Category Archives: Fund Choices

Dont panic – plan!

There are essentially 2 emotions that drive human behaviour when it comes to money: fear and greed. Both of them can result in investors behaving irrationally and this can result is significant financial losses if we are not careful.
For many South Africans there is currently a lot of fear around the future – it certainly looks like SA Inc is doomed (well for the next 5-10 years at least) and at times like this it is easy to panic and want to sell the house and take all the proceeds offshore. However, while having funds offshore may make you feel better about things, it might not be the correct thing to do financially.

Investing requires time – but investing offshore requires even more time. This is because you not only subject yourself to the volatility of the markets but also the volatility of the currency. It is possible that you get a double negative on your money – weak offshore markets and a stronger rand at the same time.

If you don’t think this is possible, ask anyone who took funds offshore during the first 3 months of 2016 – we hit almost R17/US$ (we are currently under R14/$) and we touched R24/GBP (R17.1/GBP currently). Those are significant short term losses as a result of currency movements*.

The point is this – take money offshore by all means but make sure that:
• You have a plan in place for investing and that this forms part of your long-term plan.
• You don’t need the funds for at least the next 10+ years and possibly longer.
• You don’t need to draw income from the funds at any stage.
• You don’t leave it sitting in a bank account offshore.
• Don’t put it into an insurance backed product – use unit trusts and ETF’s as far as is possible.
• It is also probably not a good idea to borrow money to take it offshore – there is a very real chance that interest rates could go up by a few % points over the next few years which might make the repayments on the loan impossible. If this corresponds to a period of currency strength and market weakness, you could end up in a real cash-flow crisis

*for anyone who can remember back to 2001/2 – the rand almost hit R14/$ and then fell right back to around R5/$ over the next few years.

Gryphon Money Market unit trust – the most accessible money market account out there?

Despite all the money that the banks spend advertising their savings products and all the claims to have no fees or commissions, I would not put a cent into any of their money market or savings products. If you want a money market account then you need to use a unit trust money market fund. They are safer, more transparent (cheaper) and give better returns than the bank money market accounts:

Safer – the money is held in a trust and you own units in the trust (remember Saambou or African Bank?)

Better returns – the fund generally invests billions and is able to secure a better rate than your single investment at the bank

Transparent/Cheaper – each fund publishes its annual fee and these range from 0.25% to about 0.5%. As a rule, the lower the fee, the better the return you will receive.

Expected return – currently 8%+ pa (after fees)

Unfortunately, most unit trust money market accounts want big initial deposits and/or very high monthly debit orders…but not the Gryphon Money Market Unit Trust Fund. They accept an initial investment of just R2000 or a R200 debit order and on that amount you will receive the same interest as someone who invests R1m. That’s the beauty of a unit trust account!

You can read more about the fund on their website and can also find the application there http://www.gryphonam.co.za/Gryphon/portfolio/the-gryphon-money-market-fund/

Below are a few of the facts about the fund…happy saving.

Benchmark: Short term Fixed Interest Index (STEFI)
Charges (Incl. VAT): Initial 0%
Annual Management Fee 0.29%
Minimum lump sum: R2,000
Minimum debit order: R200

For the record – they also have some other great funds.

 

It’s too late to panic

As we wake to the news of a significant cabinet reshuffle by Mr Zuma and that the rand has lost another 4% on the news, there will be a tendency to panic. Now is not the time for knee-jerk reactions. The market will do that for you. Like a pendulum, it will overshoot as people attempt to digest and predict the future consequences of the moves.
You are a long-term investor and should not be swayed by short term noise – even if it is a very loud noise. Today will most likely be horrible from a market and currency point of view but over the next few weeks and months we will make sense of it and there will be some positives that come out of this – don’t do anything in a panic. It is too late to take that money offshore (today) and it is too late to sell your portfolio to try to get out of the market.

