The marketing schpiel tells us Exchange Traded Funds (ETFs) are an efficient means to enter the market and that ETF’s over a period of time will outperform the vast majority of peer group managed funds. What if, however you had completely ignored the unit trust and ETF universes and invested solely in investment holding company Remgro over the past decade? (And at the risk of sounding like a financial services ad: historical returns are no guarantee of future performance.)
Sure, your financial adviser would have had a heart attack and cursed you for a lack of diversification – but the evidence suggests you would have done rather well over five and ten years. So well in fact that it turns out that diversification would have been a bad thing.
An investment of R1000 invested in Satrix 40 vs Remgro over both five and ten year periods see the investment holding company significantly outperforming the ETF. Over a five year period resource heavy Satrix 40 would have grown to R1588 vs Remgro’s R2481. The outperformance is amplified over the past decade where the Top 40 index (as a proxy as ETF’s have not been around that long) would be worth R5573 and the Remgro holding R9802.
Rearview mirrors provide outstanding trivia benefits but give little valuable insight as to what the next decade holds for Remgro without British American Tobacco in the fold (remembering of course that despite its size the firm is also not included in the top forty) due to the absurdities of exchange control regulation.
Brett Landman, CEO of Satrix points out that despite its significant resource bias, Satrix 40 provides ordinary investors a level of diversification they might not otherwise afford, plus it reduces risk. Investors however have to choose whether they want market performance or outperformance and the greater that level of diversification; the less likely you are to get that.
“The outperformance of Remgro relative to the resource heavy Top 40 Index can largely be explained by the fact that industrials have strongly outperformed resources over the past five years,” says Landman. He argues a more appropriate comparison therefore would be vs the Satrix Indi – an ETF which tracks the performance of the FTSE/JSE Industrial index. It has delivered 17.34% per annum over the past five years, outperforming its unit trust peer group. Landman however concedes Remgro has done even better than that but he again points to the advantages of diversification limiting risk.
The big question therefore for private investors goes to who you believe is the better asset manager? Remgro without its stake in BAT remains largely SA focused with stakes in a broad universe of local listed and unlisted financial and industrial firms. It’s recently announced plan to acquire up to 22% of shipping and logistics group Grindrod broadens not only its global exposure but also gives it interesting Africa trade connection as well.
“The problem with index funds,” says Rudi van der Merwe at Standard Bank Stockbroking “is that it can take many years of underperformance for a company to be excluded from the index. Remgro has a number of interesting investments including FirstRand which they might choose to unbundle one day, plus investments now in shipping and fibre optics – that one is still small but will be substantially cash generative into the future.”
Stockmarket veteran of four decades David Shapiro would choose a handful Top 40 shares over the next ten years including BHP Billiton, Richemont, Aspen, Sasol and Bidvest, over either Satrix 40 or Remgro. Forced to choose between the either the ETF or the investment company – he would pick the latter.
In his recent newsletter to clients – Chief Investment Strategist at Brenthurst Wealth Management Magnus Heystek cautioned his clients against ETF’s which in bull markets are shown to be highly effective investment instruments. However in more volatile markets there is not enough investment flexibility.
US based Vanguard Investments founder John Bogle might fundamentally disagree. In his world, there was no grey area between active investment and index funds. His lower cost approach to investing earned him a strong following in the US. He is no longer associated with the firm and its 21st century managers are taking a different approach including actively managed portfolios into their mix. Explained Gus Sauter, Vanguards CIO in a letter titled: Active and index funds: No contradiction he explained the thinking behind the strategic switch: “I don’t think the markets are completely efficient. They are reasonably efficient, but there are mispricings. While I think there’s a very prudent argument for index investing, that argument doesn’t rule out well-executed active management at a reasonable price.”
In that lies the secret – the purchase of assets at a reasonable price.
Investors with experience, cash, lashings of wisdom and patience have a significant advantage over those who invest blindly by debit order on a monthly basis. While those who put money into ETF’s do so in the hope that markets will continually move steadily higher, those that put cash directly into equities or to managed funds have the opportunity to time or allow professionals to do it for them, their entry and exit from specific asset classes at particular times.
