3dvfdfv

STOCKS

SPOTLIGHT

MANAGEMENT

8 INVESTMENT MISTAKES TO AVOID

KAMSTRA ON ALPHAMIN’S BIG BET IN THE DRC

HOW TO NETWORK LIKE A PRO FIND US AT: fin24.com/finweek

ENGLISH EDITION

EVERY TWO WEEKS

30 November - 13 December 2017

10 TOP STOCKS

UNDER R60 THE SMALL CAPS SHOWING

BIG POTENTIAL

FUN FOCUDS

YOUR REVIEW QUARTERLY OF DECEMB SA FUNDS ER

SA: R29.90 (incl. VAT) Namibia: N$29.90

2017

TH AND YE MARKETS OUR M ONEY Finding through your way the ma ze

TOP UNIT TRUSTS FOR TURBULENT TIMES

P. 2 0 0 2

e x c lu s i v e ,

st r o n g,

rigorous

in

precise

t i m e k e e p i n g,

the

hand-wound

P. 2 0 0 2 c a l i b r e h a s a p o w e r r e s e r v e o f e i g h t d ays w i t h l i n e a r i n d i c ato r on

the

dial ,

cale n dar,

second

time

zo n e ,

seconds

reset

and

device

fo r r a p i d a dj u st m e n t o f t h e t i m e . s i m p l i c i t y, i n t e c h n i c a l e x c e l l e n c e .

LUMINOR 1 950 8 D AYS G M T A C C I A I O - 4 4 M M ( R E F. 2 3 3 )

PA N E R A I . C O M

contents Opinion

from the editor

i

JANA MARAIS

was one of those perfect Joburg early summer nights in Soweto; the treets buzzing with people heading home from work, the promise f a late-night thunderstorm in the air. Cyril Ramaphosa was due to present his economic plan for South Africa to a hall packed with supporters and heavyweight businessmen, including Investec’s Stephen Koseff, FirstRand’s Johan Burger and Goldman Sachs’ Colin Coleman.

He couldn’t have wished for a friendlier audience. The atmosphere was electrifying, with many in the crowd singing and dancing and making no bones of their anti-Zuma sentiments. By the time Ramaphosa arrived, one almost wished he would just skip the formalities and let us all have a good singalong and go home, our faith restored in how wonderful South Africa is.

But he had his “New Deal” for the economy to announce, and his key business allies to announce it to. They, in turn, couldn’t have asked for a friendlier speech. Though there was hardly anything new about Ramaphosa’s plan, it ticked all the boxes: we need jobs, growth and investment; we should make better use of our natural resources; we need policy certainty and access for all to quality, relevant education; we should also fix our state-owned enterprises; we need to confront corruption and state capture. The fact that most of these points are already government policy that Ramaphosa, as deputy president, should have been implementing anyway, was a point nobody got the chance to make.

As his speech dragged on and on, the audience grew more and more restless. A large number of people had standing room only at the back, and Ramaphosa couldn’t get them to quiet down and pay attention. It didn’t take long for the rest of us to also be left defeated.

Rather than adapting to the situation, the presidential hopeful soldiered on, sticking to his prepared 20-page speech, ensuring every last bit of energy was sucked out of that community hall before he was whisked away to make it on time for his flight to London for the announcement of the 2023 Rugby World Cup host nation.

We slowly followed Ramaphosa’s fellow panelists – who never got a chance to share their views on the economy – out of the hall. The singing and dancing were long forgotten; there were no passionate discussions about his ideas to create jobs and fix the economy. A few enthusiastic supporters mobbed Pravin Gordhan for selfies.

