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    What's in a Fund Manager's size.

    Today I'm going to briefly touch on the difference between large and small asset managers, and what some of the more important differences between them are. You may automatically think that larger managers must be better, as they may have done something right to get where they are/ you have read about them a lot in the press, but this isn't always the case.

    Most funds start out small and as performance kicks in their assets grow, both as a result of organic growth (share price appreciation), but also as cash flows into the fund. One of the major advantages of being small is that you have a larger investable universe (when compared to large managers) as you are able to easily move in an out of smaller cap shares. This is especially true in South Africa (and is why some managers choose to cap their funds). For larger managers their initial successes can prove to be their downfall. As money rolls into their fund they find it more difficult to move into and out of small shares without moving the market significantly, and often need to change their strategy (not a good thing).

    The larger the assets under management, the closer the manager tracks the market. This is good for those investors that are worried about an extreme blow out (when compared to the market), but not great in that you lose out on the potential extreme outperformance that a smaller manager can offer.

    Generally smaller managers only have a couple funds at most, while larger managers have many funds. A quick count today showed that one of the larger managers in South Africa has 59 local unit trust funds! The attraction of a tighter range of funds is that it is the fund manager's best investment ideas, and you will be sure that everything will be put into ensuring that the fund does well, as there is nowhere to hide. On the other hand a manager with 59 funds will always have a star performer that can be advertised. Any laggards can easily be hidden! A larger manager may have a general equity, a value, a growth, a large cap, and a small cap fund! As investment consultants we need to know which of these is best going forward, not the one that won all the prizes last year. If the manager has one equity fund, we know that all his best ideas will be implemented in that portfolio.

    Smaller asset management companies are generally owner managed. As such there is a greater incentive for the fund managers to ensure that the funds do well. While incentives for these managers are higher, there is the key man problem in that if the manager has personal problems/is incapacitated in any way there could be an adverse effect on performance. Similarly if the company doesn't get sufficient assets under management, then the company could struggle to pay staff salaries, resulting in the manager getting nervous, and possibly taking his eye off the ball. A larger manager will generally be able to weather these problems better, as well as having a larger contingent of analysts who assist the manager in stock selection

    At Seed we make use of both small and large managers for our clients, extracting the best qualities out of both. We will for instance make sure that a small manager has the business side of their operation sorted out, so that they can focus their energy on managing the assets, while larger managers need to show that they are able to put their greater resources to work in garnering more insight than a smaller manager can.

    As I have often mentioned, getting a firm grasp of what you're investing in will help you understand your investments better!

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-31, 18:03:07, by ian Email , Leave a comment

    What’s in a Fund Manager’s Size?

    Today I’m going to briefly touch on the difference between large and small asset managers, and what some of the more important differences between them are. You may automatically think that larger managers must be better, as they may have done something right to get where they are, or you have read about them a lot in the press, but this isn’t always the case.

    Most funds start out small and as performance kicks in their assets grow, both as a result of organic growth (share price appreciation), but also as cash flows into the fund. One of the major advantages of being small is that you have a larger investable universe (when compared to large managers) as you are able to easily move in an out of smaller cap shares. This is especially true in South Africa (and is why some managers choose to cap their funds). For larger managers their initial successes can prove to be their downfall. As money rolls into their fund they find it more difficult to move into and out of small shares without moving the market significantly, and often need to change their strategy (not a good thing).

    The larger the assets under management, the closer the manager tracks the market. This is good for those investors that are worried about an extreme blow out (when compared to the market), but not great in that you lose out on the potential of extreme outperformance that a smaller manager can offer.

    Generally smaller managers only have a couple funds at most, while larger managers have many funds. A quick count today showed that one of the larger managers in South Africa has 59 local unit trust funds! The attraction of a tighter range of funds is that you are sure that it is the fund manager’s best investment ideas, and you will be sure that everything will be put into ensuring that the fund does well, as there is nowhere to hide. On the other hand a manager with 59 funds will always have a star performer that can be advertised. Any laggards can easily be hidden! A larger manager may have a general equity, a value, a growth, a large cap, and a small cap fund! As investment consultants we need to know which of these is best going forward, not the one that won all the prizes last year. If the manager has one equity fund, we know that all his best ideas will be implemented in that portfolio.

    Smaller asset management companies are generally owner managed. As such there is a greater incentive for the fund managers to ensure that the funds do well. While incentives for these managers are higher, there is the key man problem in that if the manager has personal problems, or is incapacitated in any way there could be an adverse effect on performance. Similarly if the company doesn’t get sufficient assets under management, then the company could struggle to pay staff salaries, resulting in the manager getting nervous, and possibly taking his eye off the ball. A larger manager will generally be able to weather these problems better, as well as having a larger contingent of analysts who assist the manager in stock selection

    At Seed we make use of both small and large managers for our clients, extracting the best qualities out of both. We will for instance make sure that a small manager has the business side of their operation sorted out, so that they can focus their energy on managing the assets, while larger managers need to show that they are able to put their greater resources to work in garnering more insight than a smaller manager can.

    As I have often mentioned, getting a firm grasp of what you’re investing in will help you understand your investments better!

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-30, 17:38:34, by Mike Email , Leave a comment

    High levels of correlation call for improved methods of diversification

    We talk a lot about diversification, but looking at how all markets across the globe have fallen in a systematic way, means that correlations are running high. This tends to be the case. In “normal” market conditions correlation may appear low, but as soon as the appetite for risk wanes, correlations increase.

    Before today’s gain, the local market was down 11,3%. This was across all the main sectors, Financials, Resources, and Industrials.

    So diversification does not mean owning 25 shares, or shares across the 3 main sectors.

    Looking further afield, the heavyweight Dow Jones appears to have held up relatively well, considering that it is down just 6,6%. This compares to the FTSE10 down 10,3%, Frances CAC down 13,1% and the German Dax down 15,4%.

    The Japanese market has also been hard hit.

    So with so many global markets all tracking each other down in times of panic, you may ask if its worthwhile looking at diversification.

    We think that it still is. Naturally in an environment where prices are falling, the ones making money are the investors that are short. By this we mean that investors that have sold borrowed shares at high prices a while back and so as prices fall, they make a profit because they can buy in at a cheaper price.

