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    Seed Weekly - The Benefits of Multi Management

    Multi management, much like other investment style/process, is just one way of investing. While it can’t be considered the ‘holy grail’ of investing (if someone finds the ‘holy grail’ please let me know!) it does have advantages over some of the more traditional/well known forms of asset management for the average retail investor.

    The first problem that investors into single manager solutions funds face is that the underlying manager requires investment skills across the entire range of asset classes. There are many top managers out there, and many do have decent skills across a broad set of asset classes, but we generally find that managers have an area of excellence which drives performance, rather than being the best across all areas (jack of all trades, master of none – or in this case one!)

    As multi managers, we believe that manager focus and specialisation is key to ensuring consistent top performance. Multi managers have the luxury of allocating capital to a variety of carefully selected managers (manager research and selection is a key skill of a multi manager). The chart below shows the range of managers currently used in the Seed Flexible Fund. ‘Other’ comprises some more niches strategies that include China and Africa equity and global property – skill sets in these more niched areas are even more difficult to replicate within one organisation.

    A common argument in favour of single managers is that the manager has full sight into the portfolio and can make changes taking the entire portfolio into account, whereas investors trying to build a portfolio with multiple building blocks don’t have the same information. While this line of thinking holds for the average investor trying to blend a range of funds, at Seed we have insight into all of the mandates that are part of our Funds. Most of the mandates that form part of our solutions are segregated mandates, where we have full see through into the holdings on a daily basis, and can therefore use this data to inform any decisions that are required.

    We believe that our multi managed process, whereby segregated mandates are accessed as far as possible, is superior to the more common Fund of Fund (FoF) process in that we generally customise each mandate with the manager to ensure that the Fund is optimised. This typically takes the form of more concentrated portfolios comprising the managers’ best views, but can also involve either increasing or decreasing the risk taken when compared to their retail fund offering. As previously mentioned, accessing segregated mandates also gives us greater insight into the manager’s investment process, which enables us to build greater conviction in the manager’s abilities.

    The Seed Flexible and Seed Absolute Return Funds are both multi managed multi asset class Funds. Both have performed particularly well over the past few years when compared to both their inflation targets and peers. The Seed Flexible Fund has top quartile performance over 3 and 1 years, while the Seed Absolute Return Fund (with a shorter track record) has top quartile performance over 1 year. For more information on these Funds please contact us.

    Take care,

    Mike Browne

    021 914 4966

    Permalink2015-04-28, 09:01:10, by Mike Email , Leave a comment

    Seed Weekly - Investment Greats – Sir John Templeton

    As a pioneer in both financial investment and philanthropy, the late Sir John Templeton spent a lifetime encouraging open-mindedness. Sir John Templeton was born in Tennessee 1912 and as many successful businessmen grew up poorly. He went on to study economics at Yale University with a scholarship. After graduating top of his class in 1934, was awarded the Rhodes scholarship where after he obtained a Masters in Law in 1936 from Oxford University. He returned to New York and started his long career in the investment industry.

    His first firm was found in 1937, in the depths of the Great Depression. Under his name he created some of the world’s largest and most successful international investment funds. In 1992, he sold his Templeton funds to the Franklin Group, now known as the Franklin Templeton range of funds. He was a value contrarian investor – following a principle called “bargain hunting”. He took the strategy of "buy low, sell high" to an extreme, picking nations, industries, and companies hitting rock-bottom, what he called "points of maximum pessimism." When the war broke out in Europe in 1939, he borrowed money to buy 100 shares each of the 104 companies selling at one dollar per share or less, including 34 companies that were in bankruptcy. Only four of these companies turned out to be worthless, and he turned large profits on the others. He would take profits when values and expectations were high.

    He rejected technical analysis for stock trading, preferring instead to use fundamental analysis and to invest into companies that offered low prices and an excellent long term outlook. Templeton believed that the best bargains were in stocks that were completely neglected - those that other investors were not even studying. Think about areas that other people are not thinking about. In this regard, he had an advantage not readily available to the average individual investor namely his residence in the Lyford Cay Club in the Bahamas, populated with successful businessmen from all parts of the world.