The bankers disappeared into the night, no doubt to do the same thing we did after France was awarded the World Cup bid two days later: pour a stiff whisky, think of Brexit and Donald Trump, and contemplate how we get our predictions so wrong. ■

6 The case for technological optimism 8 Lending new relevance to Africa’s banks

The week in brief 10 News in numbers 12 Big mistakes that Joe Bloggs continually makes on the stock exchange

Marketplace Fund Focus: A less volatile Shari’ah-compliant option House View: Long4Life, Woolworths Killer Trade: Vodacom, Coronation Fund Managers Simon Says: Steinhoff, Purple Group, Brait, Oceana Group, Richemont, Consolidated Infrastructure Group, Healthcare stocks, Golden Brands, Naspers, Group Five 20 Invest DIY: How to manage concentration risk 37 Investment: Retailers could have investors smiling again 38 Technical Study: Fat profits take Kumba to the top 39 Rights Issues: Putting investors in a tricky position 40 Pro Pick: Taking advantage of a highly diversified offering 14 16 17 18

FundFocus 22 Introduction: Celebrating another successful year FUND FOCUS 23 Q&A: Great tidings in a volatile market THE RKETS AND YOMA 24 Prudential: How to protect value in the long term UR MONE Y 26 Stanlib: Consider your goals when investing offshore 27 How Naspers influences portfolio returns 28 Allan Gray: The value of bitcoin 29 Old Mutual: An excellent vehicle for long-term savings 30 Investec Asset Management: Navigating a mature bull market 31 PSG: Emerging markets offer opportunities 32 Coronation Fund Managers: Avoid the post-retirement income gap 34 Sasfin: A practical approach to cautious investing 35 Unit Trusts: Economy hampers unit trust performance 36 Last Word: Profiting from chaos YOUR QUARTER LY REVIEW OF SA FUNDS

Finding your through the way maze

Cover 41 Stock Tips: Small stocks, big potential

In depth 47 Mining: Diversifieds back in favour

On the money 49 51 52 53 54

Spotlight: The reluctant CEO Technology: A robot-run megacity – technological wonder or horror?

Management: How to build valuable networks Crossword and quiz Piker

EDITORIAL & SALES Editor Jana Marais Deputy Editor Anneli Groenewald Journalists and Contributors Simon Brown, Lucas de Lange, Johan Fourie, Moxima Gama, Lloyd Gedye, Natalie Greve, Niel Joubert, Marcia Klein, Leon Kok, Schalk Louw, Kent Marais, David McKay, Amanda Visser Sub-Editors Stefanie Muller, Katrien Smit Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli, Tshebetso Ditabo Senior Sales Executives Paul Goddard 082 650 9231 / paul@fivetwelve.co.za Marita Schoonbee 082 882 7375 / marita. schoonbee@newmediapub.co.za Sales Executive Tanya Finch 082 961 9429/tanya@fivetwelve.co.za Publisher Sandra Ladas sandra.ladas@newmediapub.co.za General Manager Dev Naidoo Production Angela Silver angela.silver@newmediapub.co.za, Rae Morrison rae.morrison@newmediapub.co.za Published on behalf of Media24 by New Media Publishing (Pty) Ltd Johannesburg Office: Ground floor, Media Park, 69 Kingsway Avenue, Auckland Park, 2092 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 713 9601 Head Office: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 Fax: +27 (0)21 417 1112 Email: newmedia@newmediapub.co.za Managing Director: Aileen Lamb Chief Executive Officer: Bridget McCarney Executive Director: John Psillos Non Executive Director: Irna van Zyl Printed by Paarlmedia and Distributed by On The Dot Website: http://www.fin24.com/finweek Overseas Subscribers: +27 21 405 1905/7

ENQUIRIES SUBSCRIBERS 087-740-1019 subs@finweek.co.za

Fax 0864-575-918

SHOPS 0861-888-989 assistance@onthedot.co.za

Share your thoughts with us on: @finweek

finweek

finweekmagazine

FINWEEK SUBSCRIBES TO THE SOUTH AFRICAN PRESS CODE WHICH COMMITS US TO JOURNALISM THAT IS TRUE, ACCURATE, FAIR AND BALANCED. IF YOU THINK WE ARE NOT COMPLYING WITH THE CODE, CONTACT THE PRESS OMBUDSMAN AT 011-484-3612 OR ombudsman@presscouncil.org.za © FINWEEK 2011 ALL RIGHTS RESERVED. TO INQUIRE ABOUT PERMISSION TO REPRODUCE MATERIAL CALL OUR ARCHIVE AT 021-406-3232.

