XML Feeds

What is RSS?

Categories

Top Rated

    Choosing a Financial Advisor

    I was recently in the position where I was asked what to look for when choosing a financial advisor. I realised that finding an advisor that suits one’s specific needs can be a daunting task. Below, summarised, are some key questions to ask when choosing a financial advisor:

    How do they charge for their services and how much?

    It is important to ask whether they charge an initial planning fee, whether they charge a percentage of assets under management or whether they make money on selling you a specific product. By doing this you will know whether they have an incentive to sell you certain products and may be biased towards them. Independent advisors represent several companies while tied agents are usually restricted to the company they are employed by.

    Credentials and certifications:

    It is best to go with an advisor with a globally recognised financial designation, including CFP/CFA/CA/Actuary. These certifications ensures that the financial planner meets the highest international level of education, experience and ethics for providing financial advice. Ideally one wants an advisor that is both qualified and experienced.

    Even more important will be to check whether they are licensed with the FSB (Financial Services Board). An easy way to check this is to enter their details on the FSB website -http://www.fsb.co.za/FAIS/Search_FSP.htm

    How often will the advisor communicate with you and what makes their client experience and service unique?

    The regularity of meetings between you and your advisor will greatly depend on your personal goals. If your goals are, for instance, to retire within 10 years or you want to save up over the next 5 years to start your own business, one would expect a thorough evaluation and meeting at least twice a year. If, on the other hand, your objective is to assist your financial wellbeing in 40 years time and the product is a long term retirement annuity, an annual meeting may be more than enough.

    Another important question will be what is the advisors area of specialization?

    It is difficult, and probably impossible, for a single person to become an expert on all aspects of financial advisory as the playing field is just too big.

    At Seed Investments we specialize in multi management but, coming from the wealth management space, we have recognised that there is a need to provide clients with consolidated or holistic investment reporting.

    It is fairly standard from a wealth management perspective to recommend an appropriate investment portfolio for a new client but it becomes very complicated to consistently report to the client on their consolidated portfolio. The reason for this is because a client’s assets are usually spread across various platforms and each has its own method of reporting.

    It is important for both the advisor and his clients to know exactly how their investments are positioned. A consolidated investment report, across all platforms, does just that.

    At Seed, our wealth managers make use of consolidated reporting for their clients. This ensures that they can focus their time on providing financial advice and the ongoing management of client portfolios. Ongoing professional reporting ensures that both parties are fully aware of the client’s consolidated position on a monthly basis.

    Best regards,

    Renier Hugo

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

    Permalink2013-07-30, 16:56:11, by Mike Email , Leave a comment

    Choosing a Financial Advisor

    I was recently in the position where I was asked what to look for when choosing a financial advisor. I realised that finding an advisor that suits one’s specific needs can be a daunting task. Below, summarised, are some key questions to ask when choosing a financial advisor:

    How do they charge for their services and how much?

    It is important to ask whether they charge an initial planning fee, whether they charge a percentage of assets under management or whether they make money on selling you a specific product. By doing this you will know whether they have an incentive to sell you certain products and may be biased towards them. Independent advisors represent several companies while tied agents are usually restricted to the company they are employed by.

    Credentials and certifications:

    It is best to go with an advisor with a globally recognised financial designation, including CFP/CFA/CA/Actuary. These certifications ensures that the financial planner meets the highest international level of education, experience and ethics for providing financial advice. Ideally one wants an advisor that is both qualified and experienced.

    Even more important will be to check whether they are licensed with the FSB (Financial Services Board). An easy way to check this is to enter their details on the FSB website -http://www.fsb.co.za/FAIS/Search_FSP.htm

    How often will the advisor communicate with you and what makes their client experience and service unique?

    The regularity of meetings between you and your advisor will greatly depend on your personal goals. If your goals are, for instance, to retire within 10 years or you want to save up over the next 5 years to start your own business, one would expect a thorough evaluation and meeting at least twice a year. If, on the other hand, your objective is to assist your financial wellbeing in 40 years time and the product is a long term retirement annuity, an annual meeting may be more than enough.

