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    An upbeat market view

    Charles Gave heads up global research company GaveKal. Webcast technology allowed me to listen to his presentation arranged by the local Chartered Financial Analyst society a week back. Upon arriving I was dismayed to discover that his discussion on globalisation and the financial revolution was actually presented around 9 months back.

    A LOT has changed in 9 months, but OK I decided that it was perhaps a good idea to asses these 9 month old views against current market trepidation and ascertain if there was ongoing validity in his opinions. The better investment strategies have some resilience.

    The thrust of the discussion was on the benefits that ongoing globalisation was having on global financial markets. He outlined a few trends, including:

    • The emergence of a new business model

    They call this the platform company revolution. I.e. knowledge focused, replacing manufacturing. So while many investors have been concerned that now only 1 in 10 jobs in the US is involved in manufacturing, as far as they see it, its irrelevant and indeed positive. More and more jobs are outsourced to the East and this has lowered costs and expanded margins.

    • Emergence of emerging markets

    Slowly but surely emerging markets are moving their economies from agriculture, to manufacturing to services. Productivity is steadily rising and this continues to be a longer term trend.

    An example of productivity increase is the benefits provided by China’s massive expansion of its road structure, improving logistics from a very low base and reducing distributable costs.

    • Financial revolution goes global

    In many countries illiquid assets stay just that, illiquid. The US took monetisation of illiquid assets to the extreme, leading now to the ongoing write downs of poor quality debt. Many emerging markets and some European countries have plenty of capacity to further enhance the liquidity of assets such as property.

    Generally lower volatility will also allow for greater leverage.

    • Inflation

    He saw this as not much of a threat, expecting further inflation in goods and food prices, but ongoing deflation in many goods, especially given the ongoing productivity out of China.

    The overall theme was that globalisation will continue to lead to higher sustainable company margins as cost structures are optimised. Knowledge based companies have a greater reliance on financial and intangible assets, which existing accounting systems and principles are not really designed to measure. Many of the benefits are just not being accurately measured.

    He concluded saying that earnings globally should continue to improve, interest rate near the top and steady and risk premiums down. All this leading to higher asst prices.

    Come February and their view had not changed too much. In a monthly newsletter they juxtaposed their views against Soros' bleak outlook, where in the Financial Times he articled “The worst market crisis in 60 years”.

    Both parties make some rational arguments and its worth expounding on these, in order to paint a probable outcome for modelling both longer term strategic and shorter term tactical asset allocation. I will do next week.

    Have a great weekend


    Ian de Lange

    Permalink2008-02-29, 17:22:28, by ian Email , Leave a comment

    Don’t confuse shorter term price volatility with long term risk

    Because an investment into listed equities has such a higher range of possible outcomes, for many investors it tends to carry a higher emotive element than an investment into a shorter duration money market account.

    This is especially true after investors have experienced a bout of negative volatility.

    The tighter range of possible outcomes in the return on a cash investment cause it to be perceived as “safe”. By definition the investment is short term, i.e. generally less than 12 months.

    This could range from a daily call, to 32 day call, to 3 month and 6 month maturity. As the one period matures, so the cash must be re-invested for a further period and so the one risk that many investors ignore is the so called reinvestment risk. This is the risk that at each reinvestment period the expected return declines.

    Risks of investments with low volatility:

    Therefore while cash or money market has a low volatility (i.e. positive and negative variability around its mean), for an investor it has the following two risks:

    • As interest rates were declining, so many investors found that they had to accept lower and lower rates as their short dated cash investments matured – the reinvestment risk.

    • Then there is the risk of the nominal return achieved not providing an adequate real return – i.e. after deducting the cost of inflation.

    Longer duration investments

    By contrast as investment into a company’s equity (share) is by definition an investment into a long duration asset. With longer duration comes the propensity for higher volatility.

    If this is the case, why should an investor then even consider taking on greater volatility by extending his investment duration? Well there are 2 very good reasons.

    • Most investors have a long duration investment horizon. At age 50, an investor has an investment horizon of at least 25 years. At age 60 this investment horizon is still at least 15 years.

    • Historically an investment into a longer duration real asset produces a higher real rate of return. This is dependent on a number of factors, not least of which is the valuation at time of purchase.

    Conclusion: Focus on the real risks

    Because volatility can be easily measured, occurs in the present and is indeed painful in times of sharp price declines, investors, advisors and many fund managers elevate its relevance.

    In contrast the risk of underestimating the investment horizon and not achieving a sufficient real rate of return will only occur some years into the future. For this reason the risk is often underestimated.


    Ian de Lange

    Permalink2008-02-28, 17:21:22, by ian Email , Leave a comment

    Old Mutual and Nedcor report annual results

    The two green companies, – Old Mutual and Nedcor - reported annual results for the year to December. Old Mutual with a listing on the LSE has a market cap of R105 billion. Results were below expectation, leading to a decline of 4,4% to 1925c. Nedcor declined 2,4% to 12290c.

    Perhaps it’s the tighter reporting deadlines in the UK that led this global company to report its annual results to December ahead of rival SA company, Sanlam. Sanlam is much smaller with a market cap of R43,8 billion.

    It’s double the market cap of Liberty at around R22bn

    Old Mutual price has declined from a peak of around R26 to its current R1910, falling over 5% at one stage today.

    Profit before tax rose 2% to GBP 1,75 billion. Adjusted embedded value per share rose from 161,1p to 173,3p.

    Old Mutual's star performer was Nedcor produced excellent results for the year to December. It’s come through a few years now where its starting to regain some of the premium. Headline EPS rose 33,5% and the tangible net asset value grew 21,6%. With headline EPS up to 1485c

    Because banks are leveraged businesses turning a small interest margin turn into a higher return on equity through gearing, they are higher risk businesses. But while growth rates are likely to slow, they continue to maintain their margins and with efficient costs structures can steadily grow earnings.

    The return on equity at 24,8% is now in line with other banks. Standard has a ROE of 25,2% and Firstrand 28%.

    Its interest margin came in at 3,94%.

    The bank at a price of 12290c now trades on a PE ratio of 8,3 times and a price to book of 1,6 times to its net asset value.

    Bank shares continue to come under pressure. Standard down over 3%, RMBH down 3,3% and Absa down 2,58%.

    Globally financial companies continue to be downrated. US company earnings for the companies in the S&P 500 that have reported, are 17% below expectations because of the ongoing writedowns.

    Local banks have been painted with the same picture. The story is just not as exciting as that of global resources, where oil is at new highs. Gold at new highs, silver at decade highs, copper close again to the 2006 high etc.

    Ben Bernanke, chairman of the US Federal Reserve delivered his testimony to the house financial services committee in Washington. It’s a semi annual event. He referred to downside risks and reiterated housing risks, saying housing and labour may deteriorate more than anticipated.