One of my favourite lines that we often get to use is from the movie “Mickey Blue Eyes” which stars Hugh Grant as the boyfriend whose prospective father-in-law is a gangster boss. Grant’s character is very proper and speaks with a real hot potato in his mouth. The father wants to introduce him to his gangster friends but cant have him speak with that accent and so he tries to teach him to speak like a mobster…about the only thing he gets right is the line “forget about it” which sounds more like “fur ged abowd did”.

I am not advocating a reckless negligence of your finances but I recommending that if you are an investor (that implies that you are in it for the long haul) and you have an investment plan/strategy in place then you need to learn to do the “Micky Blue Eyes” with your funds and “fur ged abowd did” (for now).

Five lessons learnt in 2016

It has been a while since I last posted – 2016 has been a year to remember…I think that this post by Anet Ahern from PSG pretty much sums it up. Happy holidays and here’s to a better 2017!

1.   The best investment decisions aren’t always the most comfortable

During the first two weeks of 2016, the S&P 500, Dow Jones and Nasdaq Composite indices were down between 8% and 10% – the worst start to a year ever. All three indices would eventually add to their losses after a modest rebound, hitting their lows for the year in mid-February.  The US market then staged the biggest quarterly reversal since 1933 from these lows.  Here in SA, our All Share index had a similar start, and rose by 16% in just four months to reach its high for the year in June.  But that’s only part of the story…

It was during those panic-stricken weeks that shares such as Imperial, Glencore, Anglos and FirstRand were on sale at levels which subsequently provided returns of between 30% and 300%.  What was needed to make the right decision to invest in these shares at that point?

  • A calm, unemotional, measured approach.
  • Deep knowledge of the companies in question.
  • A solid assessment of their long term value.
  • Cash to invest, whether in a separate income portfolio or as part of the asset allocation of a multi asset or flexible fund.

During 2016, PSG Asset Management’s funds were invested in the shares mentioned above as well as other undervalued shares. Our ability to do so was backed by research, and funded by cash holdings which were intended to help us take advantage of opportunities to add more of these shares to portfolios at a time when others were fearful to act.

2.   Shares in good companies don’t need a good economy to show excellent returns
It would be fair to say that economic conditions have not been ideal for the likes of Imperial.Yet, an investment in this company at the low in January 2016 has produced a return of around 70% to the end of November 2016. This is because the market is often short-term oriented and frequently extrapolates current events and conditions into the future, creating extreme under- or overvaluation.In other words, investors often fail to take a long-term view, and they overreact to short-term pressures. This creates opportunities, as is evident with Imperial, a share held across our funds.

3.   Fixed Income can work hard towards your long term goals too
It was a long-term view on inflation that helped us to recognise the attractive real yields on offer from time to time during 2016, enabling us to lock-in returns of up to 4.5% above inflation in parts of our funds. We view cash and fixed income instruments as hardworking portions of a portfolio, providing income, diversification, stability, real returns and fire-power for opportunities during uncertainty. At PSG Asset Management every single part of the portfolio is an active decision and has to bring something that will take our investors closer to their long term goals.

4.    Our institutions are holding up so far
By the skin of our teeth, I hear some say.  But the fact is that the institutions which served to help us retain credibility in the eyes of the world mostly worked for us in SA this year when it really counted.  We had a peaceful and fair election and our finance minister managed to hang on to his independence. The Reserve Bank delivered on their inflation targeting mandate. While there are many instances of poor delivery and corruption, we learned this year that our key institutions stood the test of 2016, which was no mean feat.

5.    All countries have their issues, and major events will happen
Italy’s referendum led to the resignation of their prime minister. Brits voted in favour of leaving the EU, and Trump amused, horrified and surprised the world. We saw a failed military coup in Turkey. Oil hit a 12-year low this year, and gold had its best quarter in 30 years. Japanese bonds traded at a negative interest rate for the first time ever while Apple sales fell for the first time in almost 13 years. While investors around the world try to get their mind around these as they happen, at PSG Asset Management we try to focus on seeing the bigger picture and taking a longer-term perspective, while doing most of the work from the bottom-up. We believe this approach will continue to work as it has in the past.