    Also those that managed to protect capital using derivatives, such as put options or selling futures. Naturally the relevant trades must be put in place before any major price fall. Classically hedge funds have this ability, and in a bear market one would expect to see a level of capital protection and in some cases positive returns, especially given the tools and liquidity available today.

    As investment consultants, in some instances we have seen this, which is encouraging. Fund managers that can thus take advantage of high volatility and price declines, therefore have a place in a portfolio looking for adequate diversification.

    In times of market volatility, you should be looking at your portfolio to gauge the effectiveness of the diversification that you have in place. See also my article this week where we discussed cash and bonds.

    Sincerely

    Ian de Lange
    Ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-29, 18:12:04, by ian Email , Leave a comment

    Prices just get cheaper

    The JSE opened up down as Asian markets had already slipped sharply. Japan closed down 3,9%, Shanghai down 7,19% and the Hang Seng off 4,2%. The JSE All Share index closed down 3% or 809 points. It was weak across the board. The US is currently up into positive territory- but only just

    Newgold has been a steady investment as bullion in US dollar terms has remained up through the $900/oz level. The exchange traded fund, Newgold which tracks 1/100 of an ounce of gold has had further investments to the point where they issue a further 1,2m debentures following the 4,4m issued last week.

    The price gained 1,6% to 6620 as the market cap of this fund is now at R5,5 billion.

    The metal has outperformed the shares, as the latter struggle with cost and operational issues. The gains in the metal price are a reflection of the dollar weakness. Looking at graphs in other currencies, these have also moved up steadily.

    With the US under tremendous pressure to assist ailing banks and insurers, there is a high probability that they drop rates again this week.

    With no real reason for the US dollar to appreciate against goods, investors appear to be slowly but steadily moving some capital into bullion.

    Local new

    Datatec announced the appointment of a new finance director following the resignation of David Pfaff. Datatec shares have fallen from a high of 4495 to 2790c.

    Simmer and Jack Mines, which owns Buffelsfontein and a 62,4% stake in listed First Uranium, gave an operational update today, which largely revolved around the energy crisis and the impact on its operations.

    The share price fell 2,2% to 489c

    PPC issued a trading update following the chairman’s statements at its AGM. Cement sales have slowed from a high base, but they expect positive growth for the year. December was however down 1,5% from the previous year, due to a number of factors, while it said that power outages were cause for concern.

    The price fell 6,9% to 3710c.

    Murray and Roberts gave a detailed announcement on the power issue. On the one hand it has been affected where last week its underground mining contacting operations were suspended.

    They say that there is ongoing discussion with clients and Eskom concerning the guarantee of uninterrupted supply of electricity to the projects dedicated to the 2010 World cup.

    On the other hand Murray and Roberts is benefiting from capacity problem and announced that it has secured the construction contract to Hitachi for the Medupi and Bravo boiler projects. It is also a contender for the Medupi civil construction contract (around R2,5 billion) and the Ingula pumped storage construction contract (R6,5 billion). It will also partnership with Westinghouse and Shaw Group submit a proposal for a nuclear power plant.

    MUR shares fell 5,7% to 7860c


    For all those investors that have a high cash weighting, this is an excellent time to structure your asset allocation more appropriately. Over time cash will under perform inflation – governments keep printing. This is investor’s biggest risk. Contact me if you want to discuss this.

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-28, 18:06:37, by ian Email , Leave a comment

    Lack of electricity now blackens the economy

    Power outages are now severely hurting the economy and the concern on everyone’s mind now is the depth of the problem. Anecdotal evidence abounds as to the cost that companies have to incur just on putting in generators. Today we saw a direct impact on the JSE as large mines were shut down.

    Today Eskom “forced” the closure of some of the large mining operations. The Gold index fell 5,8% as the overall market gained just 39 points to 26502.

    Anglogold Ashanti has stopped mining on all its SA operations. It cannot confirm how long this position will last. Investors marked down the price from R310 to a low of R287. It recovered later in the day, but still down.

    Goldfields, also one of SA’s large users (a so called Eskom Key Industrial Consumer) was forced to shut down from Thursday night. Unlike Anglogold however, Eskom has indicated to them that this it will be on “survival levels” for the next 2 to 4 weeks.

    Producing 7000 ounces a day at a margin of at a selling price of R6500/oz, this translates into R45m loss in sales per day. Naturally costs remain high, despite the lack of activity, given high fixed nature and high salary and wage component.

    Just how much company’s on behalf of their shareholders will be able to recover from government is very much up in the air.

    Impala Platinum (Implats) was also notified that electricity to its Rustenburg operation could not be guaranteed, forcing closure. The impact of this is approximately 3500 ounces of platinum per day, translating into a loss of R41,5m in revenue per day.

    Anglo Platinum made now announcement, but it is having its own problems at the Amandelbult mine because of flooding.

    The recent presentation by Jacob Maroga, ceo of Eskom left Kevin Lings, economist at Stanlib with the following conclusions:

    • South Africa’s electricity reserve margin has fallen substantially in a relatively short period of time from around 25% as recently as 2002 to 8% to 10% in 2007/2008.

    • The increase in electricity generating capacity has not kept pace with the growth in the economy.

    • In the 1960 and 1970, the growth in electricity demand exceeded the overall growth in the economy, reflecting the fact that South Africa was rapidly growing its industrial base. Over the past 20 years South Africa has become much more of a service economy . Consequently the growth in electricity has been lower than the growth of the economy.

    • Eskom is budgeting on the economy growing by 6% a year over the next 20 years and on electricity demand growing by 4% a year. This is potentially too low given that South Africa’s capacity utilisation is currently at a 30 year high and industry needs to build capacity.

    • Very worryingly, despite the planned increase in electricity capacity until 2014, Eskom’s reserve margin remains fractional. This is still the case even if we imports additional electricity from Cahora Basa. This is massively negative for the potential growth of the economy!

    • The current outlook for electricity demand and supply (as detailed by Eskom) would suggest that SA is extremely unlikely to grow the economy by much more than 4% a year on a sustained basis. 6% growth would seem extremely unlikely.

    • Eskom is arguing that the SA’s cost of the electricity is extremely cheap by world standards and not reflective of the replacement cost. They are arguing for sustained high but predictable price hikes.

    • Eskom is acknowledging that there is a National Energy Shortage and has proposed a number of ‘soft’ measures that could help over the next few years.

