XML Feeds

What is RSS?

Categories

Top Rated

    Seven Cures for a Lean Purse

    In my view, one of the most important books on personal financial planning is The Richest Man in Babylon, written by George Clason.

    In this book two friends, who both earn a good income and are highly skilled in their respective trades, decide to ask their childhood friend Arkhad the secrets on his vast wealth. Despite the fact that Arkhad was neither more intelligent nor harder working than they were and given the fact that he did not inherit any money Arkhad was the richest man in Babylon and they were struggling to make ends meet. In this book Arkhad gives the reader the seven cures for a lean purse.

    1. Start by purse fattening

    “For every ten coins placed in their purse, take out for use but nine.” Most people have a steady source of income and the first step to a fat wallet is paying yourself (i.e. saving) R1 for every R10 earned.

    2. Control thy expenditure

    “What each of us calls our necessary expenses will always grow to equal our income unless we protest to the contrary”. People often tend to confuse necessary expenses with their desires. If you look around you will see people with varying levels of income yet very few of them have money left at the end of the month. From the domestic worker earning R 2 000 per month to the business owner earing R 100 000 per month our expenses always seem to grow faster than our income.

    3. Make thy gold multiply

    Once you have started paying yourself every month, you need to ensure that that money is put to work earning a real return. It is also important that any income earned is also reinvested. The compounding effect of “interest on interest” is what generates wealth.

    4. Guard thy treasure from loss

    Invest only where the principle is safe and were it may be reclaimed if needed. Always consult with wise men. Arkhad told his friends that his first investment had been with the baker who was going to buy precious jewels; needless to say he lost his whole investment.

    5. Make thy dwelling an investment

    Own thy own home. Why pay off someone else’s bond when you can pay off your own dwelling?

    6. Insure a future income

    You need to ensure that your family is looked after if you die “too soon”. You also need to ensure that you have an income if you are unable to work (disability) and you need to ensure that you have an income if you die “too late” (retirement).

    7. Increase thy ability to earn

    By increasing your earning potential through studies and hard work you will make the provision of your needs a lot easier.

    Whilst the advice that is given here may appear to be far too simple, the fact of the matter is that if you implemented this advice you may not be the “richest person in Durban, Cape Town, or Johannesburg”, but you will not have a “Lean Purse”. Personal financial planning is all about being disciplined enough to do the ‘basics’, as discussed above, right.

    Kind regards,

    Barry Hugo

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2012-08-28, 09:58:34, by Mike Email , Leave a comment

    Harmony Gold – Unlocking Potential in Papua New Guinea?

    Harmony Gold, South Africa’s third-largest gold producer, recently released a set of strong numbers for their financial year ended 30 June 2012. The gold miner reported an 80% increase in operating (production) profits for the year to R 5.9bn, with headline earnings per share more than doubling from 223 cents to 551 cents. A final dividend of 50c brought total dividends for the year to 90c per share.

    Simple start, rapid expansion

    Harmony was incorporated and registered in 1950 and operated a single gold mine in agreement with Randgold until 1997, when it became completely independent. Through a series of acquisitions including Lydex, Bissett, Evander Gold Mines, Randfontein Estates, Kalgold, and West Rand Consolidated Mines, the company has evolved into a world-class gold producer that is looking for opportunity to expand even further. Much of Harmony’s recent success can be attributed to their innovative management team and executives, including CEO Graham Briggs and non-executive chairman Patrice Motsepe.

    Operations

    The miner’s interests in South Africa include nine continuing underground operations and three surface operations, mostly concentrated in the Witwatersrand area. Operations at Kusasalethu and Tshepong account for nearly 33% of the total gold produced locally, and contribute 37% to the production profit.

    Source: www.harmony.co.za

    Harmony has made a conscious effort of late to dispose of high-cost, unproductive mines, and this strategy is rewarded in that only one operation posted a loss for the year. In addition to streamlining its current operations, a renewed focus was placed on exploration and unearthing new opportunities in SA and abroad.

    Harmony launched into offshore operations in 2007, acquiring royalty rights for the Hidden Valley area in Papua New Guinea. The Morobe Mining Joint Venture situated at Hidden Valley, which is a 50% partnership with Newcrest of Australia, is still in its exploration phase, with production planned to start in 2016.

    This area is probably the most valuable untapped resource on the planet, with investigations and test drilling at the Wafi-Golpu site revealing the presence of vast amounts of high-quality copper and gold. The results of the pre-feasibility study on the region, which Harmony will release on 29 August, will be critical to Harmony’s future production and resultant profitability. Management hopes to mine 40% to 45% of its gold outside of SA by 2017, and establishing a flourishing operation at Wafi-Golphu can make this objective a reality.

