SA Markets in Review – June 2016

SA Markets in Review – June 2016

Click here to download the June 2016 Quarterly...

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Buying your first property

Buying your first property

First time buyers need to be of essential details that should not be overlooked during the purchasing process; this is difficult as excitement and the associated freedom can override the logical thought process. Home ownership is essentially a commitment, a marriage between yourself and the property you are interested in and should not be taken lightly. When evaluating your affordability of the property is – assuming you do not have a car payment now – will you be able to afford a car payment at a future date when you purchase this property? First time buyers should gather relevant to ensure an informed decision is made, as well as being fully aware of your future long term plans. Some points to consider: 1. It is not just a matter of being able to afford a monthly repayment, you also need to assess whether this repayment is a high percentage of your income (I recommend that a bond should never exceed more than 25% of your income, this buffers in a safety mechanism should interest rates rise). You also need to place the less visible costs into your estimation of affordability, such as insurance, maintenance, and improvements. 2. Even if you can afford the monthly repayment, have you considered that the costs of purchasing a property can be as high as R50 000 on a R1 000 000 purchase? You also need to consider whether it is a buyer or sellers’ market? (Are the interest rates rising, is the economy growing or shrinking etc.). It may not be such a bad idea to hold back on purchasing until you have saved up a nice big deposit, of at least 20% in my view. 3. The adage “buy the worst house in the best area” is something to consider. Property location is an extremely important factor when buying, it does not matter how much money you throw at a property in a poor area to improve it, and it is likely you will still not make as much money as you should if you decide to sell your property later. Always...

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Investment Portfolio’s – Blending Balanced Fund Managers

Investment Portfolio’s – Blending Balanced Fund Managers

A financial Advisor has the responsibility of assisting clients in selecting investment portfolios for their various investment requirements; this is the responsibility to select the appropriate asset allocation for you based on targeted risk, returns and time horizon objectives and generally comes in the form of having to choose the right unit trust for your investment. I often come across clients’ portfolios whose solution is to hold multiple balanced funds as the underlying unit trusts, which I believe is an attempt by the advisor to ‘diversify’ the portfolio –this, in my opinion, is a quasi-approach to attempting to reduce risk and does not always work as the advisor intends. One of the biggest contributors to risk is the asset allocation of the portfolio (i.e. placing more money into volatiles assets if the time horizon is short); blending balanced fund managers may exacerbate this risk instead of reducing it. The reason for this is the discretion that the various managers may have to re-balance the underlying weightings towards various asset classes, let’s explore this idea further. Managers may, at various points through an investment or economic cycle, increase or decrease their holdings in, let’s say equity or bonds. This is alright if, on average, the fund manager’s combined in your portfolio hold opposite views on the market or hold different mandates as their changes in weightings will hopefully offset each other, by one manager increasing equity and the other decreasing the equity (or any of the other asset classes). The problem arises when the managers hold the same convictions to the asset classes and move in conjunction with each other (which is very common as most managers in a specific investment “space” may track the same benchmark or fall into the same peer group for ratings). Your portfolio may now be more aggressive or conservative than when you originally set the account up, which may not be ideal to your required solution – said otherwise, this means that you cannot control your asset allocation. Everyone understands the analogy “buy low and sell high), and without a structured asset allocation you...

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SA Markets in Review – September 2015