18792

EXPERIENCE THE NEW NEDBANK PRIVATE WEALTH APP NOW. STAY IN TOUCH WITH LOCAL AND GLOBAL MARKETS, YOUR WEALTH AND YOUR BANK, 24 HOURS A DAY.

Network

3

4:07 PM

nique, B eve erley y, C...

Patrick, Monique, Beverley,

Gain a 360 0 perspective of your wealth.

Message your relationship manager directly.

ZAR

My wealth

R11 582 701,94

A personalised dashboard that shows you a consolidated view of your wealth, locally and internationally.

Obtain immediate, personal and secure access, with a built-in private messaging function.

1/2

My assets

R17 362 819,92

Patrick

Monique

Beverley

Ca Cand and

14:23 AM

Yesterday

Frrida Friday ay

Friiday Friday y

See all contacts

Trade shares.

Enjoy the convenience of trading shares on your phone.

Today

Hello Tom, do you nee need ed h help? elp p?

14:13 14 4:1 :13 3

Hello Tom, help?

I would likedo toyou see need Statements for Visa purposes Talk completed

Investments

Home

Banking

114:13 4:113

R8 825 461,85

Transact

Investments

Move

CALL 0860 111 263 OR VISIT NEDBANKPRIVATEWEALTH.CO.ZA.

see money differently Nedgroup Private Wealth (Pty) Ltd Reg No 1997/009637/07, trading as Nedbank Private Wealth. Authorised financial services provider (FSP828), registered credit provider through Nedbank Ltd (NCRCP16) and a member of JSE Ltd through Nedgroup Private Wealth Stockbrokers (Pty) Ltd (NCRCP59).

opinion

By Johan Fourie

INNOVATION

The case for technological optimism

a

Despite rapid technological innovation, growth in labour productivity is falling. But some economists argue it is too early to determine how artificial intelligence and machine learning will shape our lives.

few months ago, I visited the Computer History Museum in Mountain View, California. The museum, with more than 90 000 objects on display, is dedicated to the computer revolution, from its roots in the 20th century to selfdriving cars today.

It’s remarkable to observe the profound change in technology over the past three decades. The mobile computing display, I thought, summarised this best, showing the first laptop computers of the 1980s to a modern-day iPhone. What also became clear from the exhibitions was that those in the know at the start of the revolution were right about the transformational impact of computers, but almost certainly wrong about the way it would affect us.

We are now at the cusp of another revolution. Artificial intelligence (AI), led by remarkable innovations in machine-learning technology, is making rapid progress. It is already around us. Facebook’s imagerecognition software, the voice recognition of Apple’s Siri and, probably most ambitiously, the self-driving ability of Tesla’s electric cars all rely on machine learning.

Computer scientists are finding more applications every day, from financial markets (Michael Jordaan recently launched a machinelearning unit trust) to court judgments (a team of economists and computer scientists have shown that the quality of New York verdicts can be significantly improved with machine learning technology). Ask any technology optimist and they’ll tell you the next few years will see new applications that we currently cannot even imagine.

But there is a paradox. A new NBER working paper by three economists, Erik Brynjolfsson, Chad Syverson and Daniel Rock, affiliated to MIT and the University of Chicago, shows something peculiar: a decline in labour productivity over the past decade. Across both the developed and developing world, growth in labour productivity, meaning the amount of output per worker, is falling. Whereas one would expect that rapid improvements in technology would increase total factor productivity, boosting investment and raising the ability of workers to build more stuff faster, we observe slower growth, and in some countries even stagnation.