    Another important question will be what is the advisors area of specialization?

    It is difficult, and probably impossible, for a single person to become an expert on all aspects of financial advisory as the playing field is just too big.

    At Seed Investments we specialize in multi management but, coming from the wealth management space, we have recognised that there is a need to provide clients with consolidated or holistic investment reporting.

    It is fairly standard from a wealth management perspective to recommend an appropriate investment portfolio for a new client but it becomes very complicated to consistently report to the client on their consolidated portfolio. The reason for this is because a client’s assets are usually spread across various platforms and each has its own method of reporting.

    It is important for both the advisor and his clients to know exactly how their investments are positioned. A consolidated investment report, across all platforms, does just that.

    At Seed, our wealth managers make use of consolidated reporting for their clients. This ensures that they can focus their time on providing financial advice and the ongoing management of client portfolios. Ongoing professional reporting ensures that both parties are fully aware of the client’s consolidated position on a monthly basis.

    Best regards,

    Renier Hugo

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

    Permalink2013-07-30, 15:44:26, by Mike Email , Leave a comment

    Different Investment Companies

    As multi managers at Seed, we spend a considerable portion of our time meeting with investment managers and performing due diligences in order to separate the good the bad and the ugly. Over the past year we have spent in excess of 200 hours meeting with investment managers specialising across a wide range of asset classes (equity, property, commodities, fixed income, derivatives, etc, across local and global jurisdictions) and investment types (unit trusts, hedge funds, structured products, segregated mandates, etc). On top of this we have spent significantly more time researching managers on a quantitative basis and assessing them, in the office, on a qualitative basis.

    Before we decide on which funds / managers to invest with there are certain attributes at an investment company level that we need to determine. There aren’t many ‘deal breakers’, but some company structures are naturally better than others. Firstly we need to categorise how the company’s various funds are managed between these three broad types:

    • Boutique
    • Houseview portfolios
    • Central research

    We have discussed the pro’s and con’s of boutiques in previous Weekly’s, but there are also some large asset management companies that operate a ‘multiple boutique model’ across their fund range. Here, managers are given complete autonomy in how they manage their funds – which is great – but there is the risk that when a manager underperforms, the company puts undue pressure on him/her to change their process to improve performance or risk losing their job. Where each manager essentially runs a boutique within a large firm we need to ensure that there is a proper alignment of interests to gain the full benefits of a boutique operation. In a ‘multiple boutique model’ environment, we research each and every manager’s investment style and not just the investment company’s philosophy and process.

    At the other end of the scale there are companies where all clients essentially get the same portfolio, up or down risked based on their needs, as the investment process and fund managers are common across all/most portfolios. Here the individual skill of each of the managers is less important than the ‘whole’ of the investment company’s approach.

    In between, we have companies where there is one central research process and investment philosophy, but each manager is given a level of autonomy in order to express the company’s view how he/she sees fit. In this environment the manager is able to express some flair, but their portfolios will be more or less in line with their peers. Here, the risk is that there will be slightly different outcomes between clients with different managers.

    There is no ‘right’ or ‘wrong’ way, but we need to ensure that we know how the investments are (and have been) managed in order to provide accurate analysis. Our research process gets more complicated when an investment company’s structure has migrated between a houseview and a central research and a boutique (and sometimes back again to houseview). In this case we need to distinctly identify performance under each of the various regimes (just as performance needs to be separated for each manager in a boutique environment).

    For the average retail investor this depth of research just isn’t possible, and this is where multi managers should play an important role in your portfolio.

    Take care,

    Mike Browne

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

    Permalink2013-07-23, 10:09:28, by Mike Email , Leave a comment

    The High Risk of Low Risk Investments

    I recently did an investment feedback presentation for a retirement fund that was attended by the wife of an ex client of mine, and seeing her got me thinking about investment risk.