SA Markets in Review – September 2015

MARKET REVIEW… What happens in China does not stay in China… All I can say is thank goodness Q3 is behind us! In many ways the third quarter picked up many of the unresolved issues that we left behind in the Q2; that being an indecisive US Fed, a worrisome Chinese growth outlook and the impact of both on global growth, implicit or not, as well as picking up several new thorns (corporate scandals) which left risk assets battered and bruised. (The culmination of the 4 Cs = China, commodities, currencies and corporates). The MSCI South Africa index (measured in USD) was down 18.5%, similarly China lost 22.7%, Brazil -33.8%, Russia -14.4% and Turkey -19.5%. Developed markets fared only slightly better, however all losing ground. Volatility peaked in August, the VIX (volatility index) touching levels last seen in August 2011. From an asset allocation basis and In Rand terms, Income assets were the outright winners for the quarter – Global Bonds rallied 15.4%, Global Property rose 11.8% whilst SA Property rose 6.2%. Cash gave you 1.6%, the All Bond index managed +1.1% and Inflation-linked bonds +0.9%. Global equity returned 3.4% all thanks to Rand weakness, and worst performer being the JSE All Share which lost 2.1%. The Rand fell 12.1% against the USD over the quarter. The “fragile five” grew to the “troubled ten” = the major victims of yuan devaluation and vulnerability to China. Brazilian Real -21.4%, Russian Ruble -15.4%, Turkish Lira -11.4%. SA inflation eased from its July high of 5.0% to 4.6% in September.     Data sourced from Bloombergs, total return calculated on Net Dividends reinvested Global Equity = MSCI AC World, Global Bonds = JPM GBI, Global Cash = JPM Cash, Global Property = MSCI World Real Estate Index     SA EQUITIES – Weighed down by Resources   After touching record highs in the second quarter, the volatile global sell-off of risk assets left the JSE down 2.1% for the third quarter, although somewhat buffered by the weak rand. SA was particularly weighed down by Resources which were hindered by concerns of a...

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Your portfolio and its risks

Your portfolio and its risks

When you create an investment one of the first considerations is the topic of risk, which is usually stated as “I do not want to lose money”. This however presents a problem as capital risk is the risk of losing money on your initial investment amount, for example, if you invest R100 and it grows to R200 but subsequently loses 50% (R100) you will be back to R100 and will not have lost capital; you would not have made money at all but neither would you have lost any, or is this the case? A better adjustment would be to increase your initial capital value by a pre-determined rate or inflation annually; over time inflation will erode the amount of goods that your Rands can buy so earning a rate of return under inflation is also a version of capital loss. Secondly, when risk is referred to, what exactly is it that you as an investor should be concerned with? The aforementioned risk of capital loss certainly is a big concern however what about the risk of not outperforming inflation, not reaching the required growth rate used in the projections for your retirement calculations or the different risks faced when using active or passive (yes, who would of thought that risk was so extensive – daunting to say the least isn’t it?). Keeping risk in mind is important, especially if you are going to place a lump sum of money into the market or withdraw a lump sum out. The main concern in this situation is referred to as sequence risk, which basically means that there is a difference between losing money in the beginning or at the end of your investment term and getting a nice consistent average return. The problem is that losing money in the beginning of your investment means your investment now has to make back the money off of a smaller amount (this principle is thought of as Siegel’s paradox), this is one of the reasons why your advisor would either ask you to add more money after a correction or to re- balance...

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SA, Markets in Review – April 2015

SA, Markets in Review – April 2015

MARKET REVIEW… The temporary perfect storm – Equities, Bonds and Property rise in tandem • South African markets were largely guided by global drivers over this first quarter of 2015; namely: (1) Europe’s QE (Quantitative Easing) stimulus and signs of economic recovery across the euro area, (2) initiation of US rate hikes being pushed out, and (3) ongoing falls in Oil and other commodity prices. Overlain upon these market moving drivers talk of “Grexit” (Greek exit from the Eurozone) grabbed many a headline with a drawn-out negotiation process still in play. • The JSE All Share touched a record peak at 53,374.8 on February 24th, before entering a choppier period for the remainder of the quarter. March in particular saw the Rand as well as Resources and Industrials pressured whilst Financials and Property stocks carried their winning streak. • Looking across the asset spectrum in Rand terms: SA listed Property once again trumped returns with a 13.7% rise over the quarter, followed by Global Property returning 9.7%, Global Equity 7.7%, then Local Equity at 5.9%, both Local and Global Bonds gave you a 3% return. Sitting in cash proved unfruitful with SA Cash yielding 1.5% and Global Cash lost you 4% in Rand terms. Local headline inflation for February was 3.9%. • The Rand began the year on slightly firmer footing at 11.57 to the USD and steadied for the first two months. However the strong dollar across the globe, saw our local currency suffer a volatile March and gave back all its earlier gains. The Rand ended the quarter 4.9% weaker against the USD at 12.13 but healthy against the Euro at 13.02 and Sterling at 17.98. Encouraging is the 7% appreciation of the Rand against the Euro over the quarter, SA’s major trading partner.               Data sourced from Bloombergs, total return calculated on Gross Dividends reinvested Global Equity = MSCI AC World, Global Bonds = JPM GBI, Global Cash = JPM Cash, Global Property = MSCI World Real Estate Index             SA EQUITIES – Bolt out...