Some, therefore, are pessimistic about the prospects of AI, and in technological innovation more generally. Robert Gordon, in his The Rise and Fall of American Growth, argues that, despite an upward shift in productivity between 1995 and 2004, US productivity is on a longrun decline. Other notable economists, including Nicholas Bloom and William Nordhaus, are somewhat pessimistic about the ability of long-run productivity growth to return to earlier levels. Even the US Congressional Budget Office has reduced its 10-year labour productivity forecast, from 1.8% to 1.5%. On 10 years, that is equivalent to a decline of $600bn in 2017.

How is it possible, to paraphrase Robert Solow in 1987, that we see machine-learning applications everywhere but in the productivity statistics? The simplest explanation, of course, is that our optimism is misplaced. Has Siri or Facebook’s image-recognition software really made us that more productive? Some technologies never live up to the hype.

Brynjolfsson and co-authors, though, make a compelling case for technological optimism, offering three reasons for why “even a modest number of currently existing technologies could combine to substantially

6

finweek 30 November 2017

LABOUR PRODUCTIVITY LEVELS 4.5 Notes: Trend growth rates are obtained using HP filter, assuming a l=100.

Emerging market and developing economies

3.5 2.5

World

1.5

United States Other mature economies

0.5

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

SOURCE: The Conference Board Total Economy Database (adjusted version), November 2016

raise productivity growth and societal welfare”. One reason for the apparent paradox, the authors argue, is the mismeasurement of output and productivity. The slowdown in productivity in the last decade may simply be an illusion, as most new technologies – think of Google Maps’ accuracy in estimating our arrival time – involve no monetary cost. These “free” technologies significantly improve our living standards, but are not picked up by traditional estimates of GDP and productivity.

A second reason: the benefits of the AI revolution are concentrated, with little improvement in productivity for the median worker. Google (now Alphabet), Apple, and Facebook have seen their market share increase rapidly in comparison to other large industries. Where AI was adopted outside ICT, these were often in zero-sum industries, like finance or advertising.

A third, and perhaps most likely, reason: it takes a considerable time to be able to sufficiently harness new technologies. This is especially true, the authors argue, “for those major new technologies that ultimately have an important effect on aggregate statistics and welfare”, also known as general purpose technologies (GPT).

There are two reasons why it takes long for GPTs to reflect in statistics.

It takes time to build up the stock necessary to have an impact on the aggregate statistics. While cellphones are everywhere, the applications that benefit from machine learning are still only a small part of our daily lives. Second, it takes time to identify the complementary technologies and make these investments.

As Brynjolfsson and co-authors argue, even if we do not see AI technology in the productivity statistics yet, it is too early to be pessimistic. The high valuations of AI companies suggest that investors believe there is real value in those companies, and it is likely that the effects on living standards may be even larger than the benefits that investors hope to capture.

Machine-learning technology in particular will shape our lives in many ways. But much like those looking towards the future in the early 1990s and wondering how computers may affect our lives, we have little idea of the applications and complementary innovations that will determine the Googles and Facebooks of the next decade. Let the Machine (Learning) Age begin! ■ editorial@finweek.co.za Johan Fourie is associate professor in economics at Stellenbosch University.

www.fin24.com/finweek

“What do we need to grow in Africa’s dynamic markets?”

“An experienced partner.”

Best bank in Africa

Best investment Bank in Africa Best cash management services in Africa Best FX provider in Africa Transaction bank of the year Best securities lender in Africa

standardbank.com/CIB

Corporate and Investment Banking Authorised financial services and registered credit provider (NCRCP15).

The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). Moving Forward is a trademark of The Standard Bank of South Africa Limited. SBSA 281204. 11/17

opinion

By Kent Marais

FINTECH

Lending new relevance to Africa’s banks

f

Gallo/Getty Images

The continent’s banking sector is harnessing new technology to beat old challenges.

inancial technologies (fintechs) offer Africa’s banks a great opportunity for partnership, especially in addressing many of the continent’s endemic cash management and liquidity challenges.