    • Eskom’s debt has been placed on “credit watch” by the rating agencies

    Lets see what next week brings.

    Have a good weekend

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-25, 17:45:49, by ian Email , Leave a comment

    Rogue trader

    Its not enough that banks have to write off massive sub prime loans – now French bank Societe Generele, reports that unauthorised trading losses by a rogue trader resulted in a $7,2 billion trading loss, the biggest in banking history.

    This is France’s second biggest bank. There have been other large write downs due to internal bogus operators. Many will remember the collapse of Barings plc due to rogue trader Nick Leeson, who caused a $1,4 billion loss in the early 1990’s.

    The transactions essentially used stock index futures and so as the markets gained in 2007, they were in the money, but fell substantially since the beginning of the year and came to management’s attention on Jan 18th.

    This is exactly the last thing that the global banking sector needs at this point. It’s under tremendous pressure as large doses of value are being written off balance sheets.

    Societe Generale is one of the world’s top derivative participants and also a leader in risk management. The rogue trader was however able to hide bogus trades through multiple layers of risk screening. It just should not have happened.

    Its news like this, that should make investors think about their own investment process including some possible aspects such as:

    1. Large companies, even with all their risk management, are not immune to problems.
    2. Investors should look at the custodians that they use and try to assess the quality of administration.
    3. Investors should know if they own the underlying asset in their own right, or whether this is via a structure, a life company, a structure with additional nuances such as a life company etc. I.e. the structure itself may add additional risk to the underlying investment assets. This needs to be assessed.
    4. Increasing complexity can and often does lead to unintended consequences. As far as possible keep your investment affairs as simple as possible.
    5. Use the services of a professional and independent investment advisor.

    We discussed this in yesterday's report, saying that investment complexity creates opportunities, but also increases risks. You need to be sure that the potential opportunities outweigh the potential risks that exist before investing.

    I am always amazed when investors know that they have some investment “product”, but are unsure as to who is the promoter, the actual underlying assets, and who, if anyone is managing it etc.

    While naturally not on the same league as the a rogue trader wiping out $7 billion, investors should take the time to really understand what they are actually invested into. This means obtaining direct confirmations (i.e. monthly statements), hard copies of the original documents and ongoing communication

    In many respects lowering risk is about simplifying structures, diversifying assets, ongoing checking of the custodian and underlying investments, using investment advisors and working to a defined strategy.

    That’s all for now.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-24, 18:48:21, by ian Email , Leave a comment

    The Complexities of Investments

    In order to be able to retire at some stage (on more than just a government grant) we need to invest during our working years so that we are able to pull down on this investment in our ‘golden years’.

    There are different types of asset classes that you can invest in, but there are also many investment structures that can be used to ‘house’ your investments. It is important that you, or someone you trust (be it a family member, consultant, or wise counsel), fully understands what you are investing in, and makes decisions accordingly.

    We spent most of this morning in meetings with a couple asset managers. The first meeting was spent catching up with an equity fund manager whose unit trust we use. The second meeting was with a fund manager doing some fact finding on private equity investments. Tomorrow we will be catching up with a hedge fund manager who manages a fund that our clients invest in.

    These three meetings clearly illustrate the different types of asset classes, and investment structures, and the importance of understanding the dynamics of each.

    An equity unit trust is a relatively easy simple investment to understand. All investors’ money is pooled together, and managed by the manager. Each investor is issued with units from the pool, and these units are priced daily with investors being able to draw funds daily (although it might take a couple days to land in your bank account). Stock market gains are taxed at CGT rates on realisation.

    Hedge funds come in a host of forms; some are relatively straight forward, while others have complex mandates. A simple long/short fund will look to go long (buy) shares/derivatives where the manager perceives value, and short (sell) derivatives where the security is overvalued. Different funds will have different mandates, which will determine how much gearing the manager can use, and other important risk constraints. Hedge funds often come in the form of Limited Liability Partnerships. Hedge funds are often only priced once a month, and sometimes have a lock in period. There’s still some debate as to whether gains should be taxed at CGT or Income tax rates, there is also uncertainty as to whether these gains should be taxed as and when they occur in the fund, or only on redemption from the fund.

    The private equity investment is set up through an endowment structure, where your investment is locked up for at least 5 years (subject to certain withdrawal provisions); the manager then uses your money to invest across a range of private equity funds. As these funds aren’t publicly traded, they are only priced once a quarter, and withdrawals prior to the fund maturing can be penalised by 5%. The fund is taxed within the structure, and a favourable tax rate is used, so the value that you receive at maturity is tax free.

    Investment complexity creates opportunities, but also increases risks. You need to be sure that the potential opportunities outweigh the potential risks that exist before investing. If you can accurately ascertain the risk levels, and you believe that the risk/return payoff is justified, then it may well be worth looking at investments that are generally marketed for sophisticated investors. Be aware, however, that ‘sophisticated investors’ don’t always get it right, as evidenced by the sub-prime, and credit woes that we have seen over the past year or so where investors clearly didn't understand all of the risks involved.

    Having a thorough understanding of your needs will help you make the correct call when it comes to deciding on what asset class and what structure you should invest in.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-23, 16:41:09, by Mike Email , Leave a comment

    Global markets get a reprieve on lower interest rates

    Global markets were fattened on large dollops of debt creation. That was until last year when it hit a crunch and started unwinding. But governments are not in the habit of watching as tighter debt markets hamper the actual economy and those voters. While the US Federal Reserve is a quasi government organisation, i.e. part private and part government, one of its mandates is economic growth, which it controls largely by adjusting the federal funds rate.

    Today it dropped this rate by a massive 0,75% to 3,5%, which is the biggest decline in the rate since the 1% decline in 1991. The recent trend since September 2007 has been down as it has tried to stimulate the debt based economy.

    The unexpected and unscheduled 0,75% decline is massive – bringing the fed funds rate to 3,5% and the discount rate to 4%.

    The interest rate tool seems to be central banks best “get out of jail card”, which the US Federal Reserve uses to best effect. It was aggressive following the decline in the economy in 2001, when it lowered rates 13 times from early 2001 to mid 2003 to an all time low of 1%.

    With the benefit of hindsight, Greenspan reckons that he probably left rates too low for too long.