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Rebalancing – An 8th world wonder?

Rebalancing – An 8th world wonder?

What is rebalancing? When an investor sits down with their advisor, one of the most important decisions that they are going to make is their asset allocation (how much, as a percentage of your total wealth, to allocate to each asset class such as equity or bonds). Once this agreement has been implemented, the process of rebalancing is to constantly bring the “real life” portfolio, which can easily drift from this target, in line with the original long run target weights. This “drift” may occur if equity has performed well and increased in weighting from 50% of your portfolio to 60% (the same good performance and drift could also be experienced by other asset classes); the intention would be to sell the additional 10% of equities and distribute the profit to the other assets in your portfolio. The same goes for a decrease in asset class weighting due to poor performance. Why rebalance? We understand that rebalancing may go against human emotions. Why should one sell an asset class that is performing well to buy an asset class that is performing poorly? This question is justified in that allowing portfolio drift to occur (“the weights of the best performing asset classes tend to increase at the expense of poor performing asset classes” [Zietsman, 2015]) will result if your portfolio to performing better in an upward trending market. The problem comes in when the market reverts to its long run average; which portfolio performs better during these markets? It has been shown that a portfolio which is rebalanced holds its ground in these market conditions. Rebalancing in my opinion is the only time an investor and their advisor should perform the “buying low and selling high” technique, this approach is the essence of investing and without a structured approach to long run asset class weightings greed or fear could reign supreme and we could detriment long run portfolio performance. Rebalancing also reduces concentration risk. It is easily understood that if you do not rebalance your portfolio, the fastest growing asset will become the greatest proportion of your investment over time....

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Deciding between active or passive investment strategies

Deciding between active or passive investment strategies

An investor posed a question to me recently: “Is active or passive investing the best approach to take?” The truth is that both approaches have their advantages and disadvantages when considering different investment strategies. Hence, there is no cut and dry rule on which approach to follow. An active strategy is employed when you invest with managers, such as a specific equity unit trust fund, that make specific investment decisions with the aim to provide alpha (performance after fees above the return of a specific index). Passive investing, on the other hand, is the approach adopted when an investor believes that a manager will not be able to return the performance that an index will be able to deliver, on a net of fees basis. This results in an investor then selecting an investment that tracks a specific index (such as an Exchange Traded Fund [ETF]); the aim of the passive approach would be to replicate the index, and its return, at a lower cost than going through an active manager. One of the arguments in favour of passive investing is this approach is far more cost effective thereby preserving a greater portion of the investment capital by not eroding it with high fees. One should be aware that through a passive approach, an individual may theoretically under-perform the index they are tracking given the fees charged by an ETF. An active approach may offer the opportunity to provide returns greater than the respective index in consideration; however, according to ETF SA [1], 82% of South African active managers fail to outperform the market.  It is therefore important to ensure a manager does not adopt a “closet indexing” approach to managing your money; why pay for active management if the managers pretty much track the index? The decision to use an active or passive approach should never be solely based on costs. An experienced Wealth Planner will also be able to help you select the appropriate investment portfolio. An investor must remember that asset allocation will dictate a large portion of the investors risk and return profile; asset allocation...