    Drivers of Profit

    Harmony produced 39.642 tons of gold from a total of nearly 19m tons of ore milled, which is a slight decrease of 2% over the previous financial year. Cash operating costs increased by 20% due to increased electricity tariffs and a rise in transportation costs. The main drivers of profitability were the increase in the rand gold price by 36% and the weakening of the ZARUSD exchange rate by 11%. As a result, the increase in operating profit of 80% is mostly due to unpredictable macro factors that do not necessarily reflect Harmony’s ability to mine gold efficiently. These factors affect all gold miners similarly, and result in very inconsistent year-to-year earnings figures across the board.

    Source: www.harmony.co.za

    Current Valuation and Future Prospects

    Harmony currently trades at a PE of 13.69, which is expensive relative to its rivals AngloGold Ashanti (8.69) and Gold Fields (8.9), and has a DY of about 1.2%. With the resources sector in general priced at very attractive levels, the opportunity to increase exposure is ever present.

    Harmony’s venture at Wafi-Golphu has the potential to distinguish the company from its rivals in terms of ounces produced and ultimately also profitability, but only time will tell if the gold deposits can be accessed cost-effectively.

    Investors have to decide if Harmony’s current price is low enough to pay for a capable management team, established local operations, and a potential gold mine (pardon the pun) of possibilities overseas.

    Kind regards,

    Cor van Deventer

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2012-08-21, 14:29:13, by Mike Email , Leave a comment

    Let’s Save More Tomorrow

    I have a friend that is addicted to TED Talks, with the better ones always managing to find their way to my inbox. The most recent one that piqued my interest was a talk by Shlomo Benartza: Saving for tomorrow, http://www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow.html. It caught my eye as he tackles a problem that most of us face. We convince ourselves that we will save more in the future but never actually get around to it.

    Shlomo Benartzi uses behavioural economics to study how and why we plan well for the future (or fail to), and uses that to develop new programs to encourage saving for retirement. He identified three key reasons why people make the promise to save, but fail to follow through.

    Present Biased

    We all make promises to exercise more, eat healthier, and save more in the future but when the day comes we generally succumb to instant gratification. Self control is only a problem in the present. We would rather spend today than save for tomorrow.

    Inertia

    We like to continue in our current state of motion. We don’t like to get bogged down with doing boring stuff like filling in paperwork or reading up on funds. We would rather keep procrastinating and placing the problems off until a future date.

    Loss Aversion

    People hate losing stuff. People experience savings as a loss of spending, and this is painful to the average person. It is painful to save now, because I will need to cut back on my spending today.

    Shlomo looked at the three resistances that we have against saving money and tried to find a solution and to get people start saving. The solution he found was the program Save More Tomorrow™ or SMarT.

    The program is based on four principles:

    1. The investor is approached to increase their contribution well in advance of their pay increase. By agreeing to the increase of contribution well in advance the present bias is overcome as you are not affected by this in the near term.

    2. Your contribution to the plan is increased beginning with the first pay cheque after a raise. With the increased contribution happening on your first increased pay cheque the loss effect is minimised as you haven’t yet got accustomed to new disposable income.

    3. The contribution percentage increases annually until the maximum preset percentage. Keeping your current inertia, the investor doesn’t need to do anything and requires no effort.

    4. The investor can opt out of the process at any stage. The investor is more agreeable to join the investment plan if they know that they will be able to opt out in the future and there is no lock up.

    You can take a couple things from the SMarT plan when implementing your own savings plan either through your company pension scheme or private savings plan. One is to schedule increased contributions that coincide with your salary increase way in advance. Another suggestion is to make sure that your debit order for the savings goes off as soon as possible after your salary is paid to minimise the “loss” you suffer. Ultimately getting into good saving habits now will assist us in our future retirement.

    Kind regards,

    Gerbrandt Kruger

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2012-08-14, 12:01:27, by Mike Email , Leave a comment

    Yale Endowment: 2011

    The annual Yale Endowment Report is a must read at Seed, and this year is no different. Each year we attempt to gain insights into why this is one of the best performing institutional portfolios in the world, and see if there are any nuggets of wisdom that we can use in the management of the funds and portfolios that we manage on our clients’ behalf.

    In summary, the Yale Endowment is a $19.4bn endowment that currently provides over one third of Yale’s annual revenue, while preserving (and growing) the real purchasing power of the capital base for use by future generations. In many ways high net worth individual and family trust investment plans are similar to endowments, particularly where there is a desire to leave a legacy. In years gone by we have looked at how having a well defined drawdown methodology will not only help extend the capital’s life, but that there are also ways to ensure that the annual changes in the drawdown amount aren’t too volatile.

