuters expected rates to remain flat. As always the initial movement was exaggerated (this time on the downside) and the market moved up 0.74% before close, ending the day up 1.07%.

    Once again noise resulted in people reacting. Whilst the interest rate is a key noise factor, it does often provide a distraction. You also find “investors” taking extremely short term positions related to what they think rates will do. The ones who get the call right then attempt to profit as much as possible, while those on the wrong side of the position need to cut their losses. In order to consistently profit this way you need to consistently take the opposing view to the majority (in this case be one of the 40% who thought rates would go up), and consistently be correct in your views. Logic dictates that you’re going to struggle to come out on top consistently using this “method” to “invest”.

    One positive effect of increased rates (that is if you are an importer) is that a higher interest rate results in the Rand’s yield being more attractive, and consequently the Rand often strengthens when rates rise. Today was no exception with the Rand strengthening by 1.98% against the US Dollar, 2.34% against the Pound, and 1.41% to the Euro in today’s trading. Remember that a stronger Rand, in turn, makes foreign investments more attractive, as you are able to get more Dollar for your Rand.

    That’s all for today. Hopefully the increase in your mortgage repayments will be slightly negated by the fact that the imported flat screen TV you want should be slightly cheaper come Christmas time!

    Kind regards,

    Mike Browne

    Permalink2007-10-11, 17:59:44, by Mike Email , Leave a comment

    market wrap

    A strong day on the local market as the index powers up to within a breath of 32000. Industrials slipped back slightly, but the overall breadth had 271 shares up against 194 shares down. Not a lot of corporate activity on the day.

    The Mobile and Trencor companies have not been widely followed – partly due to their complexity. Trencor owns 72% of Textainer, which it owns via Halco Holdings Inc. Textainer is a US based lessor of containers and is described as the world’s largest such lessor.

    Mobile in turn owns a majority stake in listed Trencor. Today’s announcement again made reference to the fact that the board will look at the combined listed structure.

    Textainer, the operating company, has operated since 1979 and as a total of more than 1,3 million containers in owned and managed fleets, leasing to more than 300 shipping lines.

    It lists on the New York Stock Exchange today with an IPO of 9million shares at $16,50/each. This was below the forecast range of $19 - $21 a share. They opened at $16.65 and traded as high as $17,55.

    Trencor shares fell back over 6% in late trading to 3340c. Mobile fell 2% to 240c.

    Moneyweb released strong interim results to end of September. Revenues gained 30% with margins improving to over 13%. Headline EPS jumped 144% from 54c to 132c. The share price was unchanged at 70c.

    After the market close, Moneyweb released details of its black economic empowerment shareholder. Isingqi Investment Holdings subscribed for 11,8m shares at 70c per share. It also bought a further 3,8m shares from the Hogg’s at 70c each. This will bring its shareholding to 25,1%.

    Financing to this company is provided by Mvelaphanda Holdings.

    Relatively recent construction listing, WG Wearne released a trading update saying that its finalising its interims to August and headline EPS should be up between 50% and 70%. The shares gained 3c to 519c

    The big gorilla in the construction sector, Murray and Roberts moved up to a new high at 9699c – up over 5% on the day.

    WBHO bucked the trend, ending down 3,3% to 12471c – it has had an excellent run.

    Aveng gained 4,2% to 6150c in late trading – also a new high.

    Masonite, more thinly traded gained 4,4% to R47.

    Kind regards

    Ian de Lange

    PS; sign up on the website www.seedinvestments.co.za for a weekly informative mail on investment planning. Also find out about the important retirement questions that need to be asked.

    Permalink2007-10-10, 17:28:38, by ian Email , Leave a comment

    what five investment characteristics work

    Some investment processes work well. While many may recognise and agree with the process, often the true test is the willingness to stick to the process when it appears not to be working – this is where the winning investor will come through strongly. Tweedy Browne is a US firm established in 1920 and a died in the wool value investor.

    The firm’s investment screening and decision making process was introduced in 1958 by Tom Knapp who came from Benjamin Graham’s firm. Graham was the man who influenced Warren Buffett – CEO of Berkshire Hathaway.

    They published some notes titled – What has worked in investing.

    Summing up 5 characteristics of shares that they held in their portfolios which produced above average returns over long periods of time. The five characteristics that they identified included:

    1. Low price in relation to asset value
    Shares bought on this basis are done on the assumption that in time their market value will adjust upwards to reflect what the company itself paid for its assets.