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SA, Markets in Review – January 2015

SA, Markets in Review – January 2015

2014 MARKET REVIEW – Moderate returns; Plunging Oil Prices a late Game Changer • Besides the macro and geo-political issues that played out over the course of the year, several themes shaped a volatile fourth quarter global market performance, that being: (1) the strong US dollar (2) the “surprise” rally in Treasuries (3), the late recovery in Chinese equities and lastly (4) the dramatic sell-off in Oil markets. This saw Global Equities returning 4.7% (in $- terms) in 2014, its twentieth year of positive returns in its 27 year history of data. • Against this backdrop South Africa weathered the global volatility rather well, the JSE ended the year with a sobering 10.9% total return, somewhat sombre when compared to 2013’s = 21.4% and 2012’s = 26.7%; but in context of weak commodity prices, a weak Rand, and a very uncertain and tepid macro outlook. • The MSCI South Africa index rose 5.7% in $ terms relative to the MSCI Emerging Markets index loss of 1.8%. • Although almost 10% weaker, the Rand certainly wasn’t the most significant driver in 2014 like it had been in 2013 where it lost 19% of its value. • Looking across the asset spectrum in 2014: SA listed Property trumped returns with a 26.6% gain, followed by Inflation-Linked Bonds with 11.2%, then the JSE All Share’s 10.9%, closely followed by the SA All Bond Index 10.2% and Cash returned almost 6% against average headline inflation of 6.2% for the year (cash currently offering negative real returns). • Investing in Global Equity (MSCI AC World) in Rand terms gave you 15.1% (compared with 52% last year), Global Bonds (JPM GBI) returned 11.0% (relative to 18.2% in 2013) whilst Global Cash lost 1.3% (23.5% in 2013).   SA EQUITIES – Count your blessings, it could have been worse…   •    Overall 2014 was no stellar year for investors on the JSE. The All Share index rose a mere 7.6% before dividends which is less than 2% above inflation. The total return with dividends reinvested is a slightly more comforting 10.9%. •    But in context, other...

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SA, Markets in Review – October 2014

SA, Markets in Review – October 2014

MARKET REVIEW – Markets pare early Quarter gains as Strong Dollar weighs late September: The JSE All Share recorded its worst quarter in three years and shed 2.58% in the month of September alone. For the Third Quarter, SA Listed Property was the star performer, returning 7.1%, the All Bond Index rose 2.2%, Cash gave you 1.5% whilst SA Equities lost 2.1%. SA Listed Property surprisingly leads the year to date returns at 13.9%, whilst the All Share has given you 9.5%, All Bond Index 5.7% and Cash at 4.3% against CPI inflation of 6.4%. External reasons for this weakness include: uncertain prospects out of China, worrisome economic reports from Europe prompting fears of the Eurozone dipping back into recession, and lastly commodity prices in particular being aggravated by the very sharp rally in the US dollar. Add to this a weakening local outlook given a record August trade deficit of R16.3bn and signals from the Monetary Policy Committee of a tightening bias for local rates despite a weakening economic growth outlook. Our currency remains the key upside risk to inflation which continues to appear vulnerable given SAs deteriorating current account deficit, falling commodity prices and tenuous foreign portfolio flows funding the shortfall.           Data sourced from Bloombergs, total return calculated on Gross Dividends reinvested. Global returns based upon widely-used proxy indices.                                   Data sourced from Bloombergs, total return calculated on Gross Dividends reinvested. Global returns based upon widely-used proxy indices.       ASSET ALLOCATION – SA Equities capitulate, Global & Local Property take the lead               Q3 SECTOR PERFORMANCES – Broad-based weakness   On a sector view, weakness has been broad-based with all the major indices ending lower. Although marginally lower, Financials have outperformed, with insurers benefiting from a low claim season due to favourable weather, wealth managers reaping the benefits from positive returns, compounding effects and banks have reported relatively stable earnings. African Bank obviously blots the sector’s record, the...

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