While fintechs bring both innovation and agility to the payments universe, it doesn’t have scale. Fintechs also often exist in a legal, legislative and compliance no-man’s land.

Fintechs require the risk management and other back-office capability of established banks if they are to build a recognised and compliant legal identity. Their small size and start-up nature also mean that fintechs need access to the large and established client bases of banks.

Fintechs are especially relevant to Africa’s banks when it comes to evolving digital responses to many of Africa’s traditional banking challenges, including: Legislation – Each African country has its own banking, exchange control and general business rules and legislation, presenting challenges to moving goods and money across borders.

Geographic diversity – Because Africa is made up of so many countries, businesses operating cross-border end up being multi-banked. Using different banks in different markets adds expense while also limiting the ability to operate regional treasuries.

Liquidity – Restrictive exchange control regimes mean that businesses can’t move money between their African operations easily.

Cash – Despite the growth of mobile banking in Africa, the continent remains reliant on cash as both a medium of transaction and storer of value.

Payment terms – Africa’s less-developed legislative environment means that contracts may be difficult to enforce. In this environment a culture of pre-payment dominates. When businesses are setting up in Africa, they need to be guided on what will work as a payment system on the continent – and then be helped to set this up in a largely cash-based trading environment.

To meet many of these challenges, a number of banks already partner with multiple fintechs across Africa – think for example of fintech-developed services like SnapScan, SlydePay and WeChat – providing a range of value-added functions developed to deliver the entire banking universe digitally in ever-easier

8

finweek 30 November 2017

An M-Pesa shop in Talek, Kenya.

M-Pesa was introduced by Safaricom and Vodafone in order to enable customers to make cashless payments via their mobile phones.

Fintechs require the risk management and other backoffice capability of established banks if they are to build a recognised and compliant legal identity.

SnapScan, which allows for fast and easy mobile payments, is a partnership between a local fintech firm and Standard Bank.

combinations operated via mobile.

In short, the digital journeys of many African banks have shown exactly how, in Africa, banks and fintechs need each other.

After all, even mobile money needs to be backed up by real money in a bank.

Transactions supported by distributed ledger technology, for example, eventually reach a stage where they need to actually buy or sell things, at which stage the transaction needs to dip back into the existing financial system.

To date, fintechs and non-traditional financial service providers have driven the most extreme disruption in Africa’s mobile transaction and mobile wallet environments.

Products like M-Pesa, for example, which provides mobile payments 24/7 in real time, have revolutionised the payments landscape in Africa. This has prompted traditional financial service providers to develop and implement competing capabilities, such as PesaLink, a real-time 24/7 account-to-account payment system in Kenya.

There has also been a lot of growth in the number of fintechs providing value-added payment capabilities at different stages in the value chain – in addition to standard transfers. For example, there are a number of fintechs in Africa that enable utility payments in addition to standard third-party transfers.

These platforms are forcing banks to adopt these functionalities in order to ensure that banks are not disintermediated out of the payments system.

Beyond partnering, banks also work with fintechs to develop bespoke services.

For example, Standard Bank is piloting a distributed ledger technology payments system aimed at supporting dematerialised trade and payment transactions.

Africa’s development of a digital banking capability, enabled through mobile, has completely changed how banks can access and serve previously unbanked customers and clients. Both partnering with existing fintechs or developing new fintechs in-house is seeing Africa’s banks expand their customer universe along with the range and relevance of services that banks can provide. ■ editorial@finweek.co.za Kent Marais is head of product management, transactional products and services at Standard Bank.

www.fin24.com/finweek

1561

THE FURTHER YOU TRAVEL, THE MORE OPPORTUNITIES YOU’LL FIND. 64 000km is a long way to go for a couple of fish and some squid.