Independent research into how well Vanguard’s active managers did vs the index showed up some interesting facts: Just 8/20 beat the index by more than one quarter of one percent – enough to make up for the added cost of having a human manage the money – it suggested to the researchers that finding the perceived mispricings in the market are really difficult to find.
Says Landman: “The benefit of ETF’s is that you can hold Satrix 40 or Satrix Swix as the core of your equity portfolio and hold stocks like Remgro and other funds such as Satrix Divi as satellite holdings to enhance overall performance. A more sophisticated investor could also underweight or overweight industry sectors using the Satrix sector ETF’s based on an evaluation of market mispricing.”
Steps
1
Pay off high interest debt. If you have a loan or credit card debt with a high interest rate (over 10%) there's no point in investing your hard-earned cash. Whatever interest you earn through investing (usually less than 10%) won't make much of a difference because you'll be spending a greater amount paying interest on your debt.[1] For example, let's say Sam has saved $4,000 for investing, but he also has $4,000 in credit card debt at a 14% interest rate. He could invest the $4,000 and if he gets a 12% ROI (return on investment--and this is being very optimistic) in a year he'll have made $480 in interest. But the credit card company will have charged him $560 in interest. He's $80 in the hole, and he still has that $4,000 principal to pay off. Why bother? Pay off the high interest debt first so that you can actually keep any money you make by investing. Otherwise, the only investors making money are the ones who loaned it to you at a high interest rate.
2
Build your emergency fund. If you don't have one already, it's a good idea to focus your efforts on setting aside 3-6 months of living expenses just in case. This is not money that should be invested; it should be kept readily accessible and safe from swings in the market. You can split your extra money every month, sending part of it to your emergency fund and part of it to your investing fund. Whatever you do, don't tie up all of your extra money in investments unless you have a financial safety net in place; anything can go wrong (a job loss, an injury, an illness) and failing to prepare for that possibility is irresponsible.
3
Write down your investment goals. While you're paying down high interest debt and building your emergency fund, you should think about why you're investing. How much money do you want to have, and in what period of time? Different investors have different goals, such as:
- Holding onto money so that it's just above inflation
- Having a specific amount of money for a down payment in 10 years
- Building a nest egg for retirement in 20 years
- Building a college fund for a child or grandchild in 5 years
4
Choose your investments. The bigger the chunk of money you have available for investing, the more choices you have. Most people diversify by investing in more than one place, but the way they split their investments depends on their goals and the amount of risk they're willing to accept.
- Savings accounts - low minimum balance, liquid but with limitations on how often the account is accessed, low interest rate (usually much lower than inflation), predictable
- Money market accounts (MMAs) - higher minimum balance than savings, liquid but with limitations on how often the account is accessed, earns about twice the interest rates of savings accounts,[2] high-yield MMAs offer higher interest rates but higher risks
- Certificates of deposit (CDs) - similar to savings account but with higher interest rates and restrictions on early withdrawal, offered by banks, brokerage firms and independent salespeople, low-risk but reduced liquidity, may require high minimum balance for desired interest rates
- Bonds - a loan taken out by a government or company to be paid back with interested; considered "fixed income" securities because the same income will be generated regardless of market conditions,[3] you'll need to know the par value (amount loaned), coupon rate (interest rate), and maturity rate (when the principal and interest must be paid back)
- Stocks - usually purchased through brokers; you buy pieces (shares) of a corporation which entitles you to decision-making power (usually by voting to elect a board of directors). You may also receive a fraction of the profits (dividends). Dividend reinvestment plans (DRPs) and direct stock purchase plans (DSPs) - bypass brokers (and their commissions) by buying directly from companies or their agents, offered by more than 1,000 major corporations,[4] can invest as little as $20-30 per month and can buy fractional shares of stocks, but can also be high-risk (you cannot decide the price at which to buy when you invest via such plans).
- Real estate property - ties up money (not easy to liquidate investment), capital intensive (usually leveraged through mortgage loans)
- Mutual funds - not insured by any government agency, built-in diversification, some funds have low initial purchase amounts, and you'll have to pay annual management fees
- Real Estate Investment Trusts (REITs) - similar to mutual funds, but instead of investing in stocks, they invest in real estate
- Gold and silver - these are great ways to store your money and keep up with inflation. They are not subject to tax, and they are easy to store and very liquid (can buy and sell easily).