    Now with the global economy stumbling due to excess debt created – as a result of the ultra low rates a few years back – the central bank does the only thing that has worked in the past – provided cheaper liquidity to the banking system.

    Locally:

    We saw a lot of volatility, with prices down at the opening. Then in late trade moving up on the news of the interest rate drop in the US, and ending flat on the day.

    A continued bear market especially in SA equities is unlikely because valuations are attractive.

    In 1998 when the market started falling, the PE was over 20 times. Central bankers were raising interest rates.

    Now certain value funds can structure a portfolio on a forward PE of 10 times and a 5% dividend yield. This is very good value, especially where interest rates have peaked and trend will be sideways to down.

    Therefore the probability of a protracted bear market in share prices from here out in local shares is relatively low.

    Naturally the investors that have held a relatively high cash component in their portfolios have benefited. They need to now take advantage – not necessarily rushing in, but definitely increasing exposure to real assets.

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-22, 17:58:48, by ian Email , Leave a comment

    Volatile markets identify the benefit of certain strategies

    In an environment such as this with global markets hit hard, the mindset of most investors turns from maximum wealth creation to wealth preservation. Many will be asking the question – “is it possible to actually protect capital?”

    The answer is yes it can. But at the same time, as with investing ahead of the stampede, working on your investment strategy, which must include a large dose of wealth protection, its no good closing the door after the horse has bolted.

    The JSE All Share index is down 12% since the start of the year - thus wiping out 12 months of gains and bringing the index back to the same almost the same level in January 2007.

    In times such as this investors appreciate the capital protection methods that they may have put in place, but up until now, were costing money in terms of lost opportunity as the bull market continued roaring along.

    It’s important to remember that volatility, while grabbing headlines, may not be the biggest risk that many investors face. For many the biggest risk is longevity risk, i.e. the risk of outliving your capital. Price volatility is an immediate issue, while longevity or actuarial risk has no immediate concern, only surfacing many years after retirement.

    While investments in local equity have been hard hit, certain portfolios have achieved positive performance in this time. Certain hedge funds are up for the month to date as their low and sometimes negative exposure to the market produces a positive return. It’s this negative correlation for some funds that make them very attractive in volatile markets.

    So with this risk in mind let’s look at some pointers that investors can take away from days and weeks such as this because its going to happen again – it always does.

    • Diversification is a must. No investor, despite the extent of models knows the future. Don’t diversify for the sake of it into expensive assets, but look for low correlation and value.

    Many investors don’t appreciate diversification because they remain fixed on the positive attributes of one asset class to the exclusion of others.

    Diversification includes offshore investments. It’s interesting that while many investors agree with this advice, many investors were burnt in 2001 and 2002 and have never recovered.

    • Having a plan of action, so that at times when quality assets are going cheaper, instead of panicking and selling, you can take advantage. Again just because a price has fallen sharply it is not reason enough that it will move up immediately. But over time buying quality assets as cheap as possible is a winning strategy.

    • Make use of expert fund managers, especially where they have the ability to use derivatives properly. As will all investments there is no holy grail and even hedge fund investors will get in wrong many times, but where they are focused on keeping capital intact, it can make a big difference.

    A 20% decline requires a 25% gain to neutralise the loss. For investors looking to discuss some of these points as they pertain to your circumstances, please don’t hesitate to contact me for a confidential discussion.

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za
    082 921 0220

    Permalink2008-01-21, 17:40:43, by ian Email , Leave a comment

    More Blood on the Streets

    We saw carnage on the local JSE again today, with the All Share Index ending the day down 1.43%. There was broad weakness with shares ending the day down outnumbering those ending up by almost 2:1 (283 shares down, 144 up). Most sectors ended the day down, with financials hardest hit. The Financial 15, which measures the movements of the largest 15 financial shares, was down 2.41%, in part from a 4.07% decline in life insurance companies.

    Some of the positive movements to come out of the larger cap shares were Impala Platinum up 1.19%, and that often maligned pariah Telkom up 0.66%. Maybe the negative attention that is usually focused on this parastatal is instead going the way of our favourite electricity provider? Interestingly another ex-government asset, Sasol, was also up, 0.62% on the day.

    Anglo Gold was the main drag on the gold mining index, as it ended the day down 7.71% on news that South African productions in Q4 2007 produced 55 000 ounces of gold less than the prior quarter. This decline in output came as Anglo Gold implemented a new “Safety is our First Value” campaign at the beginning of November.

    Truworths bucked the trend of falling retail prices by moving up 5.9% after releasing a positive trading statement. Basically second half (2007) earnings are expected to be between 20-30% higher than the corresponding period in 2006.

    JD Group ended the day down 6.39%, and is now down 61% from its high reached in March last year. This company has had plenty of bad news, but it is surely been knocked too far. Many astute managers have this share in their portfolio.

    A company that has been doing quite well in the last 6 months or so is Setpoint Technology (STO). It is up 56.67% since the end of June 2007, which compares favourably to the Fledgling Index’s (shares that make up the smallest 1% of market cap on the JSE) -5.09% over the same period. Setpoint provides, among others, expert analysis to the precious metal exploration industry, and fluid handling supplies medium technology, products and services to the petrochemical and mining industries.

    With no shares making new highs today, and plenty in the new 12 month lows column, this is surely the time when bargain hunters start to come to the table and pick up the scraps that have been abandoned.

    Have a good weekend!

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-18, 18:45:11, by Mike Email , Leave a comment

    Performance Fee Calculations

    All asset managers derive their income from charging a fee on the assets that they manage. These fees are calculated in various ways, and the way in which your manager charges should be clearly stated somewhere where you can access it; be it on the company website, fund fact sheet, in your mandate, or perhaps by contacting them.

    For the last 5 years or so South Africa has been in an extremely strong bull market, with asset valuations appreciating significantly over this period. In periods of market strength investors pay less attention to issues like how large a fee are they being charged, or the basis of how their fees are calculated.

    Some managers charge performance fees as a way of aligning the interests of the manager and investor, which is a good idea. In practice the alignment isn’t as close as we would like to think. You will probably find that many fee sharing structures are one sided, i.e. the manager participates on the upside, but not on the downside. Do you think that this is a fair arrangement? Obviously if the market goes up in a straight line like it did from April 2003 until October last year, then there aren’t (m)any down periods for the manager to participate in (essentially you would recoup fees in these periods), but when there are significant down periods, then these kind of questions become important.