    He lowered estimates of growth to 1,3% from 2%.

    US markets retreated.

    That’s all for today

    Kind regards

    Ian de Lange

    Permalink2008-02-27, 17:39:09, by ian Email , Leave a comment

    Are their improved ways to assess the risk to your living annuity?

    New legislation for living annuities defines the drawdown as ranging from an annual 2,5% to 17,5%. This was previously set at a range of 5% to 20%. Does the drawdown rate matter and how should this be looked at in conjunction with projected returns? We believe the only way to properly assess is to perform stochastic modelling.

    Remember a living annuity is very different to a compulsory annuity. With the latter the recipient of the annuity has no investment risk. The life company assumes all this risk in return for providing a defined and ongoing annuity. With this form of annuity, any annual step up in the annuity payment will be defined at the outset.

    A living annuity differs dramatically from a compulsory annuity, because the annuitant takes on all the investment risk and this is unfortunately where many investors have not planned as accurately as they should have.

    Unlike a fixed long term investment, which moves as the market moves, up and down, a living annuity suffers from the ongoing strain of the drawdown. When projecting the long term sustainability of such a portfolio, the 3 main factors that must be taken into account then are:

    1. projected returns on each asset class, weighted to the asset allocation.
    2. draw down rate.
    3. inflation impact

    One of the mistakes made by many investors and advisors, is that they project returns in a linear fashion. I.e. the local equity market has returned 20% per annum over 40 years, therefore this can safely be projected going forward.

    Then they compound this error, by ignoring inflation and assume that because cash is giving 10% return, and their drawdown is 7%, the portfolio will last into perpetuity.

    This is not correct. The more accurate methodology is to look at all the probabilities using stochastic modelling. A stochastic process models hundreds and thousands of plausible scenarios. The reasoning is simple. Whenever you have real assets in your portfolio, which is naturally advisable, their returns are not linear, but lumpy. E.g. the annual return to end of December was 19,3%. But an investor coming in at the end of January 2007 would have been exposed to a market that gained just 10,1%.

    Had he been exposed to bonds, property etc, the return would possibly have reduced to say 7% for the last 12months. At the same time this could run negative for any 12 month period. Had he drawn out 10%, the portfolio would naturally have declined not only in nominal terms, but also in real terms – with inflation running closer to 9% p.a.

    Should this scenario play out for 2 or 3 years, one can easily see the “damage” to the portfolio, because of the negative compounding. This risk should have been detailed at the outset. We know what certain asset classes should return over a long period of time, but investors with living annuities have 3 things working against them, limited time to make up losses, running inflation and their ongoing drawdowns.

    Therefore a stochastic process gives a far more accurate picture of the risks involved. From these various scenarios predicted an investor can soon picture the longer term probabilities. This is a far better position than currently, when so many investors are really flying blind, with no real assistance.

    An investment advisor should be able to model the probable outcomes with a fair degree of accuracy.

    If you have a large living annuity, or discretionary portfolio and would like to have some sophisticated probability modelling, please don’t hesitate to contact us.


    Ian de Lange

    Permalink2008-02-26, 17:57:32, by ian Email , Leave a comment

    Are you using the indices as a tool in managing your portfolio?

    On a daily basis, global and local indices are quoted in nominal terms and by their nominal and percent movements on a daily, weekly or monthly basis. Indices are excellent tools for all investors to quickly gauge how the overall market is doing, i.e. a quick snapshot of the current and longer term trend. But have you considered just how this index comprised?

    There have been changes to the construction, but essentially it’s an index weighted to market capitalisation of the underlying companies. Some time back with the JSE’s link up with the London Stock Exchange’s (LSE) electronic trading system, the construction and maintenance of the indices was also done in association with the FTSE.

    This is big business – the FTSE is an independent company, owned by the LSE and Financial Times, that creates and manages over 100 000 equity, bond and hedge fund indices around the world. These indices are very important for all investors and then also the managers that they appoint to assist with investment analysis, performance measurement, asset allocation, portfolio hedging and the creation of index tracking funds.

    I come across many investors with large direct portfolios which have naturally performed well over the last 3- 5 years plus. The first thing that I ask them is, “Are you accurately tracking performance, relative to a benchmark?”

    A 100% equity portfolio must be compared to the index on an ongoing basis. Index tracking funds can be acquired relatively cheaply, but over time portfolio management can and should add alpha to the index. As a direct investor, you should be tracking the percentage alpha added.

    If we look at the composition of the FTSE/JSE All share index, we find a total market capitalisation of R4,5 trillion, split into the following:

    . 9 industry economic groups
    . Further apportioned into 30 sectors.

    The nine economic industry groups and their weightings in the All Share index are as follows:

    . Oil and gas 5,7%
    . Basic materials 44,7%
    . Industrials 7,7%
    . Consumer goods 12,1%
    . Healthcare 0.8%
    . Consumer services 4,7%
    . Telecommunications 6,7%
    . Financials 17,4%
    . Technology 0,5%

    The biggest component – Basic Materials – is further split into gold mining, platinum and precious metals, and general mining.

    Market capitalisation weightings as an exact tool for portfolio replication have a flaw in that larger companies have a greater weighting and then within the larger cap universe as one becomes relatively more and more expensive, so its weighting increases.

    Its interesting to note that 32 companies make up the 44,% of the basic materials. And another 32 companies make up the 7,7% of the industrial grouping. No less than 51 companies make up the 17,% in the financial grouping.

    Overall the JSE All Share index has a composition of 48% to resources, 34,6% to industrials and 17,4% to Financials. It’s a reflection of where the recent big moves have come from, not necessarily where the value is.

    Are you disaggregating your portfolio and comparing to the benchmark provided by the indices. Not to emulate the index, but just as an additional guide. The best portfolio managers are non benchmark cognisant in their portfolio construction, but very benchmark cognisant in their tracking of returns.



    Ian de Lange

    Permalink2008-02-25, 17:49:04, by ian Email , Leave a comment

    tax on investment portfolios

    I was asked the question on whether it’s best to invest directly into the market or via a unit trust from a purely tax basis. As an element that produces a large cost to a portfolio and therefore detracts from the final value, tax is a crucial element of investment planning.

    Elements that detract from portfolio performance include management fees, administration and tax costs.

    Management fees can and should be more than compensated for through the adding to performance returns – i.e. return appreciation over and above the index return – this is known as alpha.

    Tax cost however is a given, but can only be delayed and managed down.

    There has always been a distinction between revenue gains and capital gains. Prior to Capital Gains Tax (CGT), tax court cases were littered with taxpayers asserting that a certain gain was on capital account and therefore not taxable. The introduction of CGT did not change much, only now introducing a tax on capital gains, where previously there was none.