    2. Low price in relation to earnings
    Investing in higher yielding shares does not preclude investments in shares whose earnings are expected to grow in future. Included in this definition are high dividend yields and low prices to actual cash flows.

    3. A significant pattern of purchasers by one or more directors
    It is not uncommon to see significant insider buying in companies selling in the market for low price to earnings ratios or low prices to book. This includes companies buying their own shares.

    4. A significant decline in a stock’s price
    Reversion to the mean is almost a law of nature with respect to company performance. Recent poor performance often turns up at some point and vice versa and investors can take advantage of this over time.

    5. Small capitalisation stocks
    This varies over time, but the general rule is that smaller companies are associated with higher rates of growth and can be more easily acquired by other corporations.

    It’s the classic value metrics being applied. Many investors will look at this and agree, but then often get sidetracked when actually investing by being attracted to good stories, prices moving up on growth shares etc.

    However the consistent application of the process is equally if not more important for long term sustainable returns above the market.

    Practically, all investors should have their own process - adopt a winning one for sure, but use it consistently. It takes a lot of time.

    That’s all for now. Feel free to contact us at any stage – have a look at www.seedinvestments.co.za


    Ian de Lange

    Permalink2007-10-09, 18:22:17, by ian Email , Leave a comment

    Three big hurdles investors must overcome

    Two top commodity traders in the US, Richard Dennis and Bill Eckhardt, ran an experiment in the early 1980’s after a disagreement about whether trading could be successfully taught. They ran an ad, attracted 1000 people and after screening and testing, narrowed it down to 13 participants.

    They then proceeded to teach the group (called turtles) principles such as probability, money management, and risk of ruin etc and in early 1983 provided each trader with seed capital. By and large the experiment proved successful.

    There are various accounts of this story, including some books and naturally plenty of websites. As always I like to understand some of the principles and see if they can apply to longer term investing.

    An article that I came across today provided some of the link. One of the turtle group, Curtis Faith released a book this year, called “Way of the Turtle”. He describes 3 of the BIG hurdles that all investors and traders need to overcome.

    The first is loss aversion. Most people suffer roughly twice as much from losses as the pleasure they receive from comparable gains. Its one reason why many turn down a positive expected value financial proposition. I.e. they would rather lose out than have a probability of gaining.

    Part of the problem is recency bias. i.e. where an investor has had a recent negative experience or a particular share has recently lost money, it’s considered risky.

    But many times in investing and trading, losses are important in order to benefit from the gains, and this is where the value of a process comes in.

    The second is frequency versus magnitude. Here many investors or traders look at each trade or investment and focus on this. E.g. buy a share at R50 and it trades up to R65, or down to R35. The former is considered successful and latter unsuccessful, but this is missing the point.

    Wealth generation is not a function of how many times you are right, but a function of how much money you make when you are right and how much money you lose when you are wrong. He cites an example of 20 years of trading data, which generated 5600 trades. Of these just over two-thirds lost money. i.e. a success ratio of 1 out of 3. But the winning trades earned 2,2 times the losing trades and so the net overall effect was hugely profitable.

    The third is the role of randomness in short term results. While most investors and traders agree that price is far more volatile than underlying value, many fail to recognise that the same degree of randomness affects short term results.

    Therefore short run bad outcomes are not necessarily the result of short run bad processes. Also vice versa, short run success is not necessarily a direct result of good process. There is just too much random market movement.

    The Legg Mason report concludes that the approach that is likely to boost longer term performance has 3 main attributes.

    . a focus on process versus outcome
    . a constant search for favourable odds including a recognition of risk
    . an understanding of the role of time.

    All investors should develop a system or process to think probabilistically. i.e. assign a set of probabilities to a range of outcomes.


    Ian de Lange

    Permalink2007-10-08, 17:55:17, by ian Email , Leave a comment

    Long term return details for all local asset classes

    This morning I received the annual performance report from JP Morgan, which details all local asset class returns with some data going back to 1960. we have been discussing return and risk, asset allocation and tilting the risk reward ratio in your favour. An understanding of past returns and risks from various asset classes is one input into the mix.

    The facts are that equities have outperformed all other asset classes over the last 5, 15, 20 years and 47 years. Over the last 10 year period to the end of 2006, bond returns before tax slightly pipped local equities.

    As expected equities had the highest volatility (remember we don’t see this as the same as risk). High volatility is merely high dispersions around an average. The report looked at average returns for local equities over all rolling 5 year periods with interesting results.