    Many funds will claim that they have a high watermark over which they need to improve in order to start earning performance fees again, and while this is better than no high watermark arrangements there are different ways to do the calculation with some methods ‘more fair’ to the clients than others.

    Each different way of calculating performance fees has its pro’s and con’s. One needs to ask whether a potentially flawed approach of calculating performance fees is preferable over a flat fee structure, where the incentive for the manager is not necessarily the same, or whether you prefer the certainty that comes with a fixed fee structure.

    Essentially these are some of the questions that you should be asking. There aren’t always right or wrong answers when it comes to which is better, but sometimes there will be a more favourable way for the fees to be calculated. It comes down to being educated on your investments, or having someone who assists you, and has an incentive to question the fund managers to ensure that you are being treated fairly.

    Seed Investments periodically sends out other in-depth articles that are more related to retirement issues. If you don’t already get this email, and if you would like it sent you your inbox, then send an email to info@seedinvestments.co.za with the request and you will be included on our mailing list.

    Have a good day.

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-17, 17:50:51, by Mike Email , Leave a comment

    Global GDP and global markets

    While there are a number of factors to consider when looking at how much of your investment capital should be allocated to offshore investments, an important one is South Africa’s low percentage of the world economy. True, size of economy does not necessarily automatically translate into return on investment, but it gives an indication of the concentration of risk.

    One of the biggest reasons for holding a larger percentage of your capital in South Africa would be when your pension income liability is local. This is the case for most retirees in South Africa, which means that there is definite merit in matching rand liability with rand assets.

    The other reason for holding a high weighting in South Africa would be where there is far superior value compared to global assets. However we have seen that South African asset prices have marched in tune with other emerging markets and therefore not the screaming value it once was.

    The IMF has recently released an update to their assessment of the global economy and GDP numbers. Its interesting statistics and gives a picture of how small the South African economy actually is.

    The global economy measured in terms of GDP (Gross domestic product) is $44 306, i.e. $44,3 trillion.

    South Africa’s share of this is minute at just 0,55%, ranked as the 29th largest economy. US GDP comes in at $12,3 trillion or almost 28% and with only 4,85% of the world population (total global population around 6,1 billion).

    Second is Japan, then Germany, then China, UK and France. In total Africa represents just 1,89%. This is something that global investors are excited about. I.e. Africa is at a very low percentage of the globe and this has the possibility of upside opportunity. SA is the largest component within Africa, but while ranked 29th in GDP terms it’s far behind in terms of income per capital in 57th position, with GDP/capita at $5162, running behind the global average of $7230.

    These statistics alone must make investors think about their allocation to offshore investments. An important factor is the valuation of local assets versus global assets. Then there is the rand. It’s been strong against a weak dollar, but not against other currencies such as sterling and euro.

    In rand and US dollar terms global investments have underperformed local investments, but this is unlikely to persist.

    Global markets were punished today. The JSE did not avoid the carnage falling 2,6% to 26911, off its lows of the day. All the main sectors were down and lots of new 12 months lows. This is not the time to be panicking. Instead some investment managers and hedge managers will be using this as a buying opportunity with the cash that they have held back. To wit, they know that it could decline further, but far better to buy on days with panic selling.

    If you are an investor looking for professional management of your total or the bulk of your investment portfolio across all asset classes, then don’t hesitate to give me a call for an initial confidential discussion.

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za
    082 921 0220

    Permalink2008-01-16, 18:53:28, by ian Email , Leave a comment

    A brief look at sectoral ratios

    Fundamentally biased investment analysts spend a lot of time looking at financial ratios of a company within a particular sector in their capital allocation models. In addition to the standard financial ratios many analysts have developed sophisticated company specific models over the years.

    For value biased investors it’s about trying to assess where prices are trading at below intrinsic values. But there is no hard and fast rules because many value investors require value plus a trigger event, i.e. something that will trigger the release of value in the shorter period.

    The starting off point though for investors may be to look at a top down sectoral view and then drill down into specific shares. Absa economic research released a paper today on Sectoral Financial Ratios 1998 – 2007.

    It’s interesting to look back on the ratios over this relatively short time period for some of the sectors. Back in 1998 technology shares got to exceptionally expensive levels at just prior to the bursting of the IT bubble. Absa record that the average PE ratio for the software and computer services sector in 1998 was 46 times. The average price to book was 4,7 times. The cash flow per share was R0,48.

    A few years later into 2001 the PE ratio declined to 7,5 times, now at 12,5 times. The price to book declined to a low of 0,71 in 2003, now at 1,92 times. Investors paid too much for these businesses in 1998.

    Platinum was on a PE ratio of 7,95 times and a price to book of 0,69. Cash flow per share was at R4,67. This escalated to R26,77 a share in 2002, but now at R16,04. The PE is now at 16,4 times and price to book at 2,62 times.

    Construction shares were very cheap on an average PE of 7,02 and a price to book of 0,88. Cash flow per shares was recorded at R2,24. Cash flow per share has moved up to R3,52. The PE ratio up to 15,2 times and the price to book up to 4,07 times.

    Banks are interesting because each year they have increased their cash flow per share steadily from R1,10 in 1998 to R3,71. The PE ratio in 1998 was recorded at 11,5 times (no doubt after the decline in prices) and is now at 11,03 times. For banks the important ratio is price to book. This declined from 2,04 times to 1,22 times in 2003, now back to 2,03 times.

    By comparison gold mining earnings have been volatile but essentially flat over the time period. R5,22 in 1998 up to R10,88 in 2002 as the rand weakened, but now at R5,17/share again. The price to book was 1,03 in 1998 up to 5 times in 2002 and now at 1,22 times. So while historical earnings have been depressed the PE ratio looks very expensive at 50,11 times. Now with the price of gold moving through the $900 / oz level, this ratio will reduce.

    Remember when analysing – share prices are the most volatile. Earnings are a lot steadier, but net asset values are the steadiest. Price to book is a therefore a good number to look at. But it won’t give short term answers.

    These are just a fraction of some of the ratios that analysts look at. Each sector has its own ratios. E.g. when looking at banking shares, analysts look at provisions, non performing loans, return on equity, split of income between interest and non interest income, cost ratios, capital adequacy ratios, asset solvency ratios etc.