As always, hindsight can serve to make us forget how hard it was at the time to stay calm and make the right decision.This is only possible if you have a solid framework to start with, be it around the way you research and assess shares, or the way your long-term investment strategy is crafted.

 

TFSA or not to TFSA?

Alec Hogg recently wrote a piece encouraging people to take full advantage of the tax free savings account before the end of February (http://www.biznews.com/undictated/2016/02/05/go-full-out-for-tax-free-savings-accounts-but-with-two-provisos/)…I disagree with him on this one and here are the reasons why.

Sorry Alec but I disagree with you on this one…I have previousy written about how I’m not so excited about TFSA (https://www.thefinancialcoach.co.za/2015/03/23/tfsas-a-better-way/) but we need to remember that the TFSA’s are not aimed at the people that read our websites – they are intended to get non-savers saving. For the average reader of our sites who has maxed out their retirement savings and has spare cash to invest, I would rather have funds invested into a UT or ETF physically offshore than a TFSA in SA…funds invested into an offshore unit trust are to all intents and purposes tax free in SA.

On a roll-up fund there are no distributions and therefore no tax implications in SA…yes there will be CGT one day but I will not be bringing all the funds back in one go so the tax effect of the capital gain will be muted. I think the TFSA is a great idea in principle but as with all other Government savings initiatives they dont go far enough (Fundisa being another example).
To my mind, to be meaningful the annual amount should be closer to the UK amount of 15k GBP – even R200k in SA would have been better…but government dont want to be seen to favour the wealthy.
Anyone who thinks that they are going to have a fortune saved from the TFSA is dreaming. Realistically, the R30k pa for 15 years should allow you to draw a monthly income of roughly R2150 in todays terms for 30 years…not even half a month’s shopping for our “average” reader.

If you have spare cash to invest before the end of February then first maximise your RA/retirement contributions and once you have done that then look to take the funds offshore directly into a foreign currency based unit trust or ETF. That’s what I am doing!

Guaranteed returns or guaranteed losses?

It seems trite to be talking about investment returns in the context of the “feesmustfall” campaign however, there are people who still need to invest and grow their money and in some ways life goes on.

One of the more frequent conversations we are currently having is around the issue of market volatility – which to some investors is apparently a new thing. It is in this context (and on the back of 7-8 years of really good returns) that investors often lose sight of the big picture. Market volatility causes panic and they start talking about not wanting to take any risk on their investments. Inevitably their focus turns to issue of “guaranteed” returns.

One such example is of an investor who is looking for income and has decided that the best way to secure his income is by way of a 5 year term certain annuity. In short he will receive an escalating income for 5 years and is guaranteed to receive his full capital in 5 years time. He is over the moon…but should not be.

His income may be secure but he is also guaranteeing himself a capital loss. What he is failing to take into account is that while he may receive his capital back (in nominal terms) in 5 years, in real terms he will be poorer by ±26% – or in his case, R1m on R3.8 million. This is because he has failed to factor in inflation risk! He has forgone volatility risk in favour of a much more dangerous and insidious risk in the form of inflation.

Volatility is a short term investment risk and is just one form of investment risk. Exposing your investments to this kind of risk is the only way to deal with inflation risk. But it requires time to work…1, 3 or even 12 months is not “time”. It takes years…

Inflation risk, on the other hand, is a long term investment risk and if you don’t take enough volatility risk you are guaranteeing that you will lose money. Don’t be short sighted – the current market volatility is nothing new – it has happened before and will happen again. Don’t panic and don’t lose sight of your plan. Sit it out and you will reap the rewards…or you can panic and buy yourself a guaranteed capital loss!

When Stocks Plunge

Some thoughts on the market’s slide – with thanks to the Motley Fool http://www.fool.com

“Global jitters” was used in the media 933 times last week to describe why the market was falling, according to Google. Thanks, that’s really helpful. It’s the equivalent of a doctor diagnosing you with “general illness.”