    Over all 5 year rolling periods the average return was 20%, but ranged from 5% p.a. to 41% p.a. (I.e. over some 5 year period an investor in 100% equities only received 5% per year)

    Extended to 10 year rolling periods, the dispersion narrowed from a minimum of 11% p.a. to 35% per annum.

    Extending the holding period to 15 years, the dispersion in returns narrowed again from a low of 14% p.a. to 30% p.a.

    Then the report looked at the compounded growth of the various asset classes. It’s always important to look at the starting point for investment returns. With a depressed base price, subsequent returns can be exaggerated and vice versa. In order to reduce the effect that a starting point has, it again looked at averaging rolling period returns.

    Simply investing R1000 on the 1 January 1960, it would be the equivalent of R46 400 on a CPI inflated basis. Investing the R1000 into shares and reinvesting the annual dividends, it would have compounded up at 17,7% to R2,1million. I.e. a multiple of 46 times.

    This however ignores tax on gains, which with the introduction of CGT is now more of an issue.

    Its worth noting that bonds and fixed deposits hardly kept up with inflation even before the negative impact of inflation. Bonds produced an annual 10,4% and fixed deposits 10,2% against annual inflation of 9,1%.

    JP Morgan have calculated a real return using the average of 5 year rolling periods of 8,7%. Using data going back further than 1960, we estimate slightly lower real returns. Nevertheless this real return has gone through excellent periods such as the 1960’s where it averaged 13,5% real return.

    Then during the 1970’s the real return generated from equities fell to low single digits and for a few years negative.

    Mid 1970’s to mid 1980’s were excellent years again even as inflation picked up into double digits.

    Again since 2001, the JSE has produced excellent real returns around 16% compounded.

    I will discuss other aspects next week.

    In many respects past data points to the positive effects of owning real assets, but looking at the data on discrete annual periods masks the downside in prices that investors had to endure to achieve the longer term results. In past data there is also an element of survivorship bias, which I have discussed.

    That’s all for today.

    Good rugby weekend ahead – go Bokke!!


    Ian de Lange

    Permalink2007-10-05, 16:44:19, by ian Email , Leave a comment

    Getting the Risk/Reward Ratio Skewed in Your Favour

    Investing and investments are all about risks, rewards, and the relationships between them. Reward is easily defined as your return on investment. Risk on the other hand has many definitions.

    Ian wrote about post modern portfolio theory in Tuesday’s report, and I thought that it was worth looking further at downside risk, and its role in portfolio construction. The punch line is that by protecting yourself on the downside you are able to shift the risk/reward ratio into your favour. If you want some more juice, read on.

    Risk has, up until recently, been widely accepted as standard deviation (the variation of an investment’s return). As previously mentioned, the flaw here is that a poorly performing investment that consistently performs poorly will have a low standard deviation, and will therefore be classed, under this method, as low risk.

    When speaking to most investors about the risks of investing, the over-riding concern is the permanent loss of capital, and not variance in return. It would therefore be logical to target capital protection as opposed to variance when selecting investments. We have seen the emergence, and indeed the explosion, in hedge funds over the last few decades, primarily as the savvy investors have started to realise that by protecting capital (to a certain extent) one is able to enhance wealth at a more rapid rate than those investors who don't worry about downside risk.

    Hedge funds are one way getting the risk/reward ratio skewed in your favour. The other is by getting your asset allocation correct (of which hedge funds form part of the allocation).

    You may ask, “Equities have been the best performing asset class over time, surely an investment into them will be the best decision for me?”

    Many investors’ profiles don’t allow for a 100% equity allocation. This is as a result of almost all equity managers (even the best) experiencing periods when they suffer capital losses and it is often at these depressed levels that investors withdraw their money from the equity market, thus locking into the losses. I have previously written about the difference between time weighted (fund) and value weighted (investor) returns, and that over time the investor will underperform the fund. Also, even the most disciplined investor will have unforeseen events which may require a capital withdrawal, and Murphy’s Law will have it that these occur at just the wrong time.

    What's more, by digging further down and looking at the better equity managers we generally see that they either implicitly or explicitly choose stocks that have limited downside. When we meet with these managers there is a common thread of them outperforming the market in down periods by significant amounts, and then being very close to the market in extreme bull conditions. They are generally ecstatic to outperform in a strong bull market, and if they underperform they will be satisfied as long as they are close enough to the benchmark, knowing that their turn to outperform will come again when the market turns. So despite not having a ‘capital protection’ mandate these managers see this method as the best one to realise superior returns.