But the sooty shearwater knows that it has to make the gruelling journey every year, in order to ensure survival in the long term.

We can relate. We understand the importance of gaining access to investment opportunities beyond the 1% of the global equity market represented by South Africa. That by looking just a little bit further, you can find opportunities that you never would have had on your own doorstep. Allan Gray and Orbis, our global asset management partner, know that the choices out there can be overwhelming. So we’ve narrowed down the options to what we think are the most attractive offshore investment opportunities, in the Orbis Global Equity Fund. We think the sooty shearwater would approve. For more information call Allan Gray on 0860 000 654 or your financial adviser, or visit www.allangray.co.za (ii)

(iii)

(iv)

Artist’s impression.

(v)

Allan Gray Unit Trust Management (RF) Proprietary Limited (the ‘Management Company’) is registered as a management company under the Collective Investment Schemes Control Act 45 of 2002. Allan Gray Proprietary Limited (the ‘Investment Manager’), an authorised financial services provider, is the appointed investment manager of the Management Company and is a member of the Association for Savings & Investment South Africa (ASISA). Collective Investment Schemes in Securities (unit trusts or funds) are generally medium- to long-term investments. Except for the Allan Gray Money Market Fund, where the Investment Manager aims to maintain a constant unit price, the value of units may go down as well as up. Past performance is not necessarily a guide to future performance. The Management Company does not provide any guarantee regarding the capital or the performance of the unit trusts. The Orbis Global Equity Fund invests in shares listed on stock markets around the world. Funds may be closed to new investments at any time in order for them to be managed according to their mandates. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request from the Management Company.

>> INVESTMENT: Beware the bear: Some of the most common mistakes investors make p.12

Wilf Mbanga Editor of The Zimbabwean

− Wilf Mbanga, editor of The Zimbabwean, in an opinion piece published on theguardian.com. Zimbabwean President Robert Mugabe’s “37 years in office has seen the rigging and stealing of elections, the murder and torture of his opponents, the seizure of productive farm land, the worst hyperinflation in history, and the unbridled looting and plundering of the nation’s resources by his supporters,” Mbanga wrote. “And the man taking over from him [Emmerson Mnangagwa] was his chief election agent through it all.”

10

finweek 30 November 2017

“The cheaper the stock market is when you enter, the more money you make. And that’s it. The rest is talk.” − Nick Kirrage, the co-head of Schroders Investment Management’s global value team, explaining his team’s investment approach during the investment manager’s recent annual global media conference in London.

Kirrage said he made “money from human nature”. “In the short term we learn a lot, in the medium term we learn a little, and in the long term, we learn pretty much nothing,” he said, referring to investors’ tendency to invest in stocks that were currently popular.

But, he said, popular stocks are normally “very, very expensive”.

He said about 20% of his team’s portfolio is currently in banks, a sector which investors don’t want to be in. Yet, he said, because of continued regulation and stress-testing in the banking sector, this sector was one of the only ones to have been derisking on an ongoing basis over the past decade.

“IN MINING, YOU ALWAYS NEED MARGIN FOR ERROR. YOU NEED TO HAVE SUFFICIENT CAPACITY TO DEAL WITH UNEXPECTED THINGS. AND THE ONLY WAY A MINE CAN REALLY DO THAT IS THROUGH GRADE.” − Boris Kamstra, CEO of Alphamin, comments on the company’s Bisie tin project in North Kivu in the eastern Democratic Republic of Congo (DRC). With an average grade of 4.49% and a 4.6m tonne resource, a tonne of rock from Bisie is worth four and a half times more than what the next best tin project in the world offers, Kamstra says. First production is expected in early 2019, and Alphamin is targeting steady-state production of 10 000 tonnes a year. (See page 49.)

www.fin24.com/finweek

www.fundstrategy.co.uk

“WHAT ZIMBABWEANS WANT, WHAT WOULD REALLY MAKE US DANCE IN THE STREETS AS WE DID IN 1980, IS THE CHANCE TO DECIDE OUR OWN FUTURE – AND WHO WILL LEAD US INTO THAT FUTURE.”