    One aspect in this year’s report that struck me was the endowment’s large allocation to illiquid assets. As at the end of 2011 nearly two thirds of Yale’s endowment was invested into illiquid assets! I then took a look back at how this allocation differs to their endowment in 2001, and also compared to the average educational endowment.

    The chart below shows how Yale has increased its allocation to illiquid assets over the past decade, and how the average educational endowment holds even less illiquid assets than Yale did 10 years ago. Illiquid assets are defined as private equity, real estate, and natural resources. Quasi-liquid assets are made up of absolute return strategies (typically hedge fund type investments), while liquid assets are those that trade on public exchanges, i.e. equity and fixed income.

    The first key observation is that the Yale Endowment hasn’t done well because it invested into illiquid assets per se. Illiquidity in itself doesn’t generate returns, but good illiquid investments have the ability to generate exceptional performance. Illiquid assets by their very nature are often uncorrelated to more liquid assets (as there isn’t an active market that is overly influenced by the prevailing sentiment) and investors are often rewarded with an illiquidity premium, but these asset classes typically require more in depth due diligence and larger investment minimums.

    Another observation is that while their allocation to illiquid assets is high, they still have enough invested in liquid strategies to be used to fund the university’s drawdown requirement. The defined drawdown process results in approximately 5% of the endowment being drawn on an annual basis. With this percentage being fairly static, the investment team is able to maximise their return profile. Too often we see individual investors that require a large percentage of their assets to be readily accessible as they are unsure of their income requirement, and by doing so require a large portion of their assets to be invested in low yielding highly liquid strategies.

    With 36% of the endowment in liquid and quasi-liquid strategies, in a worst case scenario (i.e. when the illiquid assets can’t be sold) the endowment will be able to fund approximately 7 years of income requirement before having to start liquidating the illiquid assets. In the normal course of business they will ensure that the level of illiquid assets doesn’t rise above a specific pre-determined maximum weighting.

    On a practical level many investors are large shareholders in the businesses that they run. For these clients their illiquid assets are locked up in their shareholding, and for them it is important to build up an asset base outside of the illiquid private equity in order to ensure that they will be able to generate sufficient liquidity should the need arise.

    Within Seed’s Funds there are a few relatively illiquid strategies which are able to generate outsized returns for the levels of risk assumed. It is important to balance the enhanced expected returns with sufficient liquidity, because the surest way to destroy capital is being forced to liquidate an illiquid asset.

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2012-08-13, 16:37:11, by Mike Email , Leave a comment

    Using Dividends as an Income Source

    Many investors, particularly those that are approaching retirement, have an aversion to investing in the stock market. The reason most often used is that the stock market is “too risky for me”. While the daily and monthly gyrations in the markets make the average investor shudder, the opportunity cost of investing in cash and not having a growing income stream is too high for most investors. We have often said and written that the riskiest investment strategy over the long run is not to have enough risk in your portfolio.

    In a simple exercise I have compared two investors that are 5 years from retirement (not taking tax into account. Taking tax into account would favour the investor who invests into shares). Investor A makes an investment into the ALSI (local stock market) and Investor B leaves his investment in cash. In both cases the investors let their savings grow with all distributions (dividends and interest income) reinvested for the first 5 years. From the 6th year both investors live off the distributions. The chart below shows the initial yield received by each investor (relative to their initial investment) in their first year of retirement.

    It is clear from the chart that in most of the periods Investor A would be significantly better off in his first year of retirement than Investor B. The peaks in the dividend yield have coincided with strong market returns and strong dividend growth.

    Investor A is further benefited by the fact that he’ll have a growing income stream once he moves into the drawdown phase, whereas Investor B’s income will be determined by the prevailing interest rates. Dividends are inflation proofed over time, with the chart below showing the annual growth in income (over rolling 5 year periods) of a cash investment versus an equity investment. An equity investor’s income would have grown, on average, at 13% per annum over this period, well above the average inflation rate. For those investors relying purely on interest income the picture is dire. Even before the effects of inflation there are many periods where a cash investor would need to reduce their standard of living. After taking into account tax and inflation the picture is even worse!

    One of the reasons for the major discrepancy is that the market values of the shares grow above inflation over time, whereas the nominal cash investment never changes. By investing with this mindset, investors should be able to better weather those periods of poor market returns in the understanding that they are not going to be relying on the capital to provide an income, but rather the growing dividend stream.

    At Seed we are aware of the importance of dividends in the total return generated by any portfolio, and as such our portfolios and funds currently have an allocation to higher yielding shares. This will not only provide a greater yield than the average equity investor (as depicted above) but has also traditionally provided more protection to investors in negative markets.

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2012-08-08, 09:10:56, by Mike Email , Leave a comment