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    Newsflash - The Seed Income Fund

    This week it is my pleasure to introduce you to our recently launched fund – The Seed Income Fund. As with most of our unit trusts this is a multi-managed fund with 3rd party specialists managing segregated mandates. Seed is responsible for the selection of the strategies as well as the managers.

    Fund specifics

    • Launch date: 19 June 2015
    • Current size: R 141 million
    • Portfolio Managers: Ian de Lange & Mike Browne
    • ASISA Category: SA Multi Asset Income
    • Benchmark: STEFI Call + 1% pa


    The Seed Income Fund aims to maximise income and achieve a higher total return than traditional money market funds. Currently we have allocated 40% to Atlantic Asset Management and 60% to Prescient. The Atlantic benchmark is STEFI Call + 2% over rolling 12 month periods, and this portfolio will consist of rand denominated money market instruments only. The Prescient benchmark is110% of the STEFI Call rate and this portfolio can consist of fixed and variable rate instruments, listed real estate, equities, preference shares as well as derivatives.

    Asset Allocation

    The current asset allocation of the two mandates, as well as of the combined fund on a see-through basis, can be seen on the graph below:

    A significant portion (55%) of the Seed Income Fund is invested into JIBAR (Johannesburg Interbank Average Rate) Linked floating rate notes. These notes are issued by banks, parastatals and corporates, and pay an annual coupon rate that is based on a spread (margin) above JIBAR. For example, a note issued by Standard Bank, with Anglo American as the underlying entity, yields a spread of 190 points above JIBAR, resulting in a total yield of 6.3% + 1.9% = 8.2%. Spreads will generally be the lowest for our big four banks, where the risk of default is very low.

    Risk allocation

    The fund is a Regulation 28 compliant Fund and is suitable for investments in retirement funds. The net equity weighting (including international equity) will never exceed 10% of the Fund’s market value.

    As can be seen below, the current issuer exposure is mostly towards our local banks which is in line with the low risk allocation of this fund:

    Who should invest?

    Some wealth managers make use of income funds to maximise returns for their clients by using the income fund as the portfolio’s bank and/or cash account. Any withdrawals, be it a once off or a monthly withdrawal like in a living annuity, would be from this account only. This would ensure that higher return generating allocations would not be reduced and returns can be maximised.

    Another great example of where these funds are utilised is in the years just prior to retirement. In these years, risk of losing capital is highest and it is crucial to be invested in funds that protect your hard earned savings of the last 20 – 30 years just prior to retiring.

    With the current uncertain market conditions, the biggest risk to investors is that of permanently losing capital. In the old days, methods used to prevent capital loss included buying physical gold or taking your cash and stashing it underneath your bed. These days we can properly maximise returns and reduce risk by being invested into funds that will protect capital even in massive market corrections.

    At Seed we strive to not only provide you with superior returns but we take great care in properly assessing all risk and reducing it as best we can. If you would like to invest into this fund or find out more about our fund range, you can contact us directly at 021 914 4966 or speak to your financial advisor.

    Kind Regards,

    Renier Hugo

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-08-25, 17:12:27, by Mike Email , Leave a comment

    Seed Weekly - Is your portfolio diversified or diworsified?

    In previous articles we have discussed the benefits of diversification. Like with all things, too much of a good thing can sometimes be a bad thing. Diversification has been described as probably the only free lunch an investor can get in portfolio construction. A well-diversified portfolio will have lower volatility and if done correctly, better risk/reward benefits.

    Below is an example of a blended portfolio and the individual underlying funds that make up the portfolio. The blended portfolio is represented by the large red dot - a balanced portfolio that targets CPI + 6%. The large black dot is the average balanced fund.

    The blended portfolio was able to outperform the average manager over the period with a lower downside deviation (the risk of losing capital). You will also notice that the portfolio’s downside deviation is lower than the underlying funds. Investors have therefore received the benefit of diversification by blending funds with low correlations to each other.

    Unfortunately the diversification benefit does have its limits. With each additional fund added to the portfolio the diversification benefit decreases. Eventually you will reach a point where the portfolio’s risk is equal to that of the market and any extra inclusion will not provide any real benefit.

    The graph below indicates this principle using a portfolio of shares. The benefits of lower volatility are marginal from owning 20 shares to 200 compared to the benefits from 1 to 20.

    The ability of additional shares or funds to add meaningful outperformance to a portfolio decrease as more and more positions are added. If you have an over-diversified portfolio you are reducing the likelihood that your portfolio will outperform the market, the second reason for diversifying. Eventually, it will become easier and cheaper to buy an index tracker fund or ETF.

    When constructing a portfolio there is no exact number of funds or shares that you should own in your portfolio. However, the principles discussed and the risk and return objectives of the portfolio must all be taken into account.

    We typically aim to construct a portfolio with between 5 and 7 funds. By limiting the number of funds we are forced to have a high conviction in the fund and or managers that we select. Each fund manager is included for a specific purpose and is monitored against its benchmark objective and our expectations.

    Kind regards,

    Gerbrandt Kruger

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-08-18, 10:27:44, by Mike Email , Leave a comment

    Seed Weekly - Investment Vehicles

    As South Africans we have a number of different investment vehicles to our disposal. Each vehicle presents us with a different set of opportunities to potentially take advantage of as the benefits of the various pre- & post retirement vehicles remains underutilised by many. This article will not list all the pros and cons of each vehicle but rather look at ways these vehicles can be used to benefit the member.

    We have always held the belief that a person’s overall asset allocation is one of the main determinants of the eventual success of an investment strategy. A successful investment strategy has many moving parts and as such has many different factors to take account of; the ‘big picture’ top down makeup of your balance sheet arguably has the biggest impact on your position over time. To take it one step further, we find it essential to look through the asset allocation and determine the best way to access the various asset classes.