    The first rule of tax on investments is that gains must be taxed as capital and not income. Depending on the taxpayer the tax differential is just too great. For individuals its 40% marginal rate for revenue profits and 10% maximum CGT.

    Naturally corporate tax rates at the now 28% are lower, but the STC rate and future dividend tax at a further 10% must be taken into account.

    To pay the additional 30% tax on profits due to greater activity is nonsensical.

    The new 3 year rule for investors makes it easy for taxpayers to claim profits as capital gains, but only where they hold the investment for at least the 3 year period. Profits on sale of investments held less than the 3 years are not necessarily taxed as revenue, but the onus of proving otherwise is more difficult.

    In these cases SARS may look more favourably on investors in unit trusts as opposed to direct investments.

    The second rule is a delay of tax is more efficient that having to pay tax today. This is the attraction of unit trusts, which have a dispensation where all gains on sales are not taxed within the trust itself, but allowed to accumulate.

    The investor is not taxed until such time as the units are sold at a profit, at which time a capital gains tax event is triggered.

    Clearly this is distinct from the direct investor, where each sale will either be taxed on revenue account – if the activity is too high – or on capital account and payable as gains are generated.

    If you are paying unnecessary tax on your gains and so reducing returns, you must make an assessment and look for ways to optimise. Remember though that investment decisions must never be driven purely by tax considerations.

    Have a great weekend

    Kind regards

    Ian de Lange

    Permalink2008-02-22, 17:59:42, by ian Email , Leave a comment

    Forex rules OK!

    Bad news was discounted and the good news of stronger commodity prices welcomed as the market raced up back through the 30 000 level. As is normal there was a lot of print dedicated to yesterday’s budget announcement. The beneficiaries for the second day were rand hedges.

    The relaxation of some of the forex controls extended to companies, trusts, partnerships now being able to also buy rand futures on the JSE’s yield X and to also invest into inwardly listed investments such as Great Basin Gold.

    The relaxation also extended to pension funds now not having to apply to the Reserve Bank for offshore allowances, but changed to a system of prudential guidelines, with quarterly reporting and monitoring by the Reserve Bank.

    The relaxation to 20% from 15% of total retail assets for pension funds and to 30% for collective investment schemes, investment managers and long term insurers was also welcomed.

    Relaxation at the institutional level is commendable. But while these assets are exposed to offshore, when ultimately paid to members or unit holders, they cannot be repatriated and held offshore, but must first be converted back to rands and paid out locally.

    The R2m offshore allowance was not increased, rather a R0,5m annual discretionary travel, gifts, donations allowance was introduced.

    While the rand was relatively steady today – commodity prices in USD continued to move up and this led to demand for resource shares. The Resource 20 index moved to a new high, closing up 3,5% and leading the JSE All Share up 2,35%.

    Mid and small caps trailed on the day, gaining just 0,4% and 0,97% respectively.

    Gold shares gained 5,9% as bullion moved up to $945/oz.

    With the sudden spurt of positive news, no less than 13 shares traded up to a new high or new 12month high, including the foreign inward listings such as GB Gold and Aquarius.

    Anglo pushed to a high of R506,20, ending up 3,44% to R498,50.

    Implats gained 6,97% to R337.

    Iron ore and Manganese producer, Assore, released interims to December reflecting headline earnings up 118% to R651,6m and a dividend increase from 150c to 250c/share.

    The price gained 4% to R645.

    With today’s strong gains, who would have thought that the JSE declined over 5% in January? For the year to date its up 4,2%.

    Do you assess the allocation of your portfolio to offshore? I.e. including your pension, living annuity, provident funds, endowments, unit trusts etc on a see through basis. Do you have a strategic weighting to offshore? If you have not made use of your R2m offshore allowance per taxpayer, or not sure where to best place these funds, don’t hesitate to contact me.

    Kind regards

    Ian de Lange

    Permalink2008-02-21, 17:38:18, by ian Email , Leave a comment

    2008 Budget Speech

    “Madam Speaker

    The global economy grew by an average of 5 per cent from 2003 to 2007. It was a period of robust expansion but also of widening international imbalances. Now there are storm clouds ahead.”

    This is how Trevor Manuel started this year’s annual budget speech. With a clear indication that we have a strong head wind to contend with.

    Trevor Manuel has now delivered a budget speech for the last 14 years, and is the world’s longest serving Finance Minister. Over this time he has offered fewer and fewer surprises on budget day, mainly as a result of getting the country’s fiscus in order, this year was no exception.

    Most of the relief this year comes in the form of adjusting tax levels to counter the effects of inflation. For example exemption from capital gains tax increases from R 15 000 per annum to R 16 000.

    There has been bracket creep for personal income tax. As always the adjustments favour the lower income earners. By way of example an individual (under 65 years of age) earning R 100 000 pa will now pay 5.26% less tax than last year, while someone earning R 1 000 000 will only save 1.17%.

    As has become the norm sin taxes are up again. Consumers are now going to have to pay an extra 66 cents for a packet of 20 cigarettes, an extra 12 cents for a bottle of wine, 5 cents extra for a 340ml can of beer, and R2.17 extra for a 750ml bottle of hard liquor. These amounts won’t break the bank, but do add up in the government’s coffers. The fuel levy is up 6 cents a litre, on top of all the increases that we’ve been experiencing.

    A new electricity levy has been tabled. It will cost the consumer 2 cents per kilowatt hour. This money will help Eskom increase its capacity (and also comes on top of the massive increase in electricity rates).

    Child support will be extended to children up to their 15th birthday from 2009.

    Exchange controls have been relaxed somewhat with the restriction on companies, trusts, partnerships and banks investing into rand futures, inwardly listed companies (for example Uranium One, Aquarius Platinum and the offshore tracker funds) being abolished. And while the R 2 000 000 offshore allowance for individuals hasn’t been changed, Treasury will introduce a R500 000 per year "discretionary allowance for purposes of travel, gifts, donations and maintenance".

    I have outlined some of the budget changes for individuals. Hopefully there is something in it for you! Ian will cover more of the budget in tomorrow’s report.

    Kind regards,

    Mike Browne

    Permalink2008-02-20, 17:27:19, by Mike Email , 1 comment

    What does the budget mean for your allocation to bonds?

    Mr Trevor Manuel will present the annual budget speech tomorrow. Not wanting to second guess what is likely to be announced, let’s look at some of the broader issues, which have an implication for how an investor should look at his allocation to bonds. In the past widely punted as low risk, we have been saying for a while that they are higher risk.

    There is no doubt that the fiscal affairs taken over by the present government is far stronger than the precarious position when taken over in 1994. Over the years, the government has been able to mostly balance the budget in the face of unlimited demands.

    In recent years, their difficult position has been helped by the strong economy.

    In October last year, Manual presented the medium term budget policy statement, which sets out the fiscal framework for the period 2008/09 to 2010/2011. This medium term outlook for the 2008/2009 year looked decent with the following numbers at a consolidated government level.

    Net revenue R616 billion

    Total expenditure R599.9 billion

    Budget balance R16,2 billion.

    This is going to be the crucial figure tomorrow – the economy has changed course in the last 6 months and revenue forecasts may have to be curtailed, while expenditure and capex is on the rise.

    SA and global governments don’t have a problem running budget deficits because they borrow in the capital markets. The balanced budget in recent years allowed for debt to be repaid. But while national government have been budgeting a surplus, the medium term budget borrowing requirement for non financial public enterprises (i.e. the likes of Transnet and Eskom) came in at R32,1 billion for the next year. The net borrowing requirement for government therefore came in at R18,5 billion. I.e. not a lot for government to borrow.

    The non government public enterprise borrowing requirement was budgeted to step up to R36,1bn in the next year and R41,5 bn in 2010/2011.

    On this basis gross loan debt (domestic plus foreign debt) was budgeted to increase from R568bn to just R571bn in 2011. I.e. still manageable compared to 1994.

    BUT …….that was before the Eskom disaster.

    The previous official capex expenditure put out by Eskom was of the order of R150 bn for 2007 to 2012.

    Financial Mail reported that Eskom is upgrading this budget to between R250bn and R350 bn. Listening to Eskom chairman, Valli Moosa last night, its apparent that even these revised figures may be too low.

    A figure of R1 trillion up to 2025 is being bandied around. Naturally this is going to be important for taxpayers and electricity consumer, because ultimately it’s the SA citizen that pays for this. But is also very important for all investors.

    While SA government net borrowing requirement has been coming down in recent years, the supply of bonds into the market has reduced, while demand by pension funds had been high resulting in an almost unnatural pressure on prices (i.e. yields coming down)

    Now with tables turning and government going to come back to the capital markets and issue paper, investors are going to be more demanding on the yields. Bond prices, as with all assets have an inverse relationship to yields. With more supply of bonds and investors requiring greater yields, prices of bonds will be under pressure.

    There was a time years back, when Eskom debt had a better rating than government debt and the yield on the Eskom long bond, the E168 was quoted nightly. The parastatal’s financial position was excellently managed. Looking at the yield on the E170 with a maturity date of 1 Aug 2020, the yield fell from 8,4% to 9.085%. The spread on its companion government bond, the R203, widened to 41 points from 31 points -i.e. investors lost money.

    We have been saying for a long time now that investors must assess the extent to which their portfolios have an allocation to government bonds and bonds generally. As yields have been under pressure, so investors have lost money. For all our clients we recommend and then assess exposure and report back monthly.


    Ian de Lange

    Permalink2008-02-19, 16:35:33, by ian Email , Leave a comment

    Preference shares - consider all the facts

    With asset prices under pressure over the last few months, the hybrid debt instruments known as preference shares, which have become very popular in recent years, have generally held up well. Because of the higher dividend yields on these instruments, preference (pref) shares became very popular for investors seeking out higher yields on their capital.

    Soon after launching by the banks in 2003, pref shares suddenly became very popular and bank after bank and then many industrial companies tapped into the demand from the market.

    A company can fund its operations using a combination of shareholders capital (equity) and debt. Shareholders take on the most risk (because they are last in line should anything go wrong), but for taking on the additional risk, shareholders have unlimited upside in growth.

    The providers of debt to a company however earn a premium (which varies, depending on the riskiness) above say the risk free rate (government bonds). If all goes well, they will receive all their interest and capital repayments, but will not participate in any growth in the business.

    Preference shares are a form of hybrid, consisting of elements of both debt and equity, but leaning towards the characteristics of debt. Holders of pref shares do stand before ordinary shareholders to receive dividends. The structure of the pref is one of fixed dividend dates, fixed dividend rates (or a fixed percentage of say the prime rate), but typically no participation in the growth of the business.

    When looking at investing into such instruments, one must assess the following facts:

    . Does the price or the yield that I am receiving compensate me for the risk? It’s important to look at the yield received on the ordinary shares. While prices have come down and yields are looking more attractive, so are the prices and yields on the ordinary shares, which will provide longer term capital growth.

    . Is the pref share cumulative or non cumulative? In the case of non cumulative pref shares, should the company run into problems in one year and be unable to pay, there is no obligation in the next year to make this up. Some prefs are cumulative, while many are not.

    . Is the pref participating or convertible. I.e. does it convert into ordinary equity at some date to provide a higher possible return? Most of the time they are non participating.

    Redeemable or callable. Most pref shares don’t have a redemption date and in theory then run forever. Andrew Canter of Futuregrowth Asset Management notes that this is of particular concern. The current price of the instrument is the discounted value of future dividend payments, and any uncertainty of a payment even 10 years out, will knock the current price dramatically.

    This is quite different to a bond with a definite redemption date, where the current price is mostly made up of the discounted value of that future final repayment of capital.

    He makes the point in a note on prefs, “One hardly thinks that any issuer of perpetuals in the SA market is likely to last as long!”

    As with all assets, it does come back to price. If there is a sufficient buffer in the pricing on both a relative and absolute basis, then investors should consider an inclusion. Diversification as a form of insurance cannot be overemphasised.

    And then its back to the definition of risk. As I have noted before, reducing shorter term volatility in your investments, does not mean that longer term risk will reduce.

    If you are an investor with a high portion of your capital invested into preference shares, please make sure that you have assessed all aspects. We have seen in the past how quickly the capital value can fall.


    Ian de Lange

    Permalink2008-02-18, 15:53:45, by ian Email , Leave a comment

    The good and the bad

    2008 remains volatile. One day global markets are up, the next all down again. The level of correlation is high, but in times of uneasiness, this is to be expected. It also highlights the fact that diversification cannot be achieved by simply spreading between resources, industrials and financials. Today I want to juxtapose two industries. Construction, currently running hot, and banking running cold.

    Construction shares received a boost with Murray and Roberts coming out with a trading update saying that headline EPS for the 6 months is expected to be up between 50% and 60%.

    HEPS for the full year to June is also expected to be up between 50% and 60%. This puts the forward EPS up to around R5 for the full year and the current price on a forward PE ratio of 18.7 times.

    A number of years back the share price itself dropped to a low of around R5 and now its annual earnings are expected at this level. At the time the company had been through a very tough time and there was only doom and gloom on the horizon.

    Fixed investment spend was at decade lows and construction shares, operating on thin margins were lucky to turn a profit at all.

    Now MUR is a likely beneficiary of capital expenditure on new power plants, and so the outlook remains very positive. All construction shares are wallowing in the quantum of work.

    But the price has run hard and it’s debatable as to how much of the good news is already in the price. A forward multiple of nearly 19 times is not cheap.

    Group 5 share price gained 5,5% to 4740. Its results for the interim will be out on Monday.

    WBHO gained 1% to 130.86 and Aveng up 2,25% to 5675c

    Smarter investors bought ahead of the story and the real smart investors bought when there was only negative news and locked the shares away.

    As far as financials have been concerned, well they have had a very tough time. Standard Bank shares fell 4,5% to R89.

    Absa down 4,2%, Nedcor down 5,22% and RMBH down 3,5%

    These are all big declines. Exacerbated by the news globally from UBS that banks around the world are at risk for another $203 billion in writedowns.

    The outlook is negative, investors can’t see any turnaround. If sentiment continues to get worse, and prices continue to remain under pressure, the weak shareholders will leave and the smarter investors will be buying.

    Have a great weekend and enjoy the rugby


    Ian de Lange

    Permalink2008-02-15, 17:28:35, by ian Email , Leave a comment

    Always get value for the fees that you pay

    The return that you as an investor generate from your investments is a function of many factors. Its asset allocation, time invested, the specific shares or unit trusts, the initial capital invested and the tax savings on the particular vehicle used. It’s also a function of costs involved.

    Let’s be honest – no one minds paying fees for services where value can be added over time. It becomes a problem when service and value add is lacking.

    At the underlying company level, all company directors must disclose their annual director’s fees. In some cases this can be excessive, but where the companies are producing the results, then shareholders don’t mind. A well run company will over time result in an excellent investment.

    When it comes to specific investment products, hedge fund managers are amongst the most expensive – typically charging 20% for gains. But again most investors have achieved good results after fees, thus providing an excellent risk return payoff. Excellent investment managers will demand and receive these higher fees.

    When it comes to the myriad compulsory investment products that can form a large part of one’s portfolio, such as retirement annuities, living annuities, preservation funds etc, there I often find that investors are not getting good value for some of the fees incurred. In some cases they are getting no value at all.

    I think that the single biggest reason for this, is that in the 1990’s life companies (who have to underwrite these investment products), introduced varying levels of flexible compulsory funds, which immediately proved attractive to investors. These products remain far superior to the old style life funds, which I call black holes. Their only caveat – with flexibility comes the requirement for ongoing advice and management.

    Perhaps you are already invested into one or a range of these and paying a fee without receiving value. You need to look closely at the fee structure you are paying.

    Where you are paying for ongoing advice and management you should assess whether you are receiving the following:

    • A detailed investment plan, typically known as an Investment Strategy. I.e. what are the specific reasons for your long term asset allocation.

    • A clear indication of your asset allocation to local equities, foreign equities, bonds, cash, and property. Remember each fund must be examined on a see through basis.

    • A level of comfort that your advisor, where acting as manager:
    o Is monitoring and benchmarking performance
    o Is updating the asset allocations of your portfolio for market movement, and changes in the underlying portfolio.
    o Is monitoring your existing funds, including important aspects such as portfolio manager changes.
    o Has the process and ability to routinely monitor all available funds for inclusion into a watch list and possible inclusion into your portfolio.
    o Is making the necessary changes or advising you on necessary changes.

    Hope this helps.


    Ian de Lange

    Permalink2008-02-14, 17:05:37, by ian Email , Leave a comment

    Gold versus Platinum

    While gold is the resource that initially spurred South African growth in the late 19th Century gold rush, platinum is arguably a more important resource for South Africa going forward. Let’s have a look at the two precious metals and why one is now more precious to SA than the other.

    Gold production in SA has, until recently, dominated global production. South Africa’s gold production in 1970 accounted for close on 70% of world production that year (over 32Moz), but our relative and absolute contribution over the last 4 decades has declined to the point where 2007 production was only 11.1% of world production (less than 10Moz). Last year China produced more gold than SA. This is the first time in over a century that SA hasn’t been the leading global gold producer.

    Platinum production, on the other hand, is still largely concentrated in Southern Africa with almost 80% of global production coming from this region (Angloplat accounts for 38% of world production)! As of 2006, South Africa land accounted for 87.7% of world reserves.

    While having massive reserves of a mineral is an important factor in creating wealth, equally important is getting the metal out of the ground. In this regard Eskom’s power shortages won’t help both gold and platinum production. However, the fact that SA has the lion’s share of platinum reserves means that global demand for South African platinum is relatively inelastic (i.e. they can’t buy much platinum from other countries), while our lack of dominance in gold production allows buyers of gold to shop elsewhere. This dynamic results in our electricity supply problems having a direct (positive) impact on the platinum price, but not so much on the gold price, and being a relative positive point for the platinum companies.

    Both mining activities are dangerous, with shut downs occurring last year over safety issues in both platinum and gold mines, but it is arguably the gold mines that are more dangerous with the miners up to 4km below the earth’s surface! These depths not only result in bigger safety concerns, but also increase the cost of bringing the mined earth to the surface.

    Not only do South African dynamics point towards platinum being a more valuable commodity, global dynamics also do. Both metals are ‘real’ assets (as mentioned in previous articles), as opposed to ‘paper’ assets, and are hence good retainers of wealth but platinum also has real industrial uses. While demand for gold is mainly through jewellery (highly price sensitive) and central bankers (as a store of wealth), platinum (and other platinum group elements) is demanded through jewellery (which is highly sensitive to price), autocatalysts (treats exhaust emissions), chemical applications, and many other industrial activities. This entrenched demand for platinum should support the price in the future.

    At writing of this report (Wednesday 4pm CAT) gold was trading at $903/oz and platinum was valued at $1925/oz. Both the gold and platinum indices were down for the day. The platinum index returned 34.43% for the year to 31 January 2008, with the gold index losing 8.57% over this same period.

    Hopefully this report has given you some more insight into two of South Africa’s precious assets.

    Kind regards,

    Mike Browne

    Sources: www.wikipedia.com, www.goldsheetlinks.com/production, http://pubs.usgs.gov/of/2004/1224/2004-1224.pdf, www.kitco.com

    Permalink2008-02-13, 16:02:10, by Mike Email , Leave a comment

    Buffett looks to step in with some cash

    No one can cherry pick unwanted down and out assets better than Warren Buffett. For a few years now, his cash generating businesses have been throwing off cash and he has been accumulating faster than a squirrel heading for winter. Now with large scale asset price declines, he announces a bid to guarantee around $800 billion in municipal bonds.

    MBIA, originally Municipal Bond Insurance Association, Ambac and FCIG, all originally started out as guaranteeing municipal bonds, but extended into packaging and selling collateralised debt. This is where their problems have arisen, resulting in the rating agencies having to (belatedly) downgrade their AAA rating status.

    Downgrades of municipal debt ratings results in an immediate sell off of the higher quality municipal bonds, which means losses for the holders of these bonds and good opportunities for those with cash to invest.

    In steps Warren with close on $50 billion cash in Berkshire Hathaway. He understands risk premiums, because the biggest business contributors are his insurance and reinsurance businesses.

    With some possibility of an underpin coming into a large segment of the debt market, stock markets stabilised.

    It seemed to provide the global market with some sense that there may be light at the end of the dark tunnel.

    The local market stabilised with the higher market in Europe and the firmer close overnight in the US.

    The JSE All share closed up a firm 3,45% to 28585. Volumes traded were down slightly with overall value at R11 billion. But the market breadth was positive with 312 shares up against 184 shares down.

    The rand firmed slightly against all main currencies.

    Some big moves across the resource index with Anglo and Billiton up over 4% each.

    Angloplat up 8,45% and Implats up 5,6%

    Sasol up to a new high at 38095c, closing at 37740c.

    Assore (Associated Ore and Metal) up 1,75% to R580.

    Tigerbrands fell 4,25% to 13740c on news of allegations of collusion in their healthcare division. This is the second large problem, following the bread price collusion, which cost the company R100m.

    The sens announcement from the company highlighted how seriously they are taking this matter. But shareholders have not been impressed and took the price to a new 12 month low.

    I looked at the relative gains made by resources over the Financial and Industrial index over the last 2 years. Whereas up to about 18 months ago, the main sectors of the JSE had been performing in sync, the gap has opened up considerably.

    Over the last 2 years resources returned 85% and the financial and industrial index just 21%. The weightings in your portfolio, either directly or indirectly via the various unit trust funds that you on has been extremely important.

    While there are plenty of positive signs confirming the ongoing run in resource shares, I don’t believe that this can continue indefinitely and investors must continually analyse their portfolios to look for rebalancing opportunities.


    Ian de Lange

    Seed Investment Consultants (Pty) Ltd is a licensed financial services provider.

    Permalink2008-02-12, 17:48:56, by ian Email , Leave a comment

    Dispersions in value create opportunities

    Each investor should have their own investment beliefs and processes. Many don’t, but still end up with a string of successes. For most investors, it’s a case of buy and hope (that things will work out and that the price will move up). But just as life is almost guaranteed to serve up trials, more astute investors wait for the (inevitable) disasters and then step in.

    That’s why calamity type scenarios are seen as opportunities – because values are mispriced and value contrarian investors can buy.

    Globally banking shares have been hit hard on the back of $billion write downs. Locally banking shares appear cheap to fair value on a current price to earnings basis of under 10 times. Standard Bank trades on a forward PE of 7,7 times for Dec 2008 earnings and a forward dividend yield of 5,3 times.

    The price for all banking shares has been under pressure. Looking at banks relative to the JSE All Share index, its amazing how much they have underperformed over the last few years.

    Today the price fell further to a fresh 12 month low at 8475c.

    Absa shares have also been under pressure, falling from R140 to R100. Again the PE drops from 7,5 times to 6,6 times one year out, with the forward dividend yield at 6,5%.

    The year end is December and today the bank released a trading update for its 2007 results, saying that headline earnings per share should be up between 25% and 28%.

    RMBH has a forward PE of 6,9 times and a dividend yield of 6,2%

    Nedbank has a forward PE of 6,4 times a dividend yield of 7,1%

    The 3 main sectors of the JSE, Resources, Financials and Industrials are now trading at a wider disparity in valuation than at any time for many years. Two years ago, valuations converged, but resources have continued to surge ahead very strongly, while banking shares have fallen steadily to their low prices.

    There is risk in the valuations. Growth in terms of new advances is slowing, and bad debt write downs may in future be higher than what has been provided. These are factors that have kept some investors back.

    Its good to look at directors dealings. Not always a perfect indication of whether a company’s shares can be acquired or not, but where a trend can be monitored, there may be something.

    I noticed Jens Montanana, who has been a long term buyer of his company’s shares, bought a further 250 000 at 2725c each – value of R6,8m. He was also a buyer last week of call options for 1 million shares.

    Then there was Barney Esterhuizen who sold 5,7m shares in Sallies at 53c each for a total consideration of just over R3m, but on the same day bought 60 000 single stock futures representing 6m shares (the sens actually stated 60m). This deal provides the investors with the same exposure to the company, but with lower capital outlay.

    Local and global markets tarded negative on Monday.


    Ian de Lange

    Permalink2008-02-11, 17:45:52, by ian Email , Leave a comment

    The difference between being strategic and tactical

    Have you honestly considered the difference between your strategic and your tactical asset allocation. Speaking to a range of investors this last week it became apparent to me just how many hold a high cash component to their portfolios. In most instances their holding cash is a tactical decision, but without a strategic plan, the next few decisions become a lot more difficult.

    Many investors do have a good sense that over any reasonable period of time, too high a cash component is possibly not going to generate the type of return that they require.

    This comes back to the ones strategic asset allocation. Each investor MUST get a good sense of what their long term asset allocation should be, before they make any tactical moves. The strategic can range from capital protection at all costs to maximum capital growth. We have clients across this full spectrum.

    For each portfolio (i.e. combination of assets) a prospective longer term return and anticipated downside risk can be established and defined. So don’t get me wrong - for some investors their strategy may dictate that a higher cash component is necessary.

    However for those high net worth investors with a high ratio of investment assets relative to the discounted value of future income drawdowns, a lower cash allocation is more prudent and the investor can AFFORD to take on more risk.

    In all instances inflation is one of the biggest risks – i.e. long term sustainability of a limited investment portfolio.

    Once an investor has established his longer term asset allocation model, then shorter term decisions to up weight and down weight exposure is known as tactical asset allocation. This is done in order to try and capture additional gains, but it must ALWAYS be done around the longer term strategy.

    So for example, if your strategy defines the local equity component to be 40% of the total investment portfolio, tactically you may move between 30% and 50%. We have all heard that timing is not an exact science and therefore should not be attempted. I believe however that this is because many want to try and time the market purely on sentiment.

    One positive way of using timing is to move tactically around the long term strategy using VALUATION metrics. For example, strategically you may have a 10% allocation to local bonds, but where they are cheap, you will want to up weight this allocation. Currently they are very expensive and so the tactical move must be to downweight – perhaps to a 3% - 5% weighting.

    If your total portfolio now has a high cash component assess whether this is long term strategic or short term tactical decision. If after crunching all the numbers, its long term strategic then that’s perfect, but if its short term tactical, then perhaps you should have up down weighted cash and up weighted your equity component slightly when valuations were more attractive.

    Have a great weekend

    For all those investors, looking to firm up on their strategy and employ some tactics, don’t hesitate to contact me.


    Ian de Lange

    Permalink2008-02-08, 17:21:53, by ian Email , Leave a comment

    A brief look at construction shares

    While there were interesting sectors on the market, including the likes of platinum, which powered up on the back of higher prices, I decided to take a quick look at construction shares with the release of Basil Read results today. All construction shares have had an excellent period of late, given the levels of activity – with Basil Read no exception.

    Its 12 month results to the end of December had revenue up 73% to R2 billion, margin expansion saw operating profit at R170m and EPS up 70% to 156,92c. The dividend was raised from 30c to 50c.

    Operating margin expansion has been massive from 4,62% to 8,47%. Remember while projects run into multi millions, the construction companies operate on relatively thin margins. A 1% swing either way on a BIG number has a big impact on the bottom line.

    The net asset value rose from 282c to 473c a share.

    It expects the growth trend to continues, but at a smaller pace and has a vision to be a R5 billion turnover company by 2010. This is a big move up from a company that was turning over R600m in 2002, made losses in 2001 and then again in 2004 and a profit of R25m in 2005.

    This profit has more than quadrupled to R117m.

    The company had guided the market in December with a trading update saying that headline EPS should be up between 50% and 70% - as it was then accruals came at the top end of that range.

    The price fell from 3945c in October to just below R25 – a drop of 37%. The actual numbers today as much as they were expected did not move the price, which ended down 0,74% to 2670. The headline EPS were slightly ahead of the consensus forecast, with the historical PE now dropping to 17 times and the expected forward PE to 12,5 times.

    The company has a long history, started in 1952, and listed in the listing boom of 1987.

    Results across all construction majors have been impressive, but investors buying in at these prices are buying into the forecasted sustained growth over then next few years. This growth in infrastructure spend comes off a base of many years of under spending on building, roads, mining and civils.

    Group 5 is another company that released a positive trading update for its interims. The price has fallen sharply from just under R70 to R45, where it trades on a forward PE of 12,7 times.

    Wilson Bayly Holmes (WBHO) has a forward PE of 17,7 times. The share price has held up better than the others, falling from around R140 to R110, but up again at R123.

    Traditionally construction shares have traded at a discount to the market has a whole given their riskier business model and earnings streams.

    But in more recent years, the share prices have all been stellar performers. The future looks bright. The question for investors is whether prices reflect a lot of this good news already. Basil Reads static share price today gives some indication that the next few years may not be as exciting as the last two or three.

    That’s all for now.


    Ian de Lange

    Permalink2008-02-07, 18:49:10, by ian Email , Leave a comment

    Daily Market Summary

    After opening roughly 3% down from Tuesday’s closing level, the JSE ALSI spent most of the day slowly making ground, and eventually ended the day up 0.42%. Miners and large cap industrial shares provided most of the impetus on the local bourse. Small and mid cap share didn’t perform as well, and were down 0.53%, and 0.21% respectively.

    Most mining shares were up, with the obvious exception being BHPBilliton, which ended down 3.07% on the back of its increased bid for Rio Tinto. Before most South Africans were up BHPBilliton announced in Australia, that they were going to be sweetening their offer for Rio Tinto to 3.4 shares for every Rio Tinto share, up from the 3 for 1 offer last November. This offer amounts to a staggering $147.4 billion (R1 130 000 000 000) although the deal would be a paper deal (as opposed to buying the shares for cash) with Rio Tinto shareholders getting a holding in the merged company.

    The Billiton CEO Marius Kloppers, a South African, has indicated that they would initiate a $30 billion share buyback should the deal go through, which should support the price, and assist those investors not keen on holding the merged entity to get a decent price on the way out.

    While BHP lost ground on the day, Anglos was up by 2.19%. The rest of the larger cap shares were a mixed bag with slightly more green (positive share price movements) numbers than red.

    Some of the bigger movers on the day included Freeworld Coatings up 10.97%. Freeworld was unbundled from Barlows in December, and its main product is Plascon. Bidvest was up 6.35%, while PPC was up 4.89%.

    On the downside we saw Shoprite off 5.82% after coming out with a trading update on Tuesday, we also saw the share price of Ellies come off 3.85%. Ellies is a major generator supplier, and has seen its share price explode in the last couple of weeks. Even after today’s pull back the share price is up 30.89% over the last 2 weeks, this is clearly a company that is benefiting from the electricity supply problems.

    With the markets weak and volatile it is obvious that many shares are going to start to hit 12 month lows. Some of the higher profile shares to hit 12 month lows today included Discovery, Tongaat, Nedcor, Standard Bank, Truworths, and Mr Price. Contrarian investors out there will be looking at these high quality shares with much interest as their share prices get pounded.

    The rand remains weak, which is a good thing for exporters, and those investors who managed to get their money offshore while the rand was still strong. Who knows where the rand will end up, but if foreigners continue to pull their money out of the JSE (as has been the case this year) then expect to see some more weakness.

    Hopefully your investments are doing well. By getting a combination of diversified quality investments and assets your portfolio should be able to weather these kinds of markets reasonably well.

    Kind regards,

    Mike Browne

    Permalink2008-02-06, 18:09:22, by Mike Email , Leave a comment

    How to cope with market volatility

    The type of market price volatility that we have been seeing has traders wide eyed. Speaking to a couple of active participants today about the local JSE today, their comments can be summarised as “Eish” and “Eish”. Those longer term investors, who were away for January, have not really missed a beat.

    Those traders that have been watching their screens on a daily basis saw the JSE All Share index drop a cumulative 17% on an intra day basis at one stage in January, only to bounce up sharply by month end.

    The FTSE/JSE All Share index ended down 5,6% for January. This is apparently the worst start to January in the last 13 years.

    But it was a case of 2 markets. Financials, Industrials feel sharply, with the index helped up only by the Resource shares, which gained 3,2% for the month.

    Sasol, Billiton, and Impala for example have had excellent runs this year. Because of their higher weighting in the index, any manager or trader that has hedged their long only portfolio using the index has suffered a double negative whammy.

    Add a touch of gearing to that and some portfolios have suffered 20% declines in one month. Given the massive disparity in movement across the main sectors, suffering a portfolio pullback such as this is not that difficult to do.

    Today global markets were again negative. 14 shares traded at new 12 month lows, including beleaguered Imperial down 6,45% to 7401.