5
Save money to invest. If you don't already have money set aside for investing, you'll need to build up your investment fund. By now, you should know how much money you'll need to reach your goals, given the risks you've chosen to undertake.
6
Buy low. Whatever you choose to invest in, try to buy it when it's "on sale" -- that is, buy when no one else is buying. For example, in real estate, you'll want to purchase property when it's a buyer's market, which is when there's a high proportion of properties for sale versus potential buyers. When people are desperate to sell, you have greater room fornegotiation, especially if you can see how the investment will pay off when others don't (or perhaps they do, but can't afford to act on it at the time).
- An alternative to buying low (since you never know for sure when it is low enough) is to to buy at a reasonable price and sell higher. When a stock is "cheap", such as 80% or more below its 52 week high, there is a reason. Stocks don't drop in price like houses. Stocks typically drop in price because there is a problem with the company, whereas houses drop in price not because there is a problem with the house, but because there is a lack of overall demand for houses. When the entire market drops, however, it is possible to find certain stocks that fell simply because of an overall "sell-off." To find these good deals, one must do extensive valuations. Try to buy at a discount price when the valuation of the company shows its stock price should cost more.
7
Hold on tight. With more volatile investment vehicles, you may be tempted to bail. It's easy to get spooked when you see the value of your investments plummet. If you did your research, however, you probably knew what you were getting into, and you decided early on how you were going to approach the swings in the market place. When the stocks you hold plummet in price, update your research to find out what is happening to the fundamentals. If you have confidence in the stock, hold, or, better yet, buy more at the better price. But if you no longer have the confidence in the stock and the fundamentals have changed permanently, sell. Keep in mind, however, that when you're selling your investments out of fear, so is everyone else, and your exit is someone else's opportunity to buy low.
8
Sell high. If and when the market bounces back, sell your investments, especially the cyclical stocks. Roll the profits over into another investment with better valuations (buying low, of course) and try to do so under a tax shelter that allows you to re-invest the full amount of your profits (rather than having it taxed first). In the U.S., examples would be1031 exchanges (in real estate) and Roth IRAs.- Source: wikihow
Johannesburg - The JSE share market closed lower on Thursday with platinum and resources leading the downside and industrials providing support‚ while the expected hold on interest rates had no material effect on the market.
The Reserve Bank’s monetary policy committee (MPC) left interest rates unchanged at 5% on Thursday following its three day meeting.
At 17.00 local time‚ the JSE all-share index was down 0.28% to 36 359.98 points‚ with platinum losing 2.22% and resources down 1.67%‚ while industrials added 0.52%.
European bourses traded lower with the FTSE last seen down 0.76%.
“Platinum counters were down on a lower platinum price with global supply concerns easing away‚ after unresolved mining issues earlier in the week now seen starting to be resolved‚” said Francois Venter‚ equity dealer at Investec Asset Management in Cape Town.
“The industrial index was led higher by continued demand seen from foreigners for retail stocks‚” he added.
“Reserve Bank Governor Gill Marcus made it clear that consumer spending was in good shape and she did not feel it necessary to cut rates‚” he said.
Big movers were Anglo American [JSE:AGL] down 3.32% at R262.99 and Sasol [JSE:SOL] off 1.74% to R375.00.
Anglo Platinum [JSE:AMS] gave up 1.32% to R449‚Impala Platinum Holdings [JSE:IMP] dropped 2.14% to R142.41 and Lonmin [JSE:LON] shed 6.31% to R82.26.
Telkom [JSE:TKG] share price dropped 5.51% to R19.37 after the fixed-telecoms operator warned of a big drop in its half-year profit to the end of September.
Headline earnings per share from continuing operations are expected to be at least 65% lower‚ from the same period a year ago.
Global furniture retailer and manufacturer Steinhoff International Holdings [JSE:SHF] closed 3.24% lower at R26.25‚ after it announced on Thursday that it had launched a bond offering in excess of €400m.
Source: Fin24
The South African property sector is worth R4.9trn.
The South African property sector is worth R4.9 trillion, the Property Sector Charter Council said on Tuesday.
CEO Portia Tau-Sekati said this emerged from a new study to determine the size and value of South Africa's property.
"Establishing the scope of the property sector is important for an accurate overview of the economy, taking into account that in 2009 the property sector contributed 8.3 percent of SA's GDP," she said.
