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    Seed Weekly - Liberty Holdings – Growing Steadily

    Liberty Holdings Ltd (LBH) is a group of companies offering a wide range of solutions in the financial services industry, including long-term insurance, investments and asset management, health risk business, and administration services.

    Liberty Life was listed on the JSE in 1962 with assets just exceeding R 1m with Guardian Royal Exchange (GRE) acquiring a 75% controlling interest in 1964. Liberty Holdings was formed in 1968 to consolidate GRE’s South African operations, and the Group managed various further acquisitions over the years.

    Company Structure

    The Retail SA division includes Liberty’s core life insurance business, tasked with developing, marketing and distributing insurance products to individuals across SA, and LibFin, which forms part of the group’s risk management structure and manages market, credit and liquidity risk originating in the life insurance business.

    The Institutional and Asset Management division has three components:
    • STANLIB is an asset management business. As on 30 June, STANLIB’s total assets under management and administration stood at R 468bn.
    • Liberty Properties develops and manages direct property assets across the retail and commercial sectors. These properties are used in many of Liberty’s products and policies.
    • Liberty Corporate provides pension, provident, investment and risk solutions for groups of company employees. This division is also responsible for the administration of retirement funds and the provision of financial advice and intermediary services.

    The Growth division includes those operations expected to grow much faster than Liberty’s core operations:
    • Liberty Africa provides distribution for Liberty’s insurance, asset management, property, and health products on the continent. The division has established a footprint in 15 African countries, with expansion into West Africa one of the goals for 2013.

    • Liberty Health provides health insurance through the Liberty Blue product, with about one million lives in Africa now serviced by the business unit.
    • Direct Financial Services was launched in November 2010 and includes three operations, of which the life insurer Frank.Net is the most significant.

    Latest Financial Results

    Liberty released its interim results for the six months ended 30 June 2013 during August, and the market showed its concern with the slow growth in some areas when the share price dropped 3% on the same day.

    Basic EPS and BEE normalised HEPS increased by only 6%, while BEE normalised operating earnings increased by 31% and BEE normalised Return on Equity stayed more or less constant at 22%. The interim dividend increased by 10% to 212 cents. Direct Financial Services and Liberty Health are still loss-making while Liberty builds up scale to leverage the investment in systems and processes.

    Although these figures have obviously disappointed shareholders, these losses have decreased significantly compared to the same period last year.

    The bulk of Liberty’s earnings came from the retail life insurance business, where earnings increased by 34%. Net cash inflows were strong at R 2.2bn, and the new business margin for the Retail SA business showed significant improvement from 1.7% to 2.0%.

    The other major source of earnings was STANLIB, where earnings increased by 22%. Net inflows for the first six months amounted to R 9bn.

    Current Valuation

    Liberty is very attractively valued, trading on a PE ratio of 9 compared to the ALSI’s 18.3 and offering an attractive DY of 4.7% (2.8% for the ALSI).

    Liberty is included in Seed’s Model Share Portfolios on the basis of the attractive current valuation and the potential upside in streamlining existing operations and achieving economies of scale within its Africa operations. Seed’s Model Share Portfolios are suitable for investors, with a minimum of R 1m to invest, through personal accounts at a stock broker.

    The Seed Equity Fund, a smart beta unit trust that blends value and momentum portfolios, also has an allocation to Liberty. The share is a top 10 holding and has both value and momentum attributes. The unit trust is available to smaller investors – for more information please contact us.

    Kind regards,

    Cor van Deventer

    021 914 4966

    Permalink2013-08-27, 10:58:46, by Mike Email , Leave a comment

    The Prospects for Local Equity

    As with any asset manager, we at Seed Investments spend the majority of our time performing research on a wide variety of investment ideas and proposals. One area that we focus on, is trying to determine where the value lies when assessing the various asset classes. While the valuation of an asset class relative to its own history is important, it is often equally as important to determine its valuation relative to other asset classes, as investment decisions are never made in isolation.

    The future returns from an investment into the stock market are dependent on a number of variables including earnings growth, the interest or discount rate, and the valuation of the market now when compared with its likely valuation in 3 to 5 years time. Ultimately, we have found that when the Price to Earnings (PE) ratio is below 11, investors tend to receive a superior return over the next 5 years. Conversely, as is the case now, where the PE ratio is above 16.5, investors tend to receive a below average return over the next 5 years. The average PE multiple of JSE listed companies over the last 27 years is 13.8. The market’s PE is currently 18, which indicates that extreme caution is required for investors with a 5 year investment horizon.

    When plotting the ALSI’s current PE ratio versus its subsequent 5 year return, we can see (in the chart below) that the starting PE has a large impact on the expected return profile. From the chart we can also see that from current levels, investors should expect low returns when compared to history.

    We also look at the level of earnings versus its longer term trend. Should earnings be materially above trend AND the PE multiple on these earnings high, there will be additional cause for concern. From our analysis it appears that the market’s current earnings are, on average, close to trend. It may be that certain sectors have inflated earnings while others, such as the resource sector, have depressed earnings.

    When comparing equity to property and bonds on a relative yield basis it is evident that the local equity market is also in expensive territory. While the charts below are useful, they don’t capture the full picture, and must therefore be used in conjunction with other valuation tools.