    Her husband (my ex client) is an academic and he invested R 100 000 of his hard earned savings with me in December 2001. Because the investment was of a long term nature we invested the money in a portfolio with a balanced mandate targeting inflation plus 5. More than a year later, in March 2003, his investment value had dropped to R 88 500. He was understandably not impressed with what had happened and gave me a long analysis on how if he had invested R 100 000 in a money market fund it would have been worth R 115 076 and that he was wasting his time with these “high risk low return” investments.

    He decided to disinvest from the balanced fund and invest in a money market fund. I tried to explain to him that his comparison was not accurate because he had neglected to take the tax effect of his interest earnings into account. He informed me that even after 30% tax he still would have had R 110 334 which was way better than my “shocking investment”. It is never easy to lose clients but, because I had a number of other clients at the institution where he worked, this one was extremely difficult.

    After seeing his wife, I decided to have a relook at where this ex client would now be after implementing his “low risk high return” policy. After taking 30% tax into account at the end of March 2013, my ex client would have had a princely sum of R 150 708 (green line below) in his money market fund. If he had stayed in the balanced fund I suggested, he would now have an investment of R 469 845 (blue line below).

    We went through a similar scenario from April 2007 to January 2009 where investors in balanced funds saw long periods of negative returns. Investors who disinvested during this period would have ended up generating a return in line with the purple line above.

    Investors need to realize that the return profiles of balanced funds are not linear and investors can sometimes go for long periods without seeing positive returns. Both investors, and advisors, tend to forget this in periods that we have had in the good years, like we experienced from March 2003 to September 2007 and from February 2009 to March this year. Over the last few months we have seen negative returns creeping back into the markets.

    If you have a 5 year plus time horizon, now is not the time to panic and switch to money market funds. With balanced funds there is a chance of losing money in real terms i.e. after tax and inflation, over the short term, but in money market funds you are guaranteed to lose money in real terms over the long term (especially when the effects of tax are taken into account).

    Should you have any investment related queries, or are approaching retirement and would like to discuss your financial plan, we have qualified Wealth Managers who are able to guide you through this process.

    Kind regards,

    Barry Hugo

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

    Permalink2013-07-16, 12:39:25, by Mike Email , Leave a comment

    Interest Rates and the Impact on Asset Prices

    Investopedia explains interest as that charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out.

    Interest rates are also used as the core component to discount future cash flows in order to determine their present value. This is essentially taking the time value of money into account with the concept that money available today is worth more than money available at a later date because it can earn interest and the risk of the future cash flows.

    An example of discounting future cash flows at different interest rates:

    An investment asset that produces future cash flow of R1 000 a year for 10 years and then has a value after the 10 year period of R15 000 (i.e. a total expected cash flow of R25 000), will have a present value of R17 000, should we discount the future cash flows using an interest rate of 5%.

    Now using the same cash flows, but rather discounting at a higher interest rate of 8.5%, the value of the same investment asset reduces to R13 200. The upward move in the interest rates negatively impacted the present value of the investment by 28%.

    It makes intuitive sense then that at lower interest rates, and all else being equal, income generating assets are worth more than at higher rates of interest. This, very simply, is the major reason that central banks around the world have continued to suppress interest rates over the last 4 years.

    Ever since the 2008 global financial crisis which began in September 2008, the US Federal Reserve has been increasingly aggressive about providing financial markets with easy money. So called QE1, started in November 2008, QE2 in Nov 2010, and QE3 in September 2012, where the US is creating an annual $1 trillion in new money in order to purchase US treasury bonds and mortgage backed securities.

    In the last Federal Reserve meeting, while the official statement mentioned no real change in current monetary policy, the Fed chairman Ben Bernanke told reporters that asset purchases by the Federal Reserve may begin to wind down. The mentioned timeline of reduced purchases in 2013 and into 2014 spooked the market.

    There is some opinion that while the central bank may slow down on newly printed money, it is still likely to hold the benchmark federal fund rate at between 0% and 0.25% per annum for a lot longer and so continue to try and hold down at least shorter term interest rates.

    The mere hint at a central bank slowdown saw an immediate spike up in the US 10 year Treasury yield from below 1.7% to 2.15% and now at 2.5% as per the chart below.

    The long term chart below gives a clear indication of the tailwinds that asset prices have enjoyed over multi decades as the cost of money and hence the discount rate applied to asset valuations has declined.

    The magnitude and direction of interest rates affects both the US local market and global markets in a number of interrelated ways. For example:

  1. The average rate for a 30-year fixed-rate mortgage rose to 4.6% at the end of June, compared to the record low average of 3.4% in December 2012. The low rates have benefitted the recent upswing in property purchases, but this more recent rise will be a slight dampener.
  2. As US interest rates rose, so investors withdrew from the local bond market with foreign investors disinvesting R 6 bn over the last 2 months.
  3. Foreign withdrawals negatively affected various currencies especially in emerging markets. The rand declined from R9/USD at the beginning of May to its current level above R10/USD.
  4. The local JSE All Share index fell from 42 000 to 38 000 mid June.
  5. Local listed property shares slumped just on 20% from mid-May to mid-June

    Because of the importance of interest rates on the valuations of all asset prices, it is of critical importance to try and have an understanding of both the direction and the magnitude of interest rates into the future. The longer term picture indicates that we should still be in a downward trend, but shorter term rates have moved up sharply with a negative impact on valuations. It is often, however, at these times of sell-off that investors should take advantage of buying in at cheaper prices.

    Kind regards,

    Ian de Lange

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

  6. Permalink2013-07-09, 10:32:35, by Mike Email , Leave a comment

    Are Boutique Managers the Way to Go?

    There is always debate about whether boutique managers are better at managing funds than medium and large managers. The lobbyers for boutique managers will always use the argument that large managers aren’t as nimble as boutique managers and can’t really participate in medium and small cap equity markets. As a way of example, one of South Africa’s largest fund managers has a 10% stake in Spar and the share amounts to less than 0.5% of their AUM.

    The table below shows what stake a large fund manager (R100bn) needs to take in a company to have a 4% exposure. The ff (free float) market cap was used for the calculations.

    From the above table you can see that it becomes very difficult for a large fund manager to take a significant (with respect to their AUM) stake in a company that isn’t in the top 40 largest companies. Liquidity constraints also come into play when they want to transact in the shares.

    Having a bigger universe to invest from doesn’t automatically mean that boutiques will outperform large and medium managers. The performance is reliant on the skills of the fund manager and his or her investment philosophy and process.

    This is where the argument for large managers comes in. They have access to more resources than the average boutique fund manager. They normally have a bigger research team that can monitor more companies and different asset classes.

    Even with the liquidity limitations in large funds, some of the large fund managers have been top performers over the past few years.

    So which are better, or is there an alternative option? This is where multi managers and fund of funds come into play.


    Over the past year, of the top 10 managers in the multi asset class high equity unit trust sector (i.e. balanced funds), more than half of them were FoF (fund of funds) or MM (multi manager) funds. Those 6 FoF and MM funds had 37% exposure to large managers, 31% exposure to medium managers, and 26% exposure to boutique managers by way of example.

    The advantage of FoF and MM funds is that they are able to select the best managers for each of the different asset classes, whether it’s a boutique, medium, or large manager. The fund manager is able to provide you access to some boutique managers that aren’t always available to investors. The blend of the overall investment portfolio can be targeted in such a way as to enhance the value of the managers' abilities and it also allows management companies to remove under performing fund managers.

    At Seed we take a multi-manager approach to managing our client’s money. We are always actively searching and looking to find managers that excel in their chosen field and will be beneficial to the Funds. In our Funds we currently have boutique managers like Visio, Fairtree, Salient, Reitway, and Atlantic.

    We are available for any questions regarding investment or retirement matters.

    Kind regards,

    Gerbrandt Kruger

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

    Permalink2013-07-02, 09:15:44, by Mike Email , Leave a comment