    If you are an investor looking for professional management of your total or the bulk of your investment portfolio across all asset classes, then don’t hesitate to contact me for an initial confidential discussion.

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za
    082 921 0220

    Permalink2008-01-15, 18:27:53, by ian Email , Leave a comment

    Global markets got off to a poor start

    Global markets had some positive news today after a very poor start to the year. JP Morgan reported that up to end of last week Wall Street was off to its poorest start since 1982 with the S&P 500 down 4,6%. Technically the major global markets are weak as they have been battling to move up through resistance levels. But this is not necessarily negative for investors.

    For sure there has been plenty of negative news and this has continued to spread into the local JSE. Bloomberg reported that Citigroup, Bank of America and Merrill Lynch and Co are likely to report their worst ever quarters this week with more write offs of over $35 billion.

    The local JSE has come under pressure from its peak in October, down around 13% before today’s gain of 1,6%. This brings the PE ratio down to a respectable 13,8 times. While the longer term average is lower, over the last 10 years, the PE for the market is around 14,5 times.

    Current price and valuation is never foolproof as a method to predict shorter term price movements, because often when prices are fair value they can go on to become even cheaper and vice versa, when expensive can continue to become even more expensive. It’s the sentiment that drives prices in the shorter term and we all know that this is more fickle than the Cape Town weather.

    Valuation is a far better barometer of the likely medium to longer term possible returns. And so while earnings growth is likely to slow, it is not likely to go into negative territory. A 12% to 15% growth rate on a 13,8 PE ratio can drop the PE to around 12 times, which is not expensive.

    There is a possibility that prices may trade sideways as earnings plays some catch-up and sentiment remains negative, but overall prices don’t appear too expensive. The critical area that will make a difference is if earnings come under pressure and companies can’t sustain them from the much higher base established.

    As always it’s the detail that counts. While some pessimism sets in and investors are not enamoured with share prices that have traded sideways for 6 months or more, value slowly starts to reassert itself. There are many share prices that have been hit hard and investors and professional fund managers alike are starting to get very excited about the prospects.

    Check the allocation that you have to local equities. With the firm rand and the high degree of ownership by foreigners of local equities, local investors should also be taking advantage and assessing their exposure to offshore.

    Formulate a total strategic plan, which includes a diversified portfolio of growth assets. Feel free to contact me to have a chat about your specific investments and how they can be structured.

    Sincerely

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-14, 18:49:10, by ian Email , Leave a comment

    The price of gold hovers at new highs

    The gold price has been hovering close to the USD 900 /oz level. Round numbers always appear more important than they really are in financial markets. Market participants understand that the psychology of the numbers plays a part and they will try and take advantage of this. In the medium term however, these round numbers are not important.

    Gold has been a natural recipient of the weak US dollar. One year ago the price was USD 612/oz, now nearly USD 900/oz, the gain in USD dollars was a credible 46%.

    As concerns about US recession have increased and the prospect of lower US interest rates increases, so investors have become more and more comfortable about holding a portion of their wealth in gold.

    South Africans can access the listed equivalent of a 100/ of ounce of gold by buying Newgold. This is an exchange traded fund (ETF) issued by Absa and is in the form of debentures. These listed and traded debentures are backed by physical gold in the form of 400oz London Good Delivery Bars and retained in the Rand Refinery.

    In late afternoon the price was trading at R60,55. At the spot Rand dollar this equates to USD889.33. The spot price of gold was at USD890. So the listed debenture trades very close to the spot.

    These debentures were initially listed on the JSE in November 2004. Newgold Issuer limited, the special purpose vehicle, takes a fee calculated at 0,4% of the

    As new money is allocated to the fund, it in turn issues and lists more debentures and then acquires more gold bullion. Today the fund issued an additional 800 000 debentures in respect of 7898 troy ounces. This lifts the market cap of this ETF to R4,8 billion.

    This compares to the Satrix 40, which also has a market cap of R4,8 billion.

    So even in Rand terms, gold as measured by the performance of Newgold, has done well. A year ago the price was trading at R45, now at R60 a gain of 33%.

    Bullion has outperformed the gold companies:

    Goldfields has declined from R130 to R120.

    Anglogold slightly up from R330 to R347.

    Harmony down from R110 to R87.

    Today the local equity market fell sharply, with Industrials off over 3% and the JSE All Share index down 1,4%. Gold shares went against this trend gaining 2,5% on the day.

    Have a great weekend.

    Regards

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-11, 17:24:48, by ian Email , Leave a comment

    Where will your focus be in 2008

    The start of a new year is a great time to make those important resolutions- as long as you have the tenacity and perseverance to stick to them. Resolutions are typically health related, losing weight and perhaps even making more money, but few have as a one of their priorities getting their investments into shape.

    Weekly finance magazines, market commentators and even some advisors will start to bombard the public with “hot tips for 2008” or “top 10 shares for 2008”. I.e. what shares to buy for the year.

    It’s an interesting exercise, but not necessarily that constructive for investors. The reason being that each investor has different circumstances, different time horizons, and definitely different expectations.

    A one year outlook on any particular share is far too short a time horizon for any investor.

    Instead of looking for hot tips, investors should be focus on the more important issues rather than doing the things that sound good in the short term.

    I.e. The first step is to make a complete assessment of your finances and investments and formulae a longer term strategic plan. This is especially important for those wishing to retire completely or indeed at some point retire actively.

    For many people, some basic steps are important for longer term success:
    • Pay yourself first;
    • Live within your means;
    • Have adequate cash reserves (2-6 months);
    • Have complete insurance coverage (risk management);
    • Pay off your debts;
    • Give generously;
    • Make regular contributions to your investments;
    • Consult an investment advisor.

    It’s an interesting point that longer term investors or savers should not be too concerned about shorter term price movements of assets. It’s not what a share or an asset class achieves in one month or six months – rather it’s the performance over a far longer period that will be the ultimate test for any investor.

    Certain actions such as stock guessing may appear expedient, but in the longer term without the backing of a plan of action, even where it may be largely correct, it will not have the desired end result.

    Regards

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-10, 17:29:50, by ian Email , Leave a comment

    Real Estate Investment Trusts (Reits)

    Someone recently asked me about the performance of offshore REITS. REITS are the equivalent of our local Property Unit Trusts (PUT) and Property Loan Stocks (PLS) listed on the JSE. The proportion of properties listed on the JSE is very small in comparison to the total value of properties that could be listed on the JSE. In the US, Canadian and Australian markets a lot more properties are listed.