Images: edition.cnn.com

in brief

DOUBLE TAKE

BY RICO

UBER BUYS DRIVERLESS CARS

24 000

Ride-hailing firm Uber has entered into an agreement to buy up to 24 000 Volvo X90 vehicles between 2019 and 2021 to prepare a fleet of fully driverless on-demand vehicles, ft.com reported. Uber already has about 200 Volvo sport utility vehicles (SUVs) fitted with its self-driving systems taking part in tests in Pittsburgh, San Francisco, and Tempe, Arizona, it reported. The deal is potentially worth $1.4bn, according to ft.com calculations.

The X90 cannot currently be driven without a human safety driver because it doesn’t have redundant braking and steering systems, Uber said. The new vehicles will be designed with specialised back-up systems that will allow them to operate without a human driver, ft.com reported.

THE GOOD

THE BAD

THE UGLY

Outgoing US Federal Reserve chair Janet Yellen has been widely praised for her leadership during her four-year term, which ends in February. Yellen, who said she will leave as soon as her successor is appointed, oversaw the first US interest rate hike in seven years, which was followed by three more hikes, and the gradual reduction in the Fed’s balance sheet that began in October, nytimes.com reported. She said in her resignation letter that the “financial system is much stronger than a decade ago, better able to withstand future bouts of instability and continue supporting the economic aspirations of American families and businesses”, it reported.

Petrol prices are expected to climb by 74c for 95 grade and 75c for 93 grade in December, driven partly by the rand’s weakening against the US dollar and increases in international oil prices, the Automobile Association (AA) said. This will bring the price of 95 grade to R14.79 a litre, the most expensive on record. Diesel is expected to increase by 63c. “Concerns over government’s fiscal discipline are likely to continue weighing heavily on the rand, and if these factors combine with continued oil strength, South Africans will face heavy fuel price hikes for the remainder of 2017 and into early 2018,” the AA said.

Eskom’s request for a 19.9% tariff hike was met with strong opposition during public hearings at regulator Nersa, with industry warning of massive job losses should the request be granted, urging Eskom to focus on cost-cutting. Despite the criticism, Eskom’s acting finance chief Calib Cassim said a tariff hike in line with inflation, as proposed by a number of parties, was not sustainable and that it needed the 19.9% hike to stay afloat, fin24.com reported. Trade union Numsa perhaps summed it up best when it stated that it views Eskom’s request as nothing more than a gross abuse of power, and an attempt by a state-owned entity to hold the entire country and economy hostage, fin24.com reported.

Unique

Financial market data and trading solutions

Choose a leading multi-asset, global market information platform with extensive charting combined with a complete trading experience for professional users. Supporting your business now and into the future.

in brief in the news

By Lucas de Lange

Big mistakes that Joe Bloggs continually makes on the stock exchange

w

Gallo/Getty Images

He regularly misses out on bargains because he becomes dejected during bear markets. hen Raymond Ackerman held his first sale at Pick n Pay by offering chickens at a bargain price, to his surprise (and pleasure) he found that there were long queues in front of the three shops he had at the time. But when the JSE has a sale, most Joe Bloggs are hardly to be seen, except to bemoan the low prices. Usually only experienced value investors buy during depressed times that characterise bear-market lows.

For example, early last year commodity shares were the orphans and the two heavyweights, Anglo American and Glencore, traded at bargain prices of 5 082c and 1 692c respectively. Since then Anglo increased by close on 450% and Glencore by 310%. It was therefore a bear market that switched to a bull market, which reflects a typical cycle in the JSE’s 100-year plus existence.

Something that market researchers all agree on is that ordinary investors tend to repeat the same mistakes over and over.

They shoot themselves in the foot, not only by dejectedly selