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    Periods of underperformance for value managers

    Benjamin Graham is considered the father of value investing. Warren Buffett and other very successful investors studied under him. In a speech given by Buffett in 1984 at Columbia Business School, which marked the 50th anniversary of Graham’s and David Dodd’s seminal work “Security Analysis”, he expounded on the merits of value investing by looking into the performance records of a group of investors he termed super investors.

    By demonstrating that a group of investment managers, who all studied under Benjamin Graham, achieved above average performance, he rules out chance. His hypothesis is that by following a proven methodology of value investing, investors have a higher probability of superior performance.

    He notes that Graham’s understudies “… have gone to different places, and bought and sold different stocks and companies, yet they have a combined record that simply can’t be explained by random chance”

    Graham set forth the intellectual theory for making investment decisions and each applied the theory in a different manner.

    He goes on to say this: “The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially they exploit those discrepancies without the efficient market theorists concern as to whether the stocks are bought on a Monday or Thursday, or whether it is January or July etc”

    He runs through a handful of managers that he knew from his time studying under Benjamin Graham and goes on to include their detailed audited performance records versus the market. Before investing and concentrating into Berkshire Hathaway, Buffett ran a partnership – very similar to a hedge fund partnership. When he closed this in 1969 he recommended to his clients that did not follow him into Berkshire to invest with Bill Ruane who ran the Sequoia Fund. Bill naturally studied with him under Graham.

    He included the Sequoia funds performance from July 15th 1970 to end of 1984. Over this period the S&P500 produced an annual return of 10%. The fund after fees returned 17,2%.

    Period of underperformance

    But for the period 1970 to 1973, the fund underperformed in each year compared to the market. In 1973 alone the S&P 500 fell 14,8%, but his fund shed 24%. Despite this period of underperformance, the manager produced an exceptional out performance over a 14 year period – the period measured by Buffett for purposes of his discussion.

    Interestingly enough, after being closed for 25 years, the Sequoia fund opened for new investors in May 2008. The long run performance from mid July to Sept 2008 is 14,87% compared to 10,81% for the S&P500.

    Another US value manager, deep value manager Brandes, recently wrote a piece, titled, “Death, Taxes and Short term underperformance: global Equity mutual funds.” They performed an in depth study which indicated that even long periods of underperformance of up to 3 years relative to peers and benchmarks, had very little impact on some of the better funds ability to generate long term success.

    They found that over a 1 year period, the top 7 funds underperformed the index by margins ranging from 4,1% to 18,3%. Distilling global funds down to a sample of 76, they ended with 7 funds with the highest 10 year return to June 2008. The graph below indicates that not all top funds outperformed on a quarterly basis and indeed 6 of the top 7 were underperforming the index at the beginning of the measurement period.

    Source : Morningstar, Brandes Institute

    So like death and taxes, short run underperformance is to be expected from a value manager. The more important aspect to long run out performance is that the manager stays with his value approach and does not deviate at a low point.

    In conclusion to his speech on the secret of value investing being out, Buffett says “I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I’ve practised it. … there will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham and Dodd will continue to prosper.”


    Have a wonderful weekend

    Regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-30, 17:00:10, by ian Email , Leave a comment

    Gold Fields Quarter 2 Result Summary

    Gold bullion and gold shares, much like most other investments, have their own dedicated followers. They are generally called gold bulls, and will continually be looking for reasons for why the price of gold or the price of gold shares should be higher than they currently are. As with most analysts (as discussed in previous Daily Equity Reports) there will be periods when their calls are right and others when they are wrong. Gold bulls today would’ve have been eagerly awaiting Gold Fields’ Quarter 2 results (Final Year End 30 June 2009).

    Gold production was up 5% over the previous quarter (at 839 000 ounces), with cash costs flat (in ZAR) at R 153 893/kg. In hard currency the costs decreased due to a weakening rand. Notional Cash Expenditure (NCE), which is defined as operating costs and capex, came in at R 244 210, up 8% over the previous quarter.

    As mentioned before gold companies are essentially price takers, and in this respect it is important for them to control costs and have production running at as close to full capacity as possible. Gold Fields managed to contain costs to a large degree, and are on their way to full production.

    Another aspect of mining in South Africa that is increasingly coming under the spotlight is that of safety. In their 2008 financial year, Gold Fields reported 47 fatalities. This number has dropped significantly to 8 for the half year ending December 2008. While this is clearly 8 to many as far as they are concerned… “Our objective is to achieve a significant decline in serious injuries and to eliminate all fatal injuries on our mines.” – Nick Holland, CEO of Gold Fields… they have been making strides in this respect.

    The production projection for the first quarter of 2009 is 975 000 ounces, as their mines around the world operate at design capacity. Problems with electricity, which were a major problem especially for South African miners, have decreased, and they now have a more stable supply stream. Priorities going forward are to “…further improve our safety performance and to increase production by optimising our existing mines.” – Nick Holland

    The result of this performance is headline earnings for the quarter of R 484m, and a dividend of 30c being declared. The revenue received per kg of gold came in at R 250 058. Gold is currently trading just shy of R 290 000/kg, which will help to boost profits even further for the next quarter (provided costs can be managed, output can be maintained, and the price stays at current levels or moves higher).

    The market was clearly pleased with these results, with the share price up 9.64% for the day. This helped the gold mining index up 5.09% for the day when compared to the ALSI which trended down 2.12%. Newgold, the ETF that tracks the rand gold price, ended the day down 0.37%.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    The full report can be obtained at:
    http://www.goldfields.co.za/reports/f_2009/q2_f2009/pdf/full.pdf

    Permalink2009-01-29, 18:42:03, by Mike Email , Leave a comment

    US analyst forecasts of company earnings

    The quantum and percentage increase (or decease) in company earnings is naturally an important factor in its valuation. The other component is the rating or multiple applied to those earnings, but today we will just look at earnings. More specifically in percentage terms how many US companies are starting to report earnings at levels lower than market forecasts, known as negative earnings surprises.

    It’s a company analyst’s role to understand the main drivers of a company’s earnings and costs, in order to closely forecast the level of earnings per share it will report 6 months, 12 months and 2 years out.

    They do this, by getting close to management, modelling the main variables, and making certain assumptions. Over time these models are refined, and most often the consensus numbers are fairly accurate, especially 12 months out.

    Armed with a forecast of reported earnings 12 months out, the analysts can make an assessment of a realistic valuation. That the theory and that’s the ongoing process.

    But when economic drivers all start working favourably to drive up corporate earnings, analysts’ numbers at first lag the actual result. A company will then report a positive surprise – i.e. the consensus forecast for Sasol is say R40/share. Prices adjust to this, but if it comes out with R48/share, this is clearly a positive surprise, which boosts the share price.

    The cycle starts to turn when analysts get too optimistic, and actual numbers start to come down quicker than they can adjust their forecasts down. Then negative earnings surprises keep on pulling market prices down.

    In South Africa companies report bi annually. In the US they report quarterly.

    A Merrill Lynch (now part of Bank of America) report said this, “Negative earnings surprises are now at a 10-year high. The proportion of negative EPS surprises in the 3rd quarter was the highest in over a decade. This surge in earnings misses has led to a new wave of downward estimate revisions over the last few months. The speed and the magnitude of these downward revisions have been much greater than that of the last two recessions.”

    They also talk about the fact that one of the big surprises for 2009 may be earnings downgrades in “early cycle” sectors such as financials, autos, housing and retailing, starting to move to mid and late cycle sectors such as energy, materials and technology.

    They put on a graph of the percentage of companies reporting EPS surprises, up and down. With reversion to the mean operating as a strong force, more and more companies in the S&P500 index are coming through with lower earnings than forecast.

    Naturally this is negative for share prices.

    Lower numbers result in analysts downgrading their forecasts. The Merrill Lynch report says that until a few months back, there was very little downward revision, but this has now stepped up at a significant pace.

    This period of downward revision tends to last for many months, but the fact that it has begun in earnest is positive for US equity markets. The quicker lower numbers are factored into prices the better.

    It remains one of the fundamental issues – prices are attractive, but are earnings near the bottom? Analyst’s will be behind the curve for w while, but will continue to downgrade furiously and tend to become too pessimistic.

    Again this is setting the base for solid real returns from these cheaper prices.


    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-28, 15:55:24, by ian Email , Leave a comment

    Daily Equity Report Tuesday 27th January 2009

    The JSE closed up 2.41% at 20643 with value traded at R 9.94 billion. Advances led declines 231 to 119 with 83 shares unchanged out of 433 active. Mining closed up 1.34% at 24147, while Industrials were up 2.44% at 19416 and financials ended the day up 4% at 14835.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 6.7% at 2188, Industrial Metals Index up 6.1% at 19299 and Banks Index up 5.9% at 27636, while the worst were FTSE/JSE All Africa ex SA 30 with US$ values down 47.4% at 45, FTSE/JSE All Africa 40 Index with US$ values down 39.5% at 47 and FTSE/JSE All Africa ex SA 30 with S A Rand values down 39.5% at 58.

    There were 1 new 12 month highs today, including Bowcalf which closed up 8.3% at 498 while there were 8 new lows of which Arb topped the list, down 28.6% at 120, Lonafric down 4% at 120 and Raubex down 2.8% at 1798.

    Of the major stocks Anglo moved up 2.3% at 19000, Anggold was down 2.01% at 28500, Sasol gained 3.77% at 27800, Mtn moved up 4.76% at 10005, Billiton moved up 1.52% at 17400.

    Biggest gainers of the day where Brc up 36.36% at 120 , Village up 28.7% at 139 , while the major losers were Arb off 28.57% at 120 and Oando off 22.22% at 700

    The Dow was up 1.1% at 8207.47 and the S&P 500 up 1.5% at 849.19 a few moments ago.

    Gold was down 0.2% at $ 901.40/oz

    The rand was last trading at R 9.96 to the dollar, R 14.16 to the pound and R 13.16 to the Euro.

    Permalink2009-01-27, 20:06:54, by admin Email , Leave a comment

    Analysts forecasts of company earnings

    The quantum and percentage increase (or decease) in company earnings is naturally an important factor in its valuation. The other component is the rating or multiple applied to those earnings, but today we will just look at earnings. More specifically in percentage terms how many US companies are starting to report earnings at levels lower than market forecasts, known as negative earnings surprises.

    It’s a company analyst’s role to understand the main drivers of a company’s earnings and costs, in order to closely forecast the level of earnings per share it will report 6 months, 12 months and 2 years out.

    They do this, by getting close to management, modelling the main variables, and making certain assumptions. Over time these models are refined, and most often the consensus numbers are fairly accurate, especially 12 months out.

    Armed with a forecast of reported earnings 12 months out, the analysts can make an assessment of a realistic valuation. That the theory and that’s the ongoing process.

    But when economic drivers all start working favourably to drive up corporate earnings, analysts’ numbers at first lag the actual result. A company will then report a positive surprise – i.e. the consensus forecast for Sasol is say R40/share. Prices adjust to this, but if it comes out with R48/share, this is clearly a positive surprise, which boosts the share price.

    The cycle starts to turn when analysts get too optimistic, and actual numbers start to come down quicker than they can adjust their forecasts down. Then negative earnings surprises keep on pulling market prices down.

    In South Africa companies report bi annually. In the US they report quarterly.

    A Merrill Lynch (now part of Bank of America) report said this, “Negative earnings surprises are now at a 10-year high. The proportion of negative EPS surprises in the 3rd quarter was the highest in over a decade. This surge in earnings misses has led to a new wave of downward estimate revisions over the last few months. The speed and the magnitude of these downward revisions have been much greater than that of the last two recessions.”

    They also talk about the fact that one of the big surprises for 2009 may be earnings downgrades in “early cycle” sectors such as financials, autos, housing and retailing, starting to move to mid and late cycle sectors such as energy, materials and technology.

    They put on a graph of the percentage of companies reporting EPS surprises, up and down. With reversion to the mean operating as a strong force, more and more companies in the S&P500 index are coming through with lower earnings than forecast.

    Naturally this is negative for share prices.

    Lower numbers result in analysts downgrading their forecasts. The Merrill Lynch report says that until a few months back, there was very little downward revision, but this has now stepped up at a significant pace.

    This period of downward revision tends to last for many months, but the fact that it has begun in earnest is positive for US equity markets. The quicker lower numbers are factored into prices the better.

    It remains one of the fundamental issues – prices are attractive, but are earnings near the bottom? Analyst’s will be behind the curve for w while, but will continue to downgrade furiously and tend to become too pessimistic.

    Again this is setting the base for solid real returns from these cheaper prices.


    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-27, 18:08:33, by ian Email , Leave a comment

    Gold and gold shares have a solid day

    Amidst the general gloom of global economies, one asset class stood out. The price of gold moved up again the through the $900/oz level to the $910 level. The rand firmed but remained above the R10/dollar level, which allowed the rand price to get close to the R300 000/kg level.

    Importantly gold is now at an all time high when denominated in currencies like the euro or the Swiss franc.

    This past year has seen dollar strong against most global currencies, yet in dollar terms the price is up, which is positive.

    In US dollar terms gold has fluctuated sharply over the years, and in fact since peaking in the early 1980’s has only recently surpassed those highs in nominal terms.

    At the same time however the rand has generally deprecated against the US dollar, and so in rand terms the price has been steadily up to new highs. See chart below of the gold price in rand terms.

    South African mines derive their revenue in rand terms based on production. In this respect they are price takers of the rand and the gold price, and naturally struggled when the rand firmed post the December 2001 crash.

    At the same time many mines have struggled with low production and high wage and other input costs. The result has been generally poor performance over an extended time frame, despite the firmer rand price.

    Looking back at the data, the annual compound rand return of gold from the late 1985 price of R786/oz ($321/oz) has been in the order of 11% per annum. To a large degree this is the depreciation of the rand versus the US dollar.

    Now with global interest rates moving close to 0%, and central banks intent on printing, the price of bullion as measured in various currencies is not only holding up, but moving to new highs. There is a high probability that it continues firming throughout 2009.

    Local shares responded well to the price gains today. With their high cost structures and generally breaking even at levels around $850/oz, many gold mines are highly geared to the price of gold moving up.

    Are you based in Cape Town and wanting to discuss your specific investments? On the 4th and 5th February, Vincent from Seed will have one on one meetings with prospective clients to discuss your current position and answer any questions you may have. Mail Helena on helena@seedinvestments.co.za to book a time.


    Sincerely

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-26, 18:05:56, by ian Email , Leave a comment

    Strategic and tactical asset allocation

    The standard theory myth is that by taking on higher risk, an investor will receive a higher rate of return. Clearly this is invariably the case over the long run, but definitely does not always hold true over a short or perhaps even medium time frame.

    The theory does not hold true because at varying times, asset valuations move far away from their long run equilibrium valuations. Quite simply assets move from cheap to expensive levels over time.

    Remember prices and value normally have an inverse correlation. I.e. Price declines that we saw in 2008 improve value, and hence the future return outlook.

    Given this fact, one method which many global asset managers, including ourselves, adopt is a strategic and tactical asset allocation of assets.

    The strategic allocation is based on the long run evidence that higher risk assets have produced higher rates of real return. The chart below gives one firm’s assessment of these long run equilibrium real rates across various asset classes. There is not too much argument about these figures.

    Where the return per asset class is plotted against the volatility of that asset class, again it’s clear that the reward for subjecting ones investments to higher volatility is higher returns. All assets can be plotted on one chart to achieve a risk return trade off graph.

    Where a particular asset is cheap, giving the possibility that its future return is higher than the long run return, then on a tactical allocation, it should be overweighed and vice versa.

    Chart 1 : Long run equilibrium real returns


    Source : GMO

    Seven years ago, GMO, a global investment firm, forecast a return from various asset classes that ranked emerging markets as no 1 with a compound 9,4% real return. The rank was spot on and the actual number came in at 9,9% per annum real return.

    At the same time they ranked the return from the US S&P 500 last with a negative 1,1% for 7 years. At the time they were very contrarian, but this proved to be optimistic, because the actual number came in at a negative 3,9% p.a. for 7 years.

    They had a reputation as being permanently bearish because of these dismal forecasts for their home base, the US.

    Now with the collapse of equity prices, the value has improved. Their forecast real return over the next 7 years is as per chart 2 below. I.e. 13% for high quality US equities and 13,6% for emerging market equities.

    Chart 2 : GMO forecasts

    Source GMO. These are not guarantees.

    These forecasts will not be realised in a linear fashion. I.e. the first 12 months or perhaps even 2 years could be negative, before reverting back again, but this is what the numbers are telling them at the moment.

    Tactically investors should be looking to increase weightings to real assets and reduce exposure to fixed income assets – in the red.

    Not necessarily tomorrow, but highly likely in 2009

    On that note have a wonderful weekend.

    If you are a high net worth investor needing to construct a robust asset allocation plan, please don’t hesitate to contact us for an initial meeting.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-23, 17:08:38, by ian Email , Leave a comment

    Lower interest rates for savers

    In a world that is intent on pushing interest rates as close as possible to 0%, corporates and individuals with geared positions will be cheering, but investors that continue to rely on their interest income to either sustain or complement their pension income will find 2009 and beyond incredibly difficult.

    Let’s look at the situation in the UK.

    At the beginning of the year the Bank of England reduced their base interest rate to 1,5%.

    Fund manager, Sarasin estimates that some 7 million people in the UK have savings accounts that are now paying 1% or less. Many banks appear to be offering higher teaser rates, but then drop these rates when accounts are open.

    Chart 1 below clearly indicates the extent of the decline from the central bank. In forcing interest rates down to artificially low levels, governments are essentially penalising savers of capital and rewarding those with debt obligations. The base rate is at a 315 year low. With government a forced buyer of the ownership of banks, they will want to also ensure that their lower rate is passed to the end borrower.

    In the long run, we believe saving into cash is invariably unsatisfactory where interest rates tend to be held lower than where market forces would normally take them. The sudden drop down paints an even worse scenario than history.


    As interest rates are forced down, those investors relying on interest income will go out hunting for additional yields.

    These investors, mostly pensioners, who in the past would have been satisfied to keep their capital at banks or money market funds, will search out higher yields. This type of environment often brings out riskier investment offerings, which investors need to be aware of.

    Remember Saambou which attracted many savers with higher yields.

    Invariably these ultra low interest rates will debase the purchasing power of cash. Not only will savers receive an inadequate income stream, but the purchasing power of their capital will decline over time at a quicker pace than in the past as central banks continue to devalue their currencies.

    In this environment, which may persist for a while all savers will need to assess their allocation of capital.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-22, 18:11:26, by ian Email , Leave a comment

    How Much Will the US Change?

    In life they say that the only two things that are certain are death and taxes. Many people contend, and I agree with this group, that change should be added to this list. Now, more than ever, the evidence that change is constant is irrefutable.

    Barack Obama ran and won the US election on the back of promising change. His inauguration was last night (South African time), and he then went on to 10 Inaugural Balls. Obama’s first day may have been spent with formalities and glamorous events, but he realises that he’s stepping into a veritable cauldron, and will need to hit the ground running in order to try and restore USA’s pride.

    He made liberal reference, in his inaugural address, of the need for everyone to be part of the change, and that one man alone cannot achieve change for an entire nation. Below is an extract of his address:

    “In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of short-cuts or settling for less. It has not been the path for the faint-hearted - for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things - some celebrated but more often men and women obscure in their labour, who have carried us up the long, rugged path towards prosperity and freedom.”

    One of Obama’s great strengths is his ability to inspire, and he knows that he’ll need to inspire a nation that is currently battling in the depths of recession.

    One of the issues that Obama will have to deal with was summed up in a research note penned at the end of last week by Goldman Sachs Chief US Economist Jan Hatzius. In it he stated that despite US interest rates dropping to between 0.25% and 0% they are still too high, and proposed that in order to stimulate the economy interest rates would need to be dropped to -6% by the end of 2010. It is, however, impossible to have negative interest rates.

    The rationale behind this assessment is that one of the ways to stimulate an economy is to have negative real rates, i.e. interest rates below inflation rate, which encourages borrowing, and that in turn helps to stimulate the economy. The problem occurs where inflation approaches 0% there is no scope to decrease interest rates further to re-inflate the economy. This is an area where Obama is powerless.

    Fiscal stimulus is an area that Obama can influence, and he has indicated that government will be playing a larger role in the future. Increasing government expenditure will assist in reviving the economy.

    As discussed in previous reports re-inflating the economy, i.e. encouraging spending and inflation, is vital for the health of the US economy, and will also assist in inflating their increasing debt away. And while the US might not be as powerful as it once was, it is still the largest economy in the world. A healthy US economy will greatly assist in the world economy being healthy.

    It is in this light that we hope that under Barack Obama the United States will go “Yes we can!”

    Enjoy the rest of your week.

    Kind regards,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-21, 16:35:02, by Mike Email , Leave a comment

    The currency allocation decision

    While adopting and sticking with a specific investment strategy is difficult enough, making an overlay selection of currency is exceptionally difficult, if not impossible to get right on a systematic basis.

    For example the bailout and support of US banks, did not appear to impact the US dollar – to the contrary, while support for UK banks, has had an immediate knock to sterling.

    A currency allocation decision is made more difficult because unlike a share price which has a long term reversion to a mean around a theoretical value, there is no real theoretical value for a currency.

    This is because after the move away from the gold standard decades ago, most currencies float against each other. Some are fixed in tighter bands.

    Yes there is the purchasing power parity model, but this is invariably a weak predictor of where a currency should be trading.

    Other factors such as interest rate and monetary policy, country inflation, political dynamics and risk as well trade and current account differentials all play a role in the movement of one currency versus another.

    But because of the fact that a currency is defined relative to another currency, which itself is a moving target, making an accurate independent assessment is virtually impossible. This is especially the case on a consistent basis.

    For many South African investors, one of the “preferred” currencies of choice has been the pound. At the same time for many years now, there has been widespread anti US dollar consensus. But this last year saw the pound plummet from a high of $2,05 to its current $1,39. It may continue falling to $1,35 as the US dollar is seen as the safe haven.

    The recent trigger was the UK bank bailout, which saw capital flee sterling. Not only was sterling weak against the US dollar, but it traded at its weakest level in 38 years against the Japanese yen.

    The dollar has also been strong against the euro. It was last at $1,29/euro and may test its recent highs in October 2008 of around $1,25

    But relative to the Japanese Yen, the dollar and by definition most other currencies have declined. Mid 2007 the dollar traded at 125 yen. The yen has appreciated to around 90 to the dollar. This at the same time as the official Japanese consumer sentiment hits record lows.

    In many respects when investing into a global diversified portfolio, the currency decision is taken care of. This is because cashflows from a multi national company operate across the various currencies – thereby mitigating concentration risk.

    Rand exchange rates

    On the back of the stronger US dollar, the rand traded at R10,26. But against the weaker pound, the rand was last at R14,30.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-20, 18:40:32, by ian Email , Leave a comment

    Dividend yields versus interest rates

    When the long run average valuations metric of shares listed on the JSE indicate a PE multiple of around 12 to 14 times and a dividend yield of around 2%- 3%, value investors start to get very excited when these long run averages start to converge and in some instances possibly even invert.

    What do I mean by this?

    Well the historical PE multiple has fallen to around 9 times, while the dividend yield is up at around 4,6%. Remember that these are historical ratios and subject to change as companies report earnings and pay out dividends.

    However certain value managers are able to construct a portfolio with an average historical PE ratio is closer to say 6,5 times. Naturally a portfolio holding more value shares and eliminating growth shares tends to have a higher dividend yield and again such a portfolio can be constructed with an average historical dividend yield approaching the 6,5%.

    Long run performance attribution indicates that the biggest element of the total return is from the starting dividend yield and the constant reinvesting for compounded growth. i.e. the price paid initially for any investment is the biggest indicator of the future total return.

    So without even looking at the possible re-rating of capital values, not over the next 6 months, but the next 5 years, let’s look at a possible scenario say 5 years out on the income received from an investment.

    With higher starting dividend yields on equity and with lower and lower expected interest rates, especially for the next 18 month period, the after tax income stream from an investment into equities starts to appear very attractive, given the price declines of 2008.

    Scenario 1. Invest R100 into money market, earning 11% now, falling to 8%, picking up to say 9% in year 5 and 10% in year 6. Assuming the full 40% tax rate, then the total after tax yield is R32,40.

    Scenario 2. Invest the R100 into equities at a starting dividend of 5%, which is expected to drop by 10% in the first year and then pick up say an average of 12% over the next 5 years from the lower base. The total after tax dividend income is R33,50.

    So in terms of yield generated, while cash returns have been high, the cumulative dividend yield, even taking into account a 10% drop from current levels, is similar across cash and equities.

    Two further considerations. In some money market funds investors can receive higher after tax rates and this improves the picture somewhat.

    We are also assuming some normalisation of company profits and this is subject to greater volatility than money in the bank.

    What we have not taking into account and which I will expand upon is the fact that over a longer period of time like 5 – 6 years, capital invested into equities tends to at least hold its purchasing power, unlike cash in the bank which depreciates. More than that an investor subjecting his capital to risk is looking for a premium above inflation.

    For sure there will be price volatility along the way – this is a given. Today local equities picked up in the morning, but then started coming off. The JSE All Share index ended down 1,9%. Financials were hard hit down 3%.

    Investors remain nervous of the outlook for short run earnings and this may still continue to put pressure on share prices.

    The US markets are closed for a holiday and tomorrow sees the inauguration of Obama as US president.

    If you would like to discuss any aspect to your overall investment planning, please don’t hesitate to contact us.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-19, 18:04:46, by ian Email , Leave a comment

    Global banks remain under pressure

    Banks as purveyors of capital for private and corporates are under immense pressure at the start of 2009. These are huge cogs in the global economy, but despite the administration of plenty of oil, they are still seizing up. This week saw more problems and despite ongoing government backing, are still reluctant to lend.

    Citigroup, an amalgamation of various banks and financial institutions, but which largely comprised the merger of Citicorp and Travelers in 1998 to create the world’s largest financial institution. It was forced to accept government funding, but today it still reported an $8,29 billion loss for the 4th quarter of 2008.

    Citigroup will give up control of once prized brokerage Smith Barney to Morgan Stanley.

    Bank of America is the US biggest bank by assets. Last year it acquired troubled Merrill Lynch. It also needed emergency funding from the US government of around $140 billion through capital injections and guarantees. It reported a 4th quarter loss of $1,79 billion – its first loss since 1991. With hindsight Bank of America was too quick jumping in and acquiring ailing Merrill Lynch and mortgage lender Countrywide.

    The shares fell to an 18 year low

    Once again US government, Federal Reserve and their advisors are in panic mode. Normal banking ability is frozen as banks need to deal with illiquid balance sheets, bad debts. Bloomberg reports a bank analyst saying that as much as $1,2 trillion more is required.

    Problem is - where will this come from? There are no reserves, and government itself is running a $1 trillion plus deficit. The money can really only be printed, which starts to put call into question its value.

    Across the water in the UK government is apparently also looking to a fresh round of finance for sailing banks. A figure of $150 in new guarantees was mentioned.

    Europe’s largest bank, HSBC, reportedly needs to raise at least $30 billion.

    Biggest Japanese bank, Mitsubishi UFJ Financial Corp announced its plans to write down securities on its balance sheet by $3,2 billion for the 4th quarter 2008 results due out at beginning of February.

    Governments are looking at various options to support banks including:

    o Direct cash injections.
    o Guarantees of assets to support their value and ability to trade
    o Establishing a bad debt bank to buy problem assets from banks
    o Full nationalisation in some cases. Ireland announced the nationalisation of Anglo Irish Bank, their third largest lender..


    All are merely different shades of the same thing.

    Private Banks make relatively small margins on lending out money. They enhance this small margin by gearing up and so $1 of deposit can be lent out multiple times 5, 10, 20 and sometimes even more times.

    In this way a very acceptable return can be generated on a sliver of bank equity. But when the asset side of their balance sheet is not as sound as it once was and they are forced to write down values, that sliver of equity quickly vanishes. That’s when they make that call to their friends at the printing press.

    With a rapidly contracting balance sheet, having to be propped up by governments, banks are now extremely reluctant to make fresh advances. Given their importance in economies, governments will continue to put pressure on them in their quest to make capital available at cheaper cost.

    Have a wonderful weekend

    Regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-16, 17:42:49, by ian Email , Leave a comment

    Investing is a Social Science

    Yesterday’s report was about how investing is not an exact science. This statement is true purely as a result of emotional humans being part of the feedback loop, i.e. we are part of the system, and therefore our actions directly affect the system. This is what George Soros has termed ‘reflexivity’.

    In an emotionless and ideal world there would be no opportunities to make excess returns over sustainable periods. This would be because all market information would be immediately disseminated to all stakeholders, thereby preventing insider trading, and all stakeholders would react in the exact same way to the information received, thereby eliminating different fair value calculations. In this ‘robot’ world the ruling price would exactly encapsulate the true value of the share, and all participants would agree on one true value.

    The mere existence of emotions and other market inefficiencies allows for the possibility that astute investors can beat the market, at the same time it will result in many investors underperforming the market. It is typically those investors that are best able to identify and control their ‘investing’ emotions that are the ones that outperform.

    However, merely being able to identify and control your emotions does not guarantee success. As mentioned often before, getting the probabilities in your favour is the first step to superior performance. This is achieved through thorough and diligent research, and following proven investment best practice. Following your strategy is the key part of this point. All too often an investor will say that he is following a value strategy, only for you to find shares with growth characteristics in his portfolio. Chopping and changing your investment style, unless you are a truly exceptional investor, is the surest way to produce a disappointing return.

    Knowing, and sticking to, your limitations is an important part of the investment process (much as it is in many walks of life). All too often we attribute positive results to our own actions, while dismissing any failures as aberrations, or the fault of others. This cycle of self commendation can be highly detrimental in any sphere of life, and investing is no different.

    Some people still try to dismiss the human factor (although this group is rapidly shrinking), and a large portion of the time it is because it is nearly impossible to quantify emotions (although volatility indices attempt to measure fear) as accurately as one is able to quantify and analyse more concrete data.

    Awareness of what is happening in the investment world and how it affects you is the first step towards achieving investment success.

    We provide a service to high net worth individuals trying as much as possible to take emotion out of the investment decision making process and guiding them in their optimal direction. If you require this assistance, please don’t hesitate to contact us in the office.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-15, 17:37:03, by Mike Email , Leave a comment

    Investing is not an exact science

    Investing is not an exact science. 100% accurate predictions are impossible. But at the same time it’s not necessary for successful long term investing. In many respects successful long term investing is about understanding probabilities. Peter Bernstein, economist and investment author, said that “Probability has always carried this double meaning, one looking into the future, the other interpreting the past. One concerned with our opinions, the other concerned with what we actually know.”

    I briefly mentioned yesterday how many investors prefer to wait for a clear horizon before making an investment decision. Unfortunately this is just not possible and all investors make decisions under varying degrees of uncertainty.

    Most often, just at the point where it feels comfortable to take on risk – it’s proven to be the worst time.

    Noted author of extreme events, Nassim Taleb, author of the Black Swan and Fooled by Randomness, scoffs at any form of long term predictions, saying "What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it."

    This is because return distributions in financial markets don’t follow a normal bell curve. This is unlike for example the height of a random group of 100 people, where the bulk will be clustered around the middle, and a few outliers on either side a few standard deviations from the mean.

    The volatility of financial markets in 2008 went far beyond what many typical models predicted. But with financial markets extraordinary volatility should be expected as the norm, not the exceptional.

    Taleb says that most financial models overestimate the value of past data and underestimate the prevalence of unexplainable randomness in data. He calls these unexpected, but high impact random events, black swan events.

    Given the difficulties, how then does this translate into portfolio construction?

    In our view investors need to consider the following:

    o A clear understanding of past history in order to provide input into a probability model.

    o But also an understanding that an unlikely outside event can be damaging to the overall portfolio.

    o In situations of uncertainty, an analysis of the consequences of outcomes, even highly improbable outside events. E.g. what will happen to my total retirement planning should the single company that I am invested into fold for whatever reason?

    o Therefore ongoing diversification is critical to portfolio construction.

    o Combined with ongoing adjustment for valuations of various asset classes.

    As mentioned above 100% accurate prediction of each single decision is impossible, but not required for successful long term success. Investors and advisors such as us always need to make decisions with various levels of uncertainty. From an emotional perspective, just when it “feels” the most comfortable, invariably it’s the riskiest time.

    Give us a call if you would like to discuss modeling your current investment portfolio into retirement. If you have recently retired or about to, then this becomes very important.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-14, 17:30:08, by ian Email , Leave a comment

    Deflation concerns

    Global markets remain volatile. In the US Bernanke is saying that fiscal stimulus is unlikely to be enough and wants government to buy tainted assets. Obama is looking to change direction for spending the TARP – Troubled Asset Relief Program – funds. He is also pressing Congress for around $775 billion in tax cuts and increased government spending.

    Central banks around the world are cutting interest rates to historical lows. This week the European Central Banks will decide on their key rate.

    What governments want to do is replace private banking system expansion, which has collapsed dramatically, with direct intervention.

    This is no easy task because typically banks, until recently, are exceptionally good at gearing up deposits received and producing a multiplier effect. Stats now indicate a sharp slowdown in the ability of fresh Fed reserves to be expanded into money supply.

    Governments can provide fresh money and they can buy back so called toxic assets at net asset value, or a discount to net asset value, but their ability to gear up this new money creation, without a fully functioning banking system willing to lend, together with customers willing to borrow is restricted.

    For this reason, many analysts are saying that despite massive doses of government printing and intervention, prices of goods and assets may become cheaper and cheaper over time – i.e. a real risk of deflation.

    In a deflationary environment consumers delay spending, which in turn becomes self fulfilling as demand remains subdued.

    Over the last 8 years, the major economic concern has moved from deflationary to inflationary and back again. Longer term its not in government’s interest to have deflation and so while consumer inflation is set down sharply in 2009, its not likely to last. With massive and growing debt levels it’s in government’s interest to inflate and so repay debt – if possible – with less valuable paper.

    Global markets were down today, but there were some positive signs at the opening of the US markets.

    The local stock market fell 2,79%.

    The rand appreciated strongly after weakening to over R10/dollar. Its now trading at R9,95/dollar, R14,51/pound and R13,16/euro.

    Shoprite issued a very positive trading update saying that growth in turnover on a like for like basis was up 22% with supermarket operation in SA increasing sales by 20%. The non RSA business is up ahead of budget. Still the share slipped back 0,4% to R55. It’s not cheap on an historical PE of 17,7 times and a div yield of 2,8%. This is a definite premium to the JSE.

    Having followed local and global markets for many years now, the outlook never becomes too clear. So many times, investors look to opt out the volatile times with the excuse that “when things become clearer, they will jump back in again.”. I will discuss this in more detail tomorrow.

    Kind regards

    Ian de Lange
    ian@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-13, 18:21:00, by ian Email , Leave a comment

    10 year bond returns versus equity returns

    Against the backdrop of a negative 23,2% for the JSE All Share index, the local bond market produced a stellar 16,97% return for calendar 2008. Of this almost 7% was in December alone as investors continued to buy bonds as safe haven investments. When looking back over 10 years, the pre tax return from bonds to the end of December slightly outperformed that of local equities.

    In many respects the excellent return from bonds in 2008 was not a function of their starting value at the beginning of 2008 but rather a function of risk aversion as investors sold out of equity portfolios and moved into money market and other shorter term safe investments.

    Naturally bonds are not tax efficient and so over time this is a large deterrent to investing into bonds for discretionary money –i.e. funds that are outside of pension funds, retirement annuities etc.

    However for tax free portfolios such as pension funds, many asset managers have continued to hold a fairly large strategic allocation to bonds.

    A R100 invested into the JSE All Share index at the beginning of 1999 would be worth R517 at the end of 2008.

    That same R100 invested into the Bond exchange each year from the beginning of 1999 would be worth R524 on a pre tax basis. This equates to an annualised 18% per annum.

    Naturally the volatility of the equity market was far higher, where returns would have fluctuated from a positive 60% in 1999 to last years negative 23% last year.

    With bonds this volatility was far lower with returns varying from 32,8% in 1999 to negative 0,9% in 2007.

    The question then is if bonds have proved to be such a good investment over the last 10 years compared to equities, why should investors not load up on this lower risk investment option and produce returns close to if not better than equity type returns.

    Well lets look at some factors that will play a part over the next 5 to 10 years:

    o As with any asset, the starting yield is important. Local bond yields spiked in August 1998 to 20,09% before declining. This largely drove the ensuing 18% annual return as yields declined.

    o Now that the yield on the local government bond has declined to 7,6%, this is closer to the expected long term return pre tax and pre inflation.

    o There is a risk that inflation starts to pick up into the foreseeable future, making current yields very unattractive.

    Globally as monetary authorities release large doses of new money into global markets, the debate now is whether bonds are in a bubble or if they represent ongoing value in a possible deflationary environment.

    Many investors are prepared to lend to the SA government at 7,5% yield and to the US government at around 2,35% for 10 years and 3% for 30 years. Some investors such as Jim Rogers have been very vocal about how expensive these yields are saying that "I can't imagine anybody is going to give the U.S. government money for 30 years at 2.5 percent or even 4 percent or 4.5 percent. It's mind boggling to me.".

    He is predicting that many creditor nations will start to shun US assets and in particular US Treasury bonds. This is negative for holders of bonds.

    Locally bond yields look expensive. But then we said that in 2008 and preferred shorter dated money market instruments. Now with yields at 7,5%, stripping off inflation at say 5% and tax at say 30% lenders of capital do not appear to be adequately compensated.

    On an ongoing basis it is important to assess your actual asset allocation against a defined longer term strategic asset allocation and adjust as valuations of asset classes change.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-12, 18:10:32, by ian Email , Leave a comment

    Advantages and disadvantages of unit trusts

    Continuing with the theme of various investments and vehicles, we have highlighted some points on unit trusts. A common question posed by investors is, “Should I invest directly into equities, bonds, preference shares or property unit trusts etc, or should I use a pooled vehicle such as a unit trust?” There is a fairly common concern that investing on a pooled basis is not as efficient as investing on a segregated basis, i.e. having ones own investment account.

    At the end of September 2008, despite the decline in the prices of global and local equities, the value of all assets held by local unit trusts was at R647 billion. This was down slightly from the beginning of last year, despite net inflows, but still represents a large and growing component of the wealth and savings industry in South Africa.

    The total number of local funds, including fund of funds and asset swap funds was 872 at the end of September 2008. Based on anecdotal evidence, the growth rate in new funds slowed down in the last quarter of 2008 and this is likely to be the case for some time, given the more recent proliferation of funds.

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

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

    Quite simply this is not the case.

    Instead of merely outright dismissing the pooling option, investors need to take into account all the facts before making a decision. Perhaps that decision may be to use a pooled vehicle for a portion of one’s wealth.

    Not only has there been growth in the quantum of funds and investment capital, but also in the type of funds available. Many investors equate a unit trust with a portfolio of equity shares, but there are many forms of funds, including:

    o Equity only funds
    o Specialist equity such as value funds
    o Sector specific funds such as gold funds or small cap funds
    o Various forms of fixed income funds
    o Prudential funds, which are balanced funds akin to pension funds
    o Flexible funds, which invest across various asset classes, while also varying their exposures.

    Advantages of investing assets via a unit trust

    o Many fund managers spend more time on their more public unit trust funds as opposed to their segregated funds.
    o A big consideration is that lack of tax on all trading within a pooled unit trust. This frees up the manager to act when necessary, without any hindrance of tax concerns. Tax considerations are a large hindrance for segregated portfolios, where each transaction triggers a possible capital gains tax event.
    o The larger pooled funds are able to negotiate their fees down with stockbrokers. Where a private client may pay 0,5% brokerage, pooled funds pay 0,1% and lower.
    o It’s far easier and quicker to liquidate a portfolio or a portion of a portfolio held via a fund than directly in the market.
    o Investors can quickly achieve diversification benefits.

    Disadvantages of investing assets via a unit trust

    o Costs. Annual management fees and other costs need to be assessed relative to the value obtained.
    o Dilution possibilities. In the event of a large cash inflow or outflow, all investors’ percentages of the underlying assets will change.
    o Another possible hindrance to future performance is the size of a pooled fund. Larger funds have a smaller universe of available opportunities.

    Pooled vehicles are not only for small investors. Many very wealthy investors have recognised the benefits of a tax efficient vehicle such as a unit trust, with excellent custodian benefits and have elected to use this instead of direct ownership of assets.

    We find that many investors are invested into various funds via different entry levels, such as retirement annuities, but don’t aggregate exposures across asset classes on a regular basis. i.e. total up exactly how much of their funds is allocated to local equities, foreign equities, property bonds etc.

    Seed Investments produces a snapshot or total asset allocation for their clients on a monthly basis. Please don’t hesitate to contact Vincent Heys on details below if you would like to get more insight into the service we provide high net worth clients.


    Have a great weekend.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-09, 17:09:09, by ian Email , Leave a comment

    lower interest rates should underpin asset prices

    Despite escalating violence in the Middle East and especially in Israel, a volatile oil price, and plenty of global economic woes, global equity markets have a greater sense of stability and an element of upward momentum to them. The bigger trend remains in question for now, but the shorter term trend, despite today’s setback appears to be positive.

    A positive fact that cannot be underestimated is the global monetary authorities acting in concert into the latter part of 2008.

    There is a saying, “Don’t fight the Fed.” i.e. where the central bank shows a willingness to reduce the cost of money, this is ultimately positive for real assets as the buying power of money is reduced.

    And central banks, led by the US Federal Reserve have been very aggressive last year.

    This headline by investment strategist, Anetole Kaletsky at the end of December.

    "By cutting interest rates from 1 per cent to zero, the Fed opened the door to a completely new world of possibilities where many traditional rules vanish or go into reverse - a sort of economic wonderland in which money can be distributed free to citizens and where governments can spend and borrow at will, without any increase in borrowing costs. Now that the Fed has blazed the trail, other central banks are likely to follow. The sooner they do this... the greater the chances of averting a depression."

    According to fund manager Sarasin, the average central bank interest rate across the G7 countries is now down to just 1,25%. This includes the US Federal Reserve decline to an unprecedented 0,25% - 0%.

    In addition to reducing interest rates to an effective 0%, they will also be printing money to buy intervene directly in the financial markets and buy commercial paper, mortgage backed securities and money market funds. Sarasin reported that the Bank of England and the ECB are also looking at similar options.

    The idea is to make their interest rate reduction actions as effective as possible and increase the availability of liquidity across the global economy given the fact that there are still blockages at the banking level.

    Europe had up to the last quarter of 2008 always been exceptionally firm on holding interest rates high – a hangover from the German Bundesbank days. But from October 2008 they cut rates by 1,75% to 2,5% and there is a good probability that they will cut by a further 0,25% next week to 2,25%.

    The Bank of England announced an expected 0,5% drop in their key lending rate today, from 2% to 1,5%. At this level, its now the lowest since the founding of the central bank in 1964 according to Bloomberg.

    The actions by central banks has seen a scramble for bonds with yields dropping – i.e. returns up.

    Even locally in 2008, bonds performed well, gaining 16,97% for the year as the yield on longer dated bonds declined. But this is unlikely to persist and as yields stabilise and rise, investors lose capital.

    In addition to a stimulatory monetary policy, the US is looking to a more aggressive fiscal policy.

    They can’t afford this because the deficit is likely to be at least $1 trillion, with no sign of reducing in the near future. At the same time Obama is looking to make around $500 billion plus tax cuts. The plan is to also seriously beef up spending on US infrastructure.

    Ultimately the US is monetising the debt. In reality the deficit will be made up by issuing more paper as the government takes over more and more of the private economy.

    The Financial Times reports that the US government is expected to borrow a further $2 trillion this year, or 14% of GDP, while some $350bn in European government bonds are expected to come to market in the first quarter.

    Global markets have responded positively thus far. The shorter term trend appears positive. The JSE All Share index has gained some 27% from its low at the end of November 2008.

    The question now is will the actions by central bankers be enough, or have they started to run out of ammunition? In the shorter time frame there is a risk that asset prices keep falling, but medium to longer term, exceptionally loose monetary policy will devalue paper against assets.

    The chart of the JSE All Share index below reflects the sharp decline and the more recent bounce up through important key levels.

    We are scheduling meetings for those investors who would like to discuss their investment planning, asset allocation and general retirement planning. If you would like to set up a meeting, please mail us on details below.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-08, 17:10:21, by ian Email , Leave a comment

    Reprieve at the Fuel Pump

    The petrol price can, as we have seen in the past 12 months in South Africa, be quite an emotive subject. One of the major reasons for this emotion is that the price of fuel plays quite a large role in most South African’s lives (particularly the poor).

    The direct effects of the fuel price are the cost of transport (land, sea, and air) and the cost of paraffin for those who don’t have electricity. The effects of the fuel price also seeps through to other places of our lives such as food (farmers also pay more to produce and transport their crops, and this needs to be passed on) and onto other products that require petrol/diesel as a large input in the production of the finished goods.

    It comes with great delight then, when the price of petrol was decreased by 18%, and diesel by 20% as the clock ticked over from 6 to 7 January 2009. The monthly movements can seem to some as possibly haphazard or random, but they are based on an agreed upon formula which takes into account the price that it costs to import fuel into the country. While it is a fairly technical calculation the major drivers are the dollar price of oil, and the rand / dollar exchange rate. While the rand has depreciated against the dollar over the second half of 2008, the oil price fell from a high of around $147 to below $40 at year end. To have an idea of what the petrol price will do the following month you can do worse than track the rand price for a barrel of brent crude oil.

    Motorists will now pay R6.01/litre inland and R5.76/litre at the coast for petrol. A far cry when it was over R10 in 2008 and at the same levels as it was almost 2 years ago!

    While this is relief to many consumers, those who are dependant on public transport haven’t been offered this reprieve as taxis have stated that they won’t be decreasing their fares. As is the case in a country with a large portion of the population living in poverty there were calls for government to subsidise the price of fuel when the price was shooting up. There have now been calls to government to force the taxi drivers to reduce their fares as taxi fares constitute a disproportionately large portion of the average taxi passenger’s disposable income.

    Unless specifically directed, it is highly unlikely that there will be wholesale drops in prices of goods and services, as prices tend to be sticky on the downside. The most reasonable scenario would be for prices to remain at current levels for an extended period, provided fuel prices don’t suddenly shoot up again. Food retailers will most likely be the ones to pass on some of the savings, but again one should only expect selected prices cuts for specific periods. Most of these companies have had their margins squeezed over the past 12 months, so any opportunity to increase their margin, without increasing their selling price will be welcomed with open arms.

    Another benefit of the rapidly falling petrol price will be on inflation, where it is a large component of CPI. A swiftly dropping inflation rate will make it easier for the Monetary Policy Committee to carrying dropping the repo rate, which will help heavily indebted consumers. Hopefully 2009 will provide us with a year of positive economic surprises.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-07, 16:19:01, by Mike Email , Leave a comment

    After the losses

    One has to go back to 1970 to see a similar decline to what investors experienced on the local stock market in 2008. The total loss on the JSE All Share index last year came in at 23,2%. Since 1960 the biggest loss was 25,8% in one calendar year – that being 1970.

    The one quarter price decline in 1970 followed the 1969 calendar year loss of 10%. Naturally at the beginning of 1971 many investors were very disgruntled after large losses to their portfolio values.

    Many investors had experienced exuberant gains in the 1969 boom period, only to end up highly disappointed as prices fell sharply from peaks.

    The mid 1970 were exceptionally tough periods around the world as the oil embargoes had a spiked effect on the price of oil and a detrimental impact on global economies.

    Local economist, Cees Bruggemans describes the 1970s as follows: “When one looks at 40-year global graphs of inflation and interest rates, whether short or long, something jumps at you rather forcefully. The 1970s were a disruption, in the process taking the world from low single-digit 1960s inflation to high double-digit inflation, with very few countries escaping this general step change.”

    Ken Fisher described the early 1970’s as “… the 1973--74 monster bear, when stocks bottomed in October 1974 but the U.S. economy kept sliding through March 1975.”

    As is the case today, there was a preponderance of bad financial news in the 1970’s, following the strong 1960’s. Many investors would have given in to their fears and looked to move their savings into cash in order to protect against further losses.

    Hindsight is perfect and so we can ascertain what type of return investors received by following a cash or shares alternative over the next 10 years from 1971 to 1980.

    As noted above one of the more important facts in that time period is that inflation starting picking up quite sharply – following the oil price gains. CPI was recorded at 4,8% in 1970 but by 1980 it had increased to 15,8% per annum.

    A R100 at the beginning of 1971 would need to have grown to R292 just to have kept pace with inflation over the 10 years. Had an investor been scared out of the market and invested into fixed deposit his investment would have only grown to R220. I.e. before tax on the interest, the investor was not keeping up with inflation.

    For those investors that stuck it out, or indeed for those who saw an opportunity to allocate new funds to assets that had declined in price from substantial peaks and invested into the JSE All Share index, their R100 would have grown to almost R900 over the ensuing 10 year period.

    This out performance over cash was over a period that included an index decline of 18,9% in 1975 and a decline of 10,9% in 1976.

    R100 invested at the beginning of 1971 after a 29,7% index loss in 1970 would have grown to the following after being invested for 10 years:

    o Inflation - R292
    o Fixed deposit - R221
    o JSE All Share index - R894

    Had the funds been invested for 2 more years, the R894 would have grown to R1200.

    There are no guarantees that history repeats itself, but it certainly rhymes. Yes a 10 year investment horizon is long, but at the start of 2009, I am sure that many recall the hype and concern around Y2K – it was not that long ago. This first decade of the 21st century has been exceptionally quick.

    The large disparity in outcomes of an investment into real assets and an investment into money market is just too large to ignore. For sure there are many particular years when having cash outperforms other assets, but when measured over multiple years, an investment into a real asset will outperform.

    The graph below reflects the annual total return of the JSE All Share index for each year from 1960. There are many years with negative performance.


    As always please don’t hesitate to contact us to discuss any aspect on this or your personal investment planning.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-06, 16:35:05, by ian Email , Leave a comment

    Sound reasons to invest

    At the end of 2008 many investors were asking themselves the question, “Just exactly why am I invested in various assets that have now tumbled in price so dramatically?” And so at the start of 2009, let’s kick off by asking some more pertinent questions, “Why invest and what are some right and wrong reasons to invest.”

    We believe that it’s important to have a strong foundation to your investment plan – asking the right question is therefore critical.

    Naturally there is no one answer, and each person should develop their own specific reasons. We would opine that in general and for specific investments, some wrong reasons to invest would include:

    1. Greed – i.e. the desire to have more and more material wealth for the sake of it.
    2. Envy, which is the desire to have based on the success of others.
    3. Excessive speculation with little substance.
    4. Investing out of ignorance or following unwise counsel.

    Time and time again, “investors” with one or more of these overriding reasons fall short. The overarching element of greed in a decision typically leads people to put money into get rich quick schemes, lotteries, high return promises, short term stock picks etc. These may last for a time, but invariably the risks outweigh the rewards and investors often not only forfeit the return but the principal as well.

    A lot of what transpired in the world in 2008 was the result of a build-up of greed in the world. Especially in the US, which naturally had reverberations around the world, greedy capital found its way into riskier and riskier assets. What started out as honest investing started turning into sophisticated speculation.

    Unfortunately over a short time period, all investors lost capital, but those with the proper foundation, right reasons and longer time horizon will not be prejudiced.

    With long term investing there are no short cuts.

    Sound reasons for investing would include the following:

    1. Optimisation of excess savings for future use. Typically this involves investing savings for use into retirement years.

    2. Management of accumulated wealth to have additional funds to give away in the future. This requires planning to give away excess funds either during or after your lifetime.

    Wealth creation and management goes beyond merely accumulation of financial wealth at all costs.

    Sound reasons for investing excess capital form the foundation for long term wealth creation.

    Wishing you a prosperous 2009 in every respect.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-01-05, 17:13:41, by ian Email , Leave a comment

    Daily Equity Report Friday 2 January 2009

    The JSE closed up 1.19% at 21765 with value traded at R 2.80 billion. Advances led declines 156 to 118 with 84 shares unchanged out of 358 active. Mining closed up 4.22% at 25844, while Industrials were down 1.17% at 20180 and financials ended the day down 0.84% at 15647.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 13.6% at 2328, FTSE/JSE RAFI 40 up 8.6% at 4321 and COAL MINING up 7.3% at 45991, while the worst were FTSE/JSE All Africa ex SA 30 with US$ values down 33.7% at 57, SHARIAH TOP40 INDEX down 30.3% at 2319 and FTSE/JSE All Africa ex SA 30 with S A Rand values down 28.9% at 68.

    There were 1 new lows today, including Trnshex topped the list, down 16.7% at 265.

    Of the major stocks Anglo was up 6.11% at 22389, Sasol ended up 4.31% at 29210, Mtn moved down 2.4% at 10590, Billiton moved up 4.16% at 18501, Naspersn ended down 1.55% at 16368.

    Best performers of the day were Decillion up 35.76% at 224 , Pinnacle up 30.77% at 238 , some of the losing shares included Trnshex off 16.67% at 265 and Eastplats off 10.79% at 281

    The Dow was up 1.8% at 8932.50 and the S&P 500 up 1.8% at 919.71 a few moments ago.

    Gold was up 0.8% at $ 877.00/oz

    The rand was last trading at R 9.33 to the dollar, R 13.50 to the pound and R 12.97 to the Euro.

    Permalink2009-01-02, 20:04:07, by admin Email , Leave a comment