She said the research -- the first of its kind -- created a "hub of knowledge" of the property sector.
It consolidated information by developing a common and consistent understanding of property in the country.
"We are moving towards a proper baseline measure to assess market size and its components," she said.
"The scale of different services and activities within the sector and ultimately BEE transformation figures [are] in line with the Property Sector Code scorecard."
The study found that one percent of land in the country was urban and residential, over 73 percent was natural pasture, and 12 percent agricultural.
Two-thirds of property owned in South Africa was residential and estimated to be worth R3 trillion, while the commercial property totalled R780 billion.
The research combined various studies which estimated the size of the country's residential market.
The number of houses in the country varied between eight and 13 million in the studies.
"Besides being a benchmark to monitor and evaluate the progress of transformation of the sector each year, this study marks the beginning of an ongoing research process, which will update information on the property sector annually," Tau-Sekati said
The study would be a useful tool for understanding the South African property market and its dynamics, she said. Source: Moneyweb
South Africa's dependence on bond inflows is starting to look like a dangerous addiction.
South Africa's dependence on bond inflows is starting to look like a dangerous addiction.
Distinguished among emerging markets by the sophistication and liquidity of its financial systems, South Africa has attracted a tsunami of portfolio flows into its domestic bonds ahead of its inclusion next month in the prominent Citigroup World Government Bond Index (WGBI).
As of Wednesday, foreigners had bought 72.1 billion rand of bonds to date in 2012 and several analysts reckon this could be a record year because of the entry into the Citi bond index.
The Treasury said foreign holdings of local debt have hit their highest ever levels this year and stood at about 33 percent by the end of August.
But this portfolio stream is the only thing plugging the gaping current account, which recorded its largest deficit in nearly four years in the second quarter, reaching 200 billion rand or 6.4 percent of GDP.
A sudden change in the course of flows could have profound implications, including a sharply weaker currency which in turn would fuel inflation at a time of mounting social unrest.
Given the volatility of portfolio flows, which can change tack at the touch of a trader's button, South Africa would be better off diversifying its external capital sources to include a steady channel of fixed investment.
It has not been doing so and the wave of violence and illegal strikes sweeping the mining sector will do little to convince sceptical investors to commit long-term cash.
"The problem here is that the current account clearly cannot be funded at this level forever as it's totally reliant on bond buying," said Peter Attard Montalto, an emerging market analyst for Nomura.
"And there is no foreign direct investment (FDI) to support it. South Africa can't attract FDI given the usual mix of policy issues, especially labour, and political and policy uncertainties," he said.
The divergence between FDI and portfolio investment is huge.
According to central bank data, in 2010 South Africa's portfolio inflows reached 108 billion rand against 33 billion rand that left. In 2011 inflows were 47 billion rand and outflows were 44 billion rand.
Direct or fixed investment over the same two years added up to around 51 billion rand.
Portfolio investments this year are scorching. Bonds have rallied aggressively since the April Citigroup announcement that South African bonds would be included in the prominent WGBI.
More money should hit South Africa's shores on October1, the day it is included in the index as some pension funds and unit trusts can only buy local bonds on the actual inclusion, while many are also buying in advance.
The index includes 22 developed and emerging market bonds with different weightings. The exact number of funds that are indexed against the fund is hard to quantify but analysts estimate portfolio flows of around $9 billion into South Africa.
"The current account deficit itself is not the whole story. It's the financing of it," said Di Luo, an emerging market strategist at HSBC. "The bond inflows are already at record high pace so that means that the structural volatility is actually rising."
A BOND IS NOT FOREVER
For example, the bond bull run cannot go on forever.
"The bonds have run so far that their value is questionable," said George Glynos, managing director of financial consultancy ETM.
"There is going to come a point in time when local bonds are just not going to attract the level of inflows required. And when that happens your currency comes under significant pressure."
Government yields have persistently tested record lows this year as foreigners pile into the local market, largely on the WGBI inclusion.
The yield on the benchmark three-year bond fell 142 basis points to a record 5.27 percent since the April announcement which prompted bond prices to rally, compared to 6.67 percent during the same period a year ago, when it fell just 42 basis points.