S&P 500 companies earned something around $38 billion in profits over the last two weeks. Over time, that number will matter far more than what the market did during the last two weeks.

The biggest impediments to a comfortable retirement are impatience, pessimism, gullibility, self-interest of middlemen, ignorance of the exponential function, and overconfidence. All six come out during market downturns.

President Obama was briefed after the market fell 10%. I guarantee you he’s not briefed after it rises 10%. Asymmetric emotional responses explain so much of why investing is difficult.

Daily market prices are determined by computers in New Jersey fighting to be a billionth of a second closer to exchanges than other computers. Business values are determined by 7 billion people waking up every morning trying to better themselves. If you bet on the latter and laugh at the former, you’ve figured half this game out.

If this decline keeps up, it could be as bad as the 2011, 2010, and 2004 downturns that no one remembers or cares about anymore.

When no one knows what the economy or stock market will do next, people say there’s high uncertainty. This is different from low uncertainty, when people think they know what the economy and stock market will do next, invariably followed by being wrong, which they blame on high uncertainty.

U.S. investors have $16 trillion in mutual funds. It sounds huge when they withdraw $20 billion, but it’s a fraction of 1% of what’s outstanding. Even during big downturns, “Nearly all investors do nothing; go about their day; couldn’t care less about yuan devaluation” is the most accurate headline.

“Be greedy when others are fearful” sounds obvious during bull markets, smart during small pullbacks, reasonable during medium pullbacks, and impossible during big downturns.

Your odds of dying in a car accident during your life are 1 in 74. That rarely makes headlines. The odds of an investor experiencing a big market crash during their life are 100%. But we treat it like it’s something rare and dangerous.

Stocks are down a lot in the last month, down a little in the last year, up a lot over the last six years, and up a little over the last eight years. Pick your narrative, and you can tell a persuasive story.

I greatly appreciate your volatility outlook of continued weakness given your prescient forecast of 96 of the last two bear markets.

Ninety-three percent of the world does not own stocks. Zero percent of market commentators can believe this.

SATRIX – ETF or UT?

I have written about the merits of using the unit trust versions of the SATRIX Funds previously but a recent example once again highlighted the advantage of the unit trust over the ETF.

Apart from the fact that the UT is cheaper than the ETF (the underlying funds are the same price but there is no “platform fee” on the UT) it is also simpler and quicker to get your money out of the unit trust than the ETF. To redeem a unit trust typically takes 48 hours from the time the forms are submitted to the time the funds are in your bank account (assuming all documentation is in order etc). However, with the ETF, they take 7 working days to pay out your money…this is far too long – where does the money sit in the interim and who is earning interest on the proceeds?

For my money – the Unit trust version is a better way to invest in SATRIX – every time!

Occam’s razor

It was while shaving one morning recently that Occam’s razor came to mind. William of Occam was a 14th century Franciscan Friar who studied logic and is credited as the first person to make known the “law of briefness”. In short he said that when faced with a problem, in the absence of evidence to the contrary, the simplest solution/explanation is usually the best solution/explanation”.

Sometimes I wonder about my subconscious but I guess the link was razors – I was using a cheap 2 blade disposable razor to get rid of my long-weekend stubble and was amazed at how sharp it was and how easily it removed the growth. This in comparison to the 4 blade razor that I had previously used and which was significantly more expensive. It struck me that despite all the hype and marketing which seems to suggest that the more blades your razor has the better it will be – the evidence (that I was experiencing) was completely to the contrary; fewer were definitely better and sharper. Or to put it another way, simple is best! Occam’s razor in real life!

I think the same thing applies to our financial lives. So often when it comes to things financial we can easily be misled by clever marketers into believing that we need complex structures such as trusts or multiple benefits and bonus pay outs (bells and whistles) on our life insurance, derivatives in our investments, multiple rewards and bonuses on our medical aids, education policies…I could go on. There may well be a place for some of these things but as a rule they are there to serve the marketers (companies’) purposes and not yours. They are designed to appear to be something that no person in their right mind should do without.