    I did some fairly simple analysis looking at various drawdown percentages on one’s portfolio, and the corresponding return required to get back to your starting point. While no drawdown is enjoyed I noticed that for fairly low drawdown levels the return required to get back to your starting point is fairly similar to the drawdown experienced. For instance, a 10% drawdown requires an 11% subsequent return. This is totally different from larger draw down levels. The subsequent return required on larger drawdowns of 20%, 30%, and 40% are 25%, 43%, and 67% respectively, while you need to double your investment should you lose half of your initial investment (a factor of 2)! As you can see the larger the drawdown the proportionately higher the subsequent required return. It is not a linear relationship!

    While it is great to stand around the braai, and boast about your gains, the smart investor is preparing for the rainy day by ensuring that the downside risk in his portfolio is limited. By getting the risk/return ratio in your favour, the odds of successful investing move in your favour.

    If you want more specific guidance on how to skew the odds in your favour then email info@seedinvestments.co.za.

    Have a good day.

    Kind regards,

    Mike Browne

    Permalink2007-10-04, 16:32:06, by Mike Email , Leave a comment

    The JSE returns have been excellent but its not the only market

    On days like today when the local equity market moved up very strong, it seems crazy to be talking about portfolio construction. By late afternoon the JSE All Share index was up 1% at 30728 with value traded at almost R14 billion. The Banks index gained 4,6% as these shares raced up.

    With interest rate cycles nearing or having already touched the peak, investors have gained the necessary confidence to come back into local equities.

    As I say then why not hold 100% of ones investment capital in local equities and enjoy the ride? Well the answer is that some investors can hold a high percentage in equities. But for a small possible reduction in return with a large reduction in downside risk, it’s vital to diversify.

    This emerging market is back in favour. The rand is relatively strong at R6,89 against the weaker US dollar. It was last at R14,04/GBP and R9,76/euro.

    South Africa was not the only emerging market that was in favour – the MSCI Emerging Markets index gained 11,1% in USD with China gaining 19,9% for the month.

    The strong rand is one reason to make sure that you have a high allocation offshore.

    Many local investors still carry the scars of large offshore losses post 2001 and given the excellent local returns are reluctant to diversify equity offshore.

    Today banks made strong gains. They have underperformed for the year to date with the Financial 15 index up only 1,6% against the JSE All Share index up 22,8% to the end of September.

    Other laggards include Gold mining down 7,5%, despite the 17,5% gain in September alone – talk about volatile. Forestry and paper – mostly Sappi but now also Mondi – down 9,1% for the year to date.

    The leading sector was construction – up 64,5% for the year and almost 9,5% for September. Mining has performed well – up 42% for the year.

    Small caps continue to power up – 33% for the year and almost 60% for the 12 months. As long as small caps can be acquired at low values, they can make excellent investments.

    Property as an asset class gained almost 20%.

    The MSCI world index was up 4,8% in US dollar terms in September.

    A weak US dollar has helped commodity prices. Gold gained 10,6% in September with platinum up 9,3% in USD.

    So it’s not only the South African equity market that has had a good run. With profits achieved, investors need to look at protecting. This is not moving to cash, but to a defined asset allocation across growth assets.

    That’s all for now. Have a look at www.seedinvestments.co.za


    Ian de Lange

    Permalink2007-10-03, 17:05:49, by ian Email , Leave a comment

    Should you be applying post modern portfolio theory to your portfolio?

    I attended a brief presentation put on by the Institute of Investment Analysts Society last night. The topic was, “Is it time for Post Modern Portfolio Theory” presented by a US investment manager. We have been using this methodology for constructing portfolios, so I was very surprised when only one of the other managers attending had even considered it.

    Portfolio construction is really asset allocation. This is the building of various investment classes to construct a portfolio with the aim of meeting a certain return and risk objective. Studies, together with intuition, have revealed that asset allocation is a key determinant of investment performance.

    Equally important is that asset allocation is an important tool to reduce risk.

    And these are the 2 main ingredients that all investors want – maximum returns for the lowest risk.

    It’s generally understood therefore that asset allocation or portfolio construction is a very important process for long term wealth generation. However most private investors do not have a detailed strategic asset allocation plan. This is in stark contrast to professionally managed portfolios.