    Under normal circumstances we would recommend that an investor carries a certain exposure to growth and income generating assets (both local and offshore). The best way to access these asset classes is to consider the appropriate vehicles to your disposal and, very importantly, the goal of this specific asset class.

    Growth assets are, generally & in the long term, best housed in a vehicle where the growth and dividends are untaxed, this is possible through utilising compulsory vehicles. As the untaxed growth and dividends compound over time it will outperform a similar investment in a self-funded (net of taxes) discretionary account. There are however 2 problems with the above statement;

    • Compulsory vehicles are generally limited in the amount of growth assets that can be held where discretionary vehicles do not have this constraint.

    • Income withdrawn from compulsory vehicles (after conversion to a living annuity) is in most cases taxed a much higher rate than income from discretionary sources (as long as the income from the discretionary sources are taxed as interest, CGT or dividends).

    A potential solution to the above problems include using a Tax Free Savings Account (TFSA) to house some growth assets. TFSA’s have their own issue in that the amount of capital that can be committed at any time is limited, this account needs to be built up over the long term and it will be some time still before this will have a measurable effect on most clients’ position.

    The solution that, in most cases, works the best is to make sure that your compulsory vehicles are fully exposed to growth assets up to the regulated limits. This is done through balanced funds in pre-retirement vehicles. Upon reaching the age of 55 one can access a living annuity which does not carry any asset allocation constraints, this makes living annuities very attractive vehicles in which to hold growth assets as the growth within these vehicles remain untaxed. Mandatory income paid out of living annuities can, however, potentially offset this benefit.

    It is therefore pertinent to look at the ‘big picture’ and determine how to structure your portfolio to gain the maximum benefit. The untaxed growth in compulsory vehicles need to weighed up against the income tax on annuity payments, while the lower taxed income stream generated by discretionary accounts needs to be weighed up against the tax paid on growth, dividends and interest. It is just as important to consider the best way to structure your income as it is to structure your capital base for growth as they are ultimately intertwined.

    The above is but one of the many factors the team at Seed takes cognisance of when designing solutions to our clients. Each solution we design is unique and tailored to your needs. We also monitor these solutions continuously and will make adjustments as circumstances dictate.

    Kind regards,

    Stefan Keeve

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-08-11, 08:20:55, by Mike Email , Leave a comment

    Seed Weekly - Market Update

    BCA Research make the comment that, “There is little mystery about what is going on: the global economy is grappling with the fallout from not just the end of the debt supercycle, but from the end of the commodity supercycle as well.

    These two main factors definitely drove both local and global markets in July, which went on to be a very volatile month.

    Local equities managed to end the month in the black – up 0,5%. This was despite the JSE Mining shares declining 8,5% in the month and down 12% for the year to date. This sector has dragged down the JSE All Share return to just 6,2% for the year to date.

    In July the local Reserve Bank took a pre-emptive step with short term interest rates - raising the repo rate from 5,75% to 6% in mid-July. This is despite low economic growth and inflation at reasonable levels.

    The increase in short term interest rates did not help the local currency, which fell to a multiyear low against the US dollar, falling to R12,65/ dollar at the end of the month.

    However local long bonds ended a losing streak and the All Bond index gained 1% for the month. For the 7 months to the end of July, local bonds are up 2,6%. This is still below cash returns for the year to date of 3,65%.

    Local property shares also bounced up from a couple of difficult months. The local property index gained 5% in July and 12,1% for the year to date. It remains the best performing asset class for the year.

    The large drop in a range of commodity prices put the mining sector component of the market under pressure. Gold shares were very hard hit, declining almost 22% for the month.

    Some of the main points on the global markets included:

    • Greece came every close to a default on its debt, coming perilously close to an exit from the EU. While this is still not totally out of the question, the fallout from a Greece default may have reasonably limited implications on a global scale. But the ongoing problems are indicative of the dangers of highly indebted nations that have been unable to trade out and renegotiate their high debt levels.

    In mid-July Greece and European creditors agreed to a further 86 billion euro bailout, still to be approved by parliament and all European member states.

    • Commodity prices continued to fall sharply in July. The Bloomberg Commodity Index dropped 11%, the biggest decline since 2011.

    Platinum continued to slide – trading below $1000 from over $1500 a year ago.

    Gold traded to a new 5 year low dipping below $1100/oz. This from over $1300/oz. a year ago. The 6,5% decline in July was the biggest drop since June 2013.

    A range of other metals also fell sharply. Oil is down in price, as is iron ore prices.

    • Chinese growth rates have slowed. Leveraged investors started selling and the Chinese Shanghai index fell 14,3% for the month. Still for the 12 months it is up 66,4%.

    • Emerging market currencies were under pressure in July with most of them falling further. The currencies of commodity exporting countries such as Australia and Canada also declined further against the US dollar.

    • Emerging market equities were also under pressure. The MSCI Emerging Equity Index retreated by 7.26%.

    • The US S&P 500 index gained 1,97% in July and is up 3,3% for the year to date. All of the gains in the S&P 500 so far this year are attributable to only two industries: health care and retail. The healthcare sector gained over 14% year to date.

    These are just some of the highlights for the month and year to date. Because of the extremes in market moves with some asset classes like commodities and related resource shares falling very sharply, it has been important to have had low exposure to this asset class. At some point these prices will settle and turn, but currently they are indicative of a low growth world, with excess capacity, low inflation in general and low demand. This despite the monetary authorities’ ongoing attempt to reflate asset prices.

    Kind regards,

    Ian de Lange

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-08-04, 14:32:05, by Mike Email , Leave a comment