    On the first day on February the local JSE, bounced up 5%, flat yesterday and so heading into today was down less than 2%. So for all shorter term traders, this is stomach churning stuff.

    Long term investors:

    By comparison, true longer term investors have it a lot easier. They don’t feel compelled to swing at every pitch. Using American parlance, they can wait for that “fat pitch”. Using a baseball analogy, where instead of swinging at every thing that comes their way, just to be active, a batter has the option of waiting for the perfect pitch, i.e. that “fat pitch” before hitting.

    Again without wanting to over simplify, it’s a matter of not trading unnecessarily, waiting for the market to present value, NEVER overpaying for any asset no matter how attractive, and taking a longer term perspective.

    While spending time with 2 such longer term investor clients today, this distinction was discussed. I.e. by not making hasty decisions, by setting out a longer term strategy, portfolios have more than weathered the daily volatility.

    Don’t hesitate to contact me if you wish to discuss your investment strategy and planning.


    Ian de Lange

    Permalink2008-02-05, 18:29:53, by ian Email , Leave a comment

    Conundrum on global markets

    Global financial markets often have elements that remain a conundrum. One that caught my attention today was reports that the US dollar is likely to appreciate against other currencies, especially the euro. But wait hasn’t the Fed just cut interest rates by 1,25% to the 3% level, the third lowest on the globe.

    The European Central Bank meets on Wednesday to decide on their rates, currently at 4%. The consensus is that these rates will be on hold.

    The opened up gap between the 3% and 4%, or some other higher yielding currency, starts to look attractive for a European bank, which can borrow from its US counterpart, who in turn can borrow direct form the Fed. The European bank can then on lend at higher rates into the EU.

    March 18th is the next Fed meeting. Many are predicting further drops in the official interest rate – possibly down to 2,5%

    An increase in borrowed US dollars from the Fed, at these lower interest rates, would typically have a downward pressure on the exchange rate. But the opposite has been forecast by 31 firms surveyed by Bloomberg. Many are now very positive on the relative strength of the US dollar against the euro, citing rate cuts, as provided the necessary boost to the economy.

    The current rate is $1,4821 to the euro. It’s traded as low as $1,4967 in November. Now many are forecasting strength back to $1,40 and even $1,36 to the euro. The truth is that the US dollar has been trading weaker for a long time, and so despite the low yields, it may be overdue for a bounce back.

    There is no doubt however that the Fed has gone all out again to boost the very leveraged US economy. Inflation however is running at 4,08%, and so the US is now running at negative real rates of interest. As I have indicated before however inflation has been relegated to secondary importance behind keeping banks and financial institutions afloat and greased with enough liquidity.

    The other conundrum is long term US treasury yields. Again there is an expectation that with the potential for higher inflation, the yields on longer term bonds would pick up. But they have hovered around 4 ½ year lows.

    3,7% - this is the current yield on 10 year US Treasury bonds! The yield on a bond is the return that an investor receives holding the bond to maturity. Inflation at over 4% and a prospective return on a so called low risk investment running below that. What are investors into this instrument thinking? This yield has come back from just under 5% last year August.

    There are some similarities between the Japanese bubble in asset prices bursting in 1989, and the US asset price bubble. Now almost 2 decades later Japanese interest rates remain at extreme lows.

    The rand fell again today, falling to R7,46/dollar, R14,74/pound and R11,06/euro.

    The overall market was flat on the day. But we saw new highs in Aquarius, Coal, Assore, ArcMittal and Kumba Iron Ore.

    Commodities remain strong and according to the likes of Jim Rogers, a very successful global investor, the trend continues. BHP shares fell slightly. If they are going to make a move on Rio, they will have to up their offer. Its going to be much tougher for them now.

    So across local and offshore, cash, equities, bonds, resources etc, the asset allocation decision remains extremely important. Longer term investors cannot make short term decisions on this call, that’s best left to traders. The most successful are those that take a longer term view on various asset classes.

    How much have you got invested into bonds and cash. With the US intent on inflating again, this and already has had global repercussions.

    That’s all for today.


    Ian de Lange

    Permalink2008-02-04, 18:40:26, by ian Email , Leave a comment

    Do you really understand your investments?

    We have talked about the voluminous flow of financial data, which in recent years has generally been accompanied by a welcome increase in quality advice and information to the investing public. I am still perturbed however when, in advising new clients, I find that they are totally confused about the investment product in which they are invested.

    In terms of complexity, investments range from the simplest, perhaps money in a money market to the very complex derivative structured investment products. Increased complexity does not necessary call for enhanced returns. It does however call for quality advice.

    With the explosion in derivatives over the years, the financial wizards make those in the advertising industry look like accountants, when it comes to innovation. What is very important to remember - cleverly designed products have been created by the sellers people. They make sure that they build in a lot of fat for themselves.

    Structures can get extremely complex in order to take advantage of tax benefits, gearing, provide guarantees etc. For example some investors are invested into hedge funds (which itself is structured as limited liability partnerships, trusts or debenture structures), but via an interposed SPV (special purpose vehicle), which in turn could transact with a bank using a swap agreement, before the funds are invested into the fund, which in turn is invested into equities and derivatives.

    Not that far-fetched. I was looking at this structure today.

    Granted, it’s not typically as convoluted as I have outlined, but unfortunately for many investors, just as confusing. With the increase in open architecture across institutions and across product types, investors need to be absolutely sure of what they own. Example - your endowment may be with Momentum, but with underlying investments into Metropolitan, Allan Gray, and Investec.

    Often investors are confused as to the legal structure in which they have accessed the underlying investments.

    The onus on all investors and where relevant their advisors, is to distil the actual investments down to the main asset classes. I.e. looking through the various layers, how much do I actually have invested into the local equity market and how much do I actually have invested offshore. And then with this volatility, not only in the asset prices, but in the currency, are these various allocations being managed on an ongoing basis.

    If you have a large part of your funds invested into a living annuity, or are planning on retiring soon, this is the type of information that is needed on a monthly or quarrel basis. The information is all available, but so many investors into living annuities (as example) may have some knowledge of the various products they hold, but no clarity on the asset allocation or how this has been managed over time.

    We are now one month into 2008 – have you managed to simplify and plan your investments, or is the year rolling away too quickly already? This is especially the case for investors heading into or already into retirement years – these investors can’t afford to make any mistakes with structure and lack of ongoing monitoring – there is enough risk in the asset prices themselves.

    That’s it. Contact us if you would like to discuss.

    In the meantime February is off to a flying start – the JSE All Share index is up 5,25% to 28751.

    Have a great weekend


    Ian de Lange

    Permalink2008-02-01, 17:42:45, by ian Email , Leave a comment