Reversals could come if, for example, the social strife that has set the mining sector ablaze led to a downgrade of South Africa's debt, which would expose the dangerous dependency on bond purchases.
"We don't get fixed investment so we become more dependent on portfolio flows," said Mike Schussler, director of economists.co.za, a Johannesburg-based research house.
Then there is the question of jobs, a pressing issue in a country where unemployment has been estimated to be as high as 40 percent, alongside glaring income disparities.
"Fixed income brings jobs, portfolio inflows do not. And we need jobs," Schussler said.
Finance Minister Pravin Gordhan said on Friday the mining strikes could have an "extremely damaging" impact on the economy, such as more imports than exports as minerals production declines.
"If you export less, and we continue to import at the rate that we are importing, it widens our current account deficit and it means that we rely on savings from other countries to come into South Africa, in order to keep the current account satisfied." Source: Moneyweb
Fast forward to 2011 and the prospects of Foreign Direct Investment (FDI) into Africa still face similar challenges. According to a KPMG survey, potential investors in Africa view a reduction in political instability, a willingness of African governments to reduce corruption and a clear macroeconomic direction as essential to attracting investment.
Recent global events have exacerbated the case for Africa. Domestic crises and natural disasters relating to floods in the United States and Australia, earthquakes in China and Japan, as well as the subsequent tsunami in Japan, have kept investors focused on the situation at home. Other issues which Africa needs to contend with in trying to attract investment, include the worldwide recession and its challenge of unemployment, low interest rate regimes to promote growth in the developed countries, sovereign debt issues in Europe, global imbalances, currency volatility and the omnipresent impact of climate change.
It is important to note that there are different forms of foreign investment into Africa, the first being investors that provide funding for infrastructure development and real economic growth. This form of capital flow is arguably more appropriate and development-friendly for emerging economies than portfolio flows. According to a United Nations Conference on Trade and Development report, 2011, FDI flows to Africa declined by 36%, mostly because of the global recession. This resulted in the widening of the gap in funding requirements for Africa and its infrastructural development.
Then there is the foreign investor pursuing yield through the various African bond and equity markets. These are investors seeking higher returns, escaping the low interest rate regimes currently in place in most developed countries. In South Africa, for example, foreign investors, lured by slowing inflation, a stronger rand and higher interest rates, channelled an estimated R97 billion into stocks and bonds through the JSE in 2010.
So far this year, foreign investors have been net buyers of South African equities, showing a continued interest and appetite. However, in the process, these foreign investors accept more short-term volatility, but how much volatility the investors are willing to accept depends on their risk tolerance. The civil unrest and uncertainty in North Africa, and rising tensions heading southwards, make the foreign investor retreat to “safe” investments, such as gold, despite the yield opportunity presented by the higher interest rates in emerging markets.
Regardless of the challenges, there are some good news and many positives. Initiatives that focus on a collaborative approach and economic integration in Africa through bodies such as New Partnership for Africa's Development (NEPAD), African Union (AU) and African Peer Review Mechanism (APRM) are all positive steps. The key is ensuring that the initiatives pay a dividend in attracting FDI to the continent. African countries are therefore beginning to understand the importance of trade between themselves and efficiently managing the process. There is also the acknowledgment that to close the funding gap in FDI requirements, African governments will have to partner with private capital. Hence the need to create a business environment that is conducive to investment and protects investor interests.
Increased demand for commodities from China, a rise in commodity prices and the showcasing of Africa's abilities in the 2010 FIFA Soccer World Cup are some factors that might assist in creating increased interest in Africa. There is the realisation that to invest in Africa, the investor must assess the risk on an opportunity by opportunity, case by case and country by country basis.
The challenge for Africa is to present opportunities that are too good for the investor to ignore. Information is now better and more readily available compared to 10 years ago, making investors seemingly more sophisticated and better informed to make decisions and influencing how investors perceive Africa.
To speak of the opportunity cost of not investing in Africa, without speaking of politics, would be foolhardy. Promises of young democracies budding from the unrest in the north and pressure mounting on undemocratic regimes are proof that the people of Africa are indeed taking the tentative steps forward in making Africa the “place to be” for investors. asa
Ruth Rudo Njawaya, BCom, CIA, is Senior Manager: Financial Risk Management at KPMG Services (Proprietary) Limited.