    So let’s take a brief look at modern portfolio theory and post modern theory.

    If we look at modern portfolio theory we do find some deficiencies:

    In a nutshell modern portfolio theory looks at asset class returns over time as well as their volatility (positive or negative), which it defines as risk. Certain assets, such as equities will have high historical returns, but high volatility, while others such as bonds will have lower returns and lower volatility.

    If these assets are plotted on a graph with return on the Y axis and risk on the X axis, then an efficient portfolio (combination of different assets) can be plotted, which is one that for a given level of risk generates the highest expected return.

    No problems here, except that risk is defined as volatility, which is mathematically known as standard deviation. Because risk is equated with standard deviation, low volatility means low risk and vice versa.

    I.e. risk has often been equated with high standard deviation. But is this really correct?

    Most investors will understand that this can produce nonsense. For example an asset class producing steady losses of around say 7% per annum, will display a low standard deviation, but is clearly not an attractive or indeed low risk investment.

    On the up side, positive deviation is also counted as risky, but any investor achieving 15% in year 1, 45% in year 2 and 22% in year 3 will be satisfied, despite the fact that standard deviation is high. The portfolio theory says the risk is high, but the investor says no problem.

    I think that the central issue revolves around the definition of risk.

    Investors think of risk in a far different way: The 2 biggest risks are:

    • Risk of losing capital
    • Risk of not meeting long term goals, such as having sufficient capital at age 65.

    Post modern portfolio theory

    When risk has been more accurately defined, then standard deviation or volatility is removed from the portfolio construction process. In its place comes downside risk. This is really where investors get concerned – losing capital on a permanent basis and not being able to achieve longer term goals.

    With downside risk optimisation when constructing a portfolio, no cognisance is given to volatility, past or expected. The result is a portfolio that is designed to achieve the longer term return goals, but with lower risk.

    I will be interviewed on CNBC Africa tomorrow evening at 8:00pm for anyone that wishes to tune in and listen to some investment views.

    For investors heading into retirement, e-mail retirementquestions@seedinvestments.co.za


    Ian de Lange

    Permalink2007-10-02, 18:54:27, by ian Email , Leave a comment

    What does Pimco say about future US interest rates

    The first day of the last quarter saw the JSE close up at a new high, over 30 000 for the first time. Gold shares took a hammering, down 3,9% even as gold bullion traded up in USD to $747. A factor was the dollar weakness against the rand, which is now at R6,85. Global investors have a very short memory because credit fears have now passed and markets are up into record territories.

    US markets took off on a positive note as well. The Dow is trading above 14000, up 1,4% with S&P500 and Nasdaq up in tandem.

    Pimco’s Bill Gross released his monthly investment outlook and it always makes for very interesting reading.

    His bottom line is that US interest rates tend to go down to around 1% real rates at the bottom of an easing cycle. Assuming US inflation of say 2,5% he is looking for US fed funds rates at 3,75%, i.e. another 1% down.

    The big issue on the agenda for the US central bank is the housing issue and its negative impact on the economy as prices come back. He agrees that fed policy should be as asymmetric as asset prices – emulating an escalator on the way up (i.e. 25 basis points increases) and an elevator on the way down (50 basis point reductions).

    There has been one and there could conceivably be 2 more in quick succession. But he thinks there is some dilemma. Current rates are not high for the corporate world, but too high for the few million homeowners who face upward adjusting mortgage payments.

    If Bernanke stops the elevator going down he faces a possible big housing crisis. However should he favour the homeowner over the corporation, he risks re-igniting speculative equity market behaviour and a run on the dollar.

    I went on record last week as saying that with the drop in US rates and the possibility of more to come, the Fed is signalling that inflation is tomorrow’s problem – today it’s a matter of retaining the status quo as regards borrowers. Pimco’s Gross is right, there is a strong possibility of more speculative equity behaviour.

    The US dollar is falling out of bed – to a low of $1,4283 to the Euro, the weakest since the launch of the Euro.

    Today on the JSE we saw more new highs on the JSE including Witsgold up 7,4% to R145, Shoprite up 4,1% to 3750c, Bell up 4,1% to R50, Billiton up 3% to 25112c and Barloworld up 90c to 13050c.

    Increased confidence could just push prices above intrinsic value. Its important to look at ones asset allocation strategy.

    Have a look at our website at www.seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-10-01, 21:11:43, by ian Email , Leave a comment