I remember a client meeting a few years back with an elderly gentleman who had no idea of how much money he had and whether or not he would be ok financially. When we investigated further it became clear that he had more than R100 million in assets – problem was that they were in about 5 trusts and 3 or 4 cc’s and companies – he had no idea of his real “financial worth” and was living a miserable and stress-filled life as a result. I can clearly hear him lamenting the decision not to keep things simple.

In my experience, simple is definitely better. I understand simple, I remember simple and simple usually costs less too!

Next time you look at yourself in the mirror think of old William of Occam and think of how you need to apply the KISS principle in life and especially when it comes to your money: Keep It Simple Stupid!

 

Sell low; buy high…Not!

I remember a great radio ad a couple of years ago by one of the unit trust mancos that feautred 2 opera singers. One sang (in a very deep/low voice) “buy, buy, buy, buy” while the other one sang “sell, sell, sell, sell” in a very high voice. The point was well made and is one that every investor should heed – you need to buy low and sell high, definitely not the other way around. Which is why I find recent articles and comments by at least 2 “prominent” sets of people quite disturbing. It could even be argued that ii possibly constitutes bad advice.

The first piece is a communique sent out by one of the asset consultants to their retirement fund members telling them that they no longer view a fund manager (RECM) as suitable and forcing their members to switch out of the fund (by a given date) or be switched out automatically. Surely this will involve selling the fund at a (very) low price only to invest in something else that has most probably already run quite hard over the past few years. In other words, they are being forced to sell low and buy something else high – locking in losses with little potential for recovery.

The 2nd piece is an attack on the fund manager (RECM) as well as Nedgroup for continuing to use them to manage their Managed Fund.

Let’s take a step back; the reason for the (very) poor performance is mining and resources shares – they have been decimated over the past ±2 years. They were cheap then and are even cheaper now. But to blame the fund manager for this is most certainly naïve and petulant.

The bottom line is that anyone who ever listened to RECM or read the Nedgroup Managed Fund fact sheets would have known that they were buying mining shares. This was a not a closely held secret. Problem is that no one ever expected the rout of mining and resources to be this long or this severe.

To my mind, full credit must be given to RECM (and one other value manager in particular) for sticking to their guns, for to sell out now would be to lock in losses for investors. Yes, if you believe that mining is finished forever then by all means sell out and invest elsewhere. But this is not the first time that a “value manager” has been lambasted or called stupid.

Anyone who was around in the late 1990’s will remember that Allan Gray almost had to close their doors as investors bolted out of value shares and into small cap and tech shares. And we all know how that one ended. With this in mind, there are at least 3 things that every investor needs to remember:

  1. The risk of investing in equities is great. There is ±20% chance of a negative return from equities (as an asset class) in any given 12 month period. This is the same for every 12 month period. Problem is that it happened so long ago that we all seem to have forgotten about it. And at the first sign of under-performance we bleat like a motorist getting a fine for talking on their cell phone while driving. If you want equity returns you need to be able to take equity risk and one of those risks is that sometimes the shares we invest in don’t give the returns we expect.
  2. Which is why diversification is key – never have all your eggs in one basket. If Nedgroup Managed (or RECM) is just one of 4or 5 funds in your portfolio then there should be no problem, unless of course the other 3 or 4 are also value managers. But then you were not diversifying in the first place.
  3. Mean reversion is a given – at some time in the future (we just don’t know when exactly) the pendulum will swing again in favour of mining/resource shares. I would rather stick it out until then than sell out now to buy something that has already run hard – it is a sure way to lose money forever. Remember 2005-2007 when we had a similarly divergent market, only then it was mining and resources that were the “darlings”. At that time these (value) managers were buying the very cheap financial and industrial shares and we were having the same discussion.sell low