    Templeton found he could easily exchange ideas and opinions with them in that attractive ambiance. For him, this worked better than networking with Wall Street contacts with limited information who were always trying to sell him something. Just like fellow legendary investor Phillip Fisher, Templeton systematically mined his numerous contacts for valuable, objective investment data, which in his case related to market conditions and investment targets around the world. Templeton became known for his "avoiding the herd" and "buy when there's blood in the streets" philosophy. "I've found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to go opposite the crowd."

    Sir John Templeton’s 16 rules for investment success:

    1. Invest for maximum total real return
    2. Invest — don’t trade or speculate
    3. Remain flexible and open minded about types of investment
    4. Buy low
    5. When buying stocks, search for bargains among quality stocks.
    6. Buy value, not market trends or the economic outlook
    7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
    8. Do your homework or hire wise experts to help you
    9. Aggressively monitor your investments
    10. Don’t panic
    11. Learn from your mistakes
    12. Begin with a prayer
    13. Outperforming the market is a difficult task
    14. An investor who has all the answers doesn’t even understand all the questions
    15. There’s no free lunch
    16. Do not be fearful or negative too often

    Upon his retirement from the investment business, Templeton became an active philanthropist worldwide through his John Templeton Foundation, which focuses its donations on spiritual and scientific research. He attributed much of his success to his ability to maintain an elevated mood, avoid anxiety and stay disciplined. He slammed consumerism, drove his own car, never flew first class and lived year-round in the Bahamas. As a naturalized British citizen living in the Bahamas, Templeton was knighted in 1987 by Queen Elizabeth II for his many accomplishments in philanthropy. Templeton died in 2008 at the age of 95.

    Keep well,

    Lourens Rabé

    Investopedia, Forbes, Wikipedia, templeton.org

    021 914 4966

    Permalink2015-04-21, 08:58:21, by Mike Email , Leave a comment

    Seed Weekly - Local Stock Market – Rand Hedges

    The JSE All Share Index (ALSI) and Top 40 Index both traded at new highs into mid-April. This is despite being dragged down by the Resource sector. The ALSI is up a further 5,8% to the end of March and over a one year period the financial and industrial index is up 25,3%, having gained over 10% for the current year to date.

    Many investors struggle to understand the disconnect between the local economy, which by most accounts remains very sluggish, and the local stock market, which continues to trade higher and higher.

    At face value there is indeed good reason to be cautious of current valuations. Countering this, however, is the fact that global interest rates remain extremely low; resulting in the ongoing attraction of South Africa’s higher yielding property, bond, and listed equity market to foreign shareholders.

    For most emerging markets, foreign capital flows are hugely important, but there is always the risk that as these flows subside or indeed reverse, that there is pressure on both local prices and the currency.

    South Africa is one of those countries that needs foreign capital because of its large trade and fiscal deficits that require funding in order to balance the books. While foreign inflows have been welcomed, there is a growing risk that as developed world interest rates are normalised, foreign flows into emerging markets will come under pressure. In such a scenario there is typically rapid currency depreciation and one hedge against this is the offshore asset base and revenue streams in many locally listed companies.

    Looking at the 10 largest constituents of the Top 40, that make up 65% of the index, an estimated 78% of their income and asset exposure is foreign (rand hedged). A brief summary of these companies and their estimated foreign exposure is as follows:

    • Naspers is listed locally with at least 90% of its value derived from its Chinese and Russian IT businesses.
    • SABMiller is a beer and beverage company with its primary listing in London. It operates in 75 countries with around 70 000 employees. Over the last 20 years it has diversified extensively away from its South Africa origins, which now represent sales of approximately 17%.
    • Billiton is one of the world’s largest diversified resource companies, focusing on petroleum, copper, iron ore and coal. It is domiciled in Australia and London.
    • Richemont is one of the world’s largest luxury goods companies with brands such as Cartier, Dunhill, and Mont Blanc. Its primary listing is in Switzerland. With no exact figures it is estimated that only 3% of its business is in South Africa.
    • MTN is large telecommunication company. Its origins are in South Africa, but it has expanded into Nigeria and Iran. A third of its margin is from South Africa.
    • Anglo American is a diversified mining group with a primary listing in London and operations around the world. It continues to have a relatively high asset base in South Africa through its Kumba and Anglo Platinum stakes, but all products are dollar priced. For purposes of this exercises we estimated 40% South African exposure.
    • Sasol is an energy and chemical business with operations in South Africa and in over 30 other countries. Key drivers of profitability are the oil price and the rand exchange rate. For purposes of this exercise it is estimated that 50% of its profitability is foreign.
    • Standard Bank is one of South Africa’s 4 main banking groups. It is 20% owned by Chinese Bank, the ICBC, and has a growing presence in Africa which contributes approximately 27% to headline earnings.
    • British American Tobacco is an international tobacco company listed in London with a number of brands across 200 countries. An estimated 7% of its sales are in South Africa.
    • Old Mutual is a life insurance and investment business that relocated its head office to London some 15 years ago. It has operations in Europe and the US, but still has substantial business in South Africa and is a major shareholder in listed Nedbank and therefore has approximately 65% of its business generated in South Africa.

    On these estimates, the top 10 shares listed in the JSE Top 40 Index have a weighted 78% rand hedge element to them. This is an important consideration if one is pessimistic about the prospects for the local currency against developed world currencies. It is also a factor to be taken into account when considering the price levels of the local stock market.

    Kind regards,

    Ian de Lange

    021 914 4966

    Permalink2015-04-14, 11:12:19, by Mike Email , Leave a comment

    Seed Weekly - The Year to Date

    The Year to Date

    It is hard to believe that the first quarter of the year is already behind us, and what an interesting quarter it has been.

    Local Asset Classes

    Property continued to dominate the local markets, returning 13.7% so far in 2015. Over the past year property did 41.4%, outperforming local equities by 28.9%.

    While the local equity market has delivered a decent 5.9% so far this year, we have seen a large dispersion in returns between the various sectors. The Financial sector was the best performing sector, returning 11.2%, which is almost double Industrials’ 5.6% YTD. Resources remained the most volatile asset class, currently down 0.2% for the year. We have seen massive swings in the returns of Resource counters. Resources were up 8.7% in February and down 8.5% in March.

    Oil Price

    So far in 2015 we’ve seen a barrel of Brent Crude drop to $46.15 by the middle of January. In the graph below you can see the dramatic fall in the oil price since the middle of 2014, where it had been consistently trading between $100 and $120 a barrel. We have since seen oil come back a bit and ended March 2015 at $55 per barrel. The decrease in headline inflation experienced locally, and worldwide, is a knock on effect from the low oil price.

    It is hard to think that in 2008 during the financial crisis, but before the peak in the commodity cycle, we saw the price rocket to $145 a barrel. At that stage stories of “Peak Oil” abounded with 2008 year end price targets of $200 a barrel. From peak to trough, Brent Crude Oil’s price declined by 68%, so the most recent price fall has not been as severe.

    Quantitative Easing in Europe

    In January Mario Draghi (Head of the European Central Bank) committed €1.1 trillion towards their version of quantitative easing. He pledged to buy €60 billion worth of bonds starting March 2015 until September 2016. The aim is to get cash into circulation and revive inflation in the region. Hopefully this will be enough to kick-start Europe’s growth that has been stagnant. Fund managers predict that the search for yield will continue, which will continue to support equity markets. So far we have seen the Euro devalue versus the US dollar. This devaluation will make European goods cheaper to the rest of the world, which should help to stimulate exports and help to prop up the region’s economy.

    All of these, and other, factors are filtered by the investment team and used in the process to make decisions that we expect will contribute over meaningful time periods.

    Kind regards,

    Gerbrandt Kruger

    021 914 4966

    Permalink2015-04-07, 09:25:24, by Mike Email , Leave a comment