    Only about 5% of the total JSE by market capitalisation is attributed to listed property. Again this 5% is a relatively small portion of our total property market.

    One of the reasons why it is so small is because of the legal structures of our local PUT and PLS. PUT and PLS are not known as “REITS” in the offshore market and as a result fewer offshore fund managers invest in our local listed property market. They generally don’t want to invest in structures that they are unfamiliar with (even though the differences are slight).

    The local property market returned 39% per annum, compounded, for the last 4 years. It is unlikely that this will continue going forward. The income yields are at about 5.5% and this looks expensive. Because of the rising interest rates it is expected that capital growth will slow down significantly.

    The risk with local property is that if trustees of large pension funds decide to reduce the property exposure then this could have a significant negative effect on the prices - especially if the listed market is so small.

    The offshore listed property market had a very different 2007. One can look at the DJ Wilshire Reit ETF. It tracks the Dow Jones Wilshire REIT Index. This ETF lost 33% (net of dividends) during 2007. However, from the beginning of the bull market in 2003 to 2006 the ETF increased by 150% from $38 to $100. If you include the income of about 6% per annum then you are looking at well over 30% per annum compound for the 4 years leading up to the beginning of 2007.

    The picture looks very different now. During the last two weeks we have seen an offshore listed property fund that changed its redemption periods. You can’t redeem your units straightaway anymore, but have to wait six months. This is mostly a consequence of higher inflation and the sub prime crises. Investors offshore are finding safer assets like gold.

    Therefore, with some of the offshore Reits coming down significantly there may be areas of value but for now the trend is still downwards.

    Regards

    Vincent Heys
    vincent@seedinvestments.co.za

    Permalink2008-01-09, 18:24:16, by vince Email , Leave a comment

    The Local Market is Waking Up

    Well it looks like South Africa is slowing crawling back to life. Many people are starting to head back to work, schools are beginning to open again for the new year, and relatives have gone back home. Much of the rush hour traffic that was experienced on the N3 to Durban before Christmas will be replaced with the regular rush hour, and despite car sales slowing, I can unfortunately guarantee you that this year the roads will be busier than the last!

    For many people this will be the first week back at work as companies start opening their doors after closing over the festive season. We even find that there are industries that completely shut down over Christmas time. One of these industries that closes shop over Christmas is the construction industry, which yesterday came back from their traditional end of year break-up (I hear that this has been practice for “over a hundred years”!)

    While some companies go into hibernation, with customers finding it impossible to get hold of anyone, others are going at full tilt to keep their customers happy. It seems that for many South Africans walking through crowded shopping malls until late at night is standard practise in December, with many shopping centres open (and packed) until at 9pm in the run up to Christmas. Despite the frenzy during this time, one can see that it wasn’t the bumper that the shop owners were hoping for, with shops slashing prices in the new year, as they try and get rid of unwanted stock.

    This year I found it rather ironic that it is the construction sector that closes down, while retailers are at their busiest. With 2010 looming ever closer there is a dire need for our stadiums to be built in short time, and it was therefore frustrating to drive past a couple of the sites and to see no activity. On the other side, inflation carries on increasing with economists continually having to upwardly revise their expectations and with inflation figures continually coming out above consensus, the consumer is slowing down on expenditure, and struggling to repay debt.

    With the Construction and Materials sector up some 77.3% last year, and General Retailers down 8.5% in 2007, one can safely conclude who investors backed in 2007. While looking back at last years performance gives you an indication as to what the thinking was last year, performance figures alone don’t help that much in trying to formulate an educated opinion going forward.

    Will Retailers continue to go down in 2008, or will they start to recover? Many investment professionals said at the beginning of 2007 (and some even earlier) that Construction shares were over-valued, and logic dictates that, as they are on average 77% higher than a year ago, they are even more over-valued now. Is it time to get rid of these high fliers in favour of the Retailers? These are the kinds of questions you need to ask yourself. There will still be some Construction shares that do well, and their may be some Retailers that continue to perform poorly, but this year will in all likelihood see divergence in share performance.

    While it is great to be able to tell you friends and colleagues that you held a share that did over 100% last year that fact should not be the reason why you continue to hold that share. While you should be consistently evaluating your investments (be they in shares or unit trusts), the beginning of the year offers a good chance to sit down, and make sure that you are correctly invested for the year ahead. Have you chosen the correct asset class, have you chosen the correct manager, have you chosen the correct shares?

    I hope that your start to the year hasn’t been too hectic, and that you are able to slowly get back into the swing of things.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-08, 18:40:28, by Mike Email , Leave a comment

    Can emerging markets keep shock at arms length?

    Recently a lot has been written about the decoupling of the emerging market (but more specifically China and India) from the developed market. The question was asked a few months ago “Will the emerging markets also go down if the US market fumbles?” The word goes that if the US sneezes the world does not catch a cold any more but rather offer a hand. Part of the reason is the difference in the economies. The US spends while China manufactures; the US runs a large deficit while China has enormous foreign reserves.

    The above statement has been challenged lately. Especially if one looks at what happened during November. The S&P 500 ended -4.4% (from a low of -9.2%) while the Hang Seng lost 8.6% (from a low of -17.1% after the first 3 weeks in November). The Indian market also ended negative at -2.3%.

    It is interesting to note the emerging market risks stated in a UBS Research Paper. Four different risks that could affect emerging markets are identified.

    The first risk is the possibility that a general dislike against risk or even just more conservative behaviour could cause the much-publicised carry trades to unwind more significantly. This is generally moving away from more “perceived” riskier assets to safer assets in the developed market.

    The second risk is the possible existence of as yet unreported or unknown exposure to sub-prime mortgage products or other structured finance products. We know at least that in South Africa our effect to this crisis is limited. Investec has had some exposure to the sub-prime market offshore, but even that was very small and a 50% drop in its share price was maybe too excessive.

    The third is the risk of adverse housing market developments in emerging markets themselves, though in most cases mortgage finance and housing markets are nowhere near as important as they are in advanced economies.

    The fourth risk, which may be the most significant of all and, in a way slightly darker, is the possible impact of slowing global growth on key commodity prices, revenues from which have been a significant factor bolstering the financial strength in several emerging markets.

    Even though some of these factors may not be necessarily relevant to the JSE, the fact is that our market is very closely correlated to the emerging market. The reason why our market did so well over the last few years is mostly because it was a resource and emerging market story and not necessarily because of our acumen.

    This proofs to be a very interesting year ahead of us.

    Regards

    Vincent Heys
    Vincent@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-07, 23:20:12, by vince Email , Leave a comment

    2007 returns

    Yesterday we discussed the performance of the local market during 2007. Let’s briefly look at what the offshore market did.

    The FTSE World Index did 8.8% for the year while the MSCI Emerging Markets did an exceptional 33.1%. The US markets produced single digit returns while the Japanese market would have lost you capital.

    Returns in local currency
    FTSE World Index (USD) 8.8%
    MSCI Emerging Markets (USD) 33.1%
    SP 500 TR (USD) 5.4%
    Nasdaq (USD) 9.8%
    Dow Jones (USD) 6.4%
    Japan Nikkei 225 (YEN) -11.1%
    UK FTSE 100 TR (STERLING) 7.3%
    DJ Euro Stoxx (Euro) 7.2%
    Canada Toronto Composite (CAD) 7.1%

    In terms off the other asset classes the returns for 2007 were (in US dollar terms):

    US 10 Year Treasury Bill 4.9%
    CRB commodity Index 16.7%
    Dow Jones Reits Index -19.2%
    HFRI Hedge Fund Index # 5.0%

    Notably commodities have done extremely well and as a result we can justify the exceptional returns in the emerging economies and also in South Africa. Property was significantly down with -19.2% for the year while the US 10 year government bond produced a modest 4.9% for the year.

    According to the HFRI Hedge Fund Index the returns to date between the different strategies vary between 4% and 6% for the year. This is in line with the credit and equity markets. Obviously certain commodity strategies would have done better.

    If one looks at the currencies relative to the Rand then both the USD and the Sterling depreciated slightly against the Rand while the Euro, Canadian Dollar and the Japanese Yen strengthened against the Rand during 2007. At the current levels the Rand remains vulnerable for further weakness.

    US Dollar (USD) -3.1%
    Sterling (GBP) -1.4%
    Euro (EUR) 7.5%
    Canadian Dollar (CAD) 14.3%
    Japanese Yen 3.4%

    In terms of commodities, oil was up 52% and gold 31% during 2007. Agricultural commodities were up 41% (all in US dollar terms). The oil and agricultural commodity increases are the primary reasons why global inflation have been ticking up … and the same is true in South Africa.

    Because of fears for higher inflation and political instability (e.g. Pakistan) there was a flight away from riskier asset classes like equities to more stable assets like gold. As a result we have seen gold reaching its 28 year high yesterday. It is still a long way away from its inflation adjusted price.

    Looking ahead into 2008, the story is not at all rosy. The US employment data came out today. This is generally a proxy for how healthy the US economy is. In short, unemployment is increasing which indicates that the US economy is slowing down. This in turn rises the probability for further US Fed rate cuts later this month to ward off a potential recession. The Fed may even want to cut rates by 0.5% instead of the normal 0.25%. As a result our market came down and ended 136 points lower at 28 989.

    I trust you have an excellent first weekend of the new year.

    Regards

    Vincent Heys
    Vincent@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-04, 23:41:55, by vince Email , Leave a comment

    The year that was ... 2007

    I am sure all agree that 2007 was a very interesting economic year.

    We saw local inflation climbing higher and higher (with some expectation of slowing down later the year) and the accompanied higher interest rates; oil prices going beyond $90 a barrel and touching $100; gold going above $840 an ounce and of course the US sub-prime problems.

    Let’s have a look at what our local market did during 2007.

    Cash:
    The STEFI index which is a proxy for cash returned 9.4%, the highest since 2003 when it was 12.3%.

    Bonds:
    If you invested in the composite bond index i.e. in a number of different government and corporate bond issues then you would have received a very low return of 4.3% during 2007. This is of course before tax.

    Listed property:
    Listed property performed well, irrespective of its volatility during the year. It gave us 26.5%, beating all other listed asset classes. Needless to say, it is looking on the expensive side now.

    Hedge funds:
    Hedge funds also performed well during 2007. According to the SA Hedge Fund Index, listed on the Bond Exchange, it did 12.6% during 2007 up to November 2007. Because of the equity market losses during December and because most of these hedge funds are long biased funds we can expect the performance to come down slightly. So let’s put that at a modest 11% for the year - still a good return.

    Listed equities:
    In general the All Share Index performed well if one considers the whole year. It did 19.2% for 2007. This includes a compound loss of 7.4% for November and December. The first six months of the year produced 15.1% while the balance of the year only 4.1%.

    So, which companies have done better based on market capitalization?

    The top 40 companies returned 17.5% while the medium sized companies produced 17.6% i.e. Mid Cap Index. The FTSE/JSE Small Cap Index performed extremely well and produced 34% while the FTSE/JSE Fledgling Index did 28.6%.

    In terms of the major sectors … ?

    The Resource 20 Index have been the best performer at 29.1% (i.e. the top 20 resource companies) while the Financial 15 Index has been the dog. It just about preserved your capital at 0.5% for the year. This has also been accompanied by massive volatility. October returned 11% while November and December returned -6% and -5% respectively. Therefore … there are some value here going forward. The Industrial 25 Index came in at an index average of 17.5%.

    As opposed to 2006 when everything went up significantly, 2007 was characterized but the importance of excellent macro views and exceptional stock picking skills

    These two elements will become even more important during 2008. There remains risk on the table and we are definitely not entering a smooth 2008.

    In conclusion … a very good year for the local investor taking into account the levels of volatility we have seen during the latter part. Property has done well and so have hedge funds and most equity counters. Cash did well and so is the expectation for 2008. Bonds performed poorly and we are not seeing value there for still some time to come.

    2008 will proof a testing time with lots of political and economic uncertainties. As a result of these uncertainties gold has now gone above $850 (a 28 year high).

    Regards

    Vincent Heys
    vincent@seedinvestments.co.za
    www.seedinvestments.co.za

    Permalink2008-01-03, 22:54:43, by vince Email , Leave a comment