    This research, inter alia, has led us to use this month’s market strength to further reduce the allocation to local equity across our Fund range. The Seed Flexible Fund now has its lowest allocation to local equity since it was launched over 3 years ago. Property has underperformed equity by nearly 25% over the past three and a half months, and we have used this weakness to increase the exposure to property. We are mindful of the risks in interest rate sensitive assets (read property and bonds) with interest rates near all time lows, and have therefore rather chosen to take interest rate exposure through property shares that should still deliver inflation beating earnings growth for the foreseeable future.

    Take care,

    Mike Browne

    021 914 4966

    Permalink2013-08-21, 17:01:51, by Mike Email , Leave a comment

    Top Down or Bottom Up?

    “Top down” and “Bottom up” are types of investment processes that determine how managers select their investments. While the processes take different routes to selecting their investments, both have the same goal of selecting the best investments.

    Top Down

    As the name suggestion you start at the top. The manager starts by formulating a macro view of the economy and tries to forecast which sector will generate the best returns. After selecting a couple industries, the fund manager will find companies in these industries to populate the fund.

    An example of top down is:
    • The manager believes that interest rates will decrease.
    • A decrease in interest rates will increase the populations’ disposable income and the consumer goods and services industry will benefit the most.
    • Those companies that are most exposed to increases in disposable income will be included in the fund.

    Bottom Up

    Bottom up funds are populated by looking at the companies first. No macro view is taken. The fund manager focuses merely on selecting stocks based on their individual qualities.

    An example of bottom up is:
    • Screen investment universe for shares with high Dividend Yields and low Price to Earnings and Price to Book ratios.
    • Follow up with research to ensure that these companies are managed properly.
    • Select those shares that have the best metrics.

    Bottom Up with Macro Overlay

    As with everything in life, there is always a middle ground. This manager starts by searching for companies on a bottom up basis. Before deciding if the company should be included in the fund, the manager takes into account his macro view. Will the company grow in the forecasted economic climate?

    An example of where this blended approach would work is with the ever cyclical resource companies. On a fundamental basis the companies are the cheapest they have ever been for a long time, but depending on your macro view this can be buying opportunity or a company to avoid at all cost.

    All of the above mention processes have their own pros and cons. If a wrong macro view is forecast, the manager might invest into an industry that returns less than the market, he will then underperform his peers. The same can happen if a manager invests into a company with good quantitative metrics, but faces severe economic head winds.

    Understanding what process fund managers follow and how they invest, will help you understand how their funds will perform in various scenarios.

    Kind regards,

    Gerbrandt Kruger

    021 914 4966

    Permalink2013-08-13, 15:41:37, by Mike Email , Leave a comment


    Dividends can be defined as the distribution of a portion of the earnings generated by a company. Private investors who need to receive a stream of income can invest in high dividend paying shares and investors looking for value biased shares will be on the lookout for companies with high dividend yields (dividend divided by price). For these, and other, reasons dividends are widely scrutinised by the public and both deserve further investigation.

    Starting with the former; the widely used logic that higher dividend paying companies are the best choice when investing for income can, to a certain extent, be countered by the theory of dividend irrelevance. This theory states that if a dividend can be “home-made” (shares sold to create a dividend like cash stream) the presence of a dividend does not necessarily mean the investor is better off receiving a dividend.

    Consider the example of Mr A, who needs an income of R 5 000 and can either hold 1 000 shares in Company X or Company Y. Both of the shares trade at R 50 and Company X declares a R 5 dividend, while Company Y doesn’t declare a dividend. When Company X goes ex-dividend (after the payment of the dividend) the value of the share should decrease by the amount of the dividend (R 5), as the cash is being paid to the investor from the company’s balance sheet.

    If Mr A invests in Company X, his shares would now be worth R 45 000 and he would have received a R 5 000 dividend. If he invests in Company Y he can sell 100 shares and receive the cash flow of R 5 000. Because this transaction has no effect on the share price, his shareholding would be worth R 45 000 (900 shares @ R 50). The chart below reflects the position that Mr A would be in under both scenarios.

    This is a simple illustration that Mr A should be in the same position if he receives a dividend or sells his shares (before the impact of any taxes). While the payment (or non payment) of dividends can be an important signal from management, a high dividend yield (or even the presence thereof) shouldn’t be the only determining factor when shares are bought.

    Looking briefly at the latter use of dividends mentioned above, a high dividend yield is a sign that the company is generating good earnings (and importantly cash flow) relative to the current share price, which is a big positive. For value investors, the presence of a high dividend yield is often an important metric, as the investor gets rewarded with a good yield, rather than being solely reliant on selling the share at a higher price. Essentially there is a margin of safety. While a high historic yield is sought after – investors need to also ensure that the dividend is sustainable – i.e. that they will receive a similar (or better) dividend in the future.

    At Seed we understand that a high dividend yield serves as a good indicator that the company deserves a closer look from a fundamental perspective. We therefore use dividend yield (both historic and forward) as a filter when looking at the investment universe. Those shares that offer investors a good yield are put on a short list, and can ultimately end up in our private client portfolios.

    Kind regards,

    Stefan Keeve

    021 914 4966

    Permalink2013-08-06, 16:25:25, by Mike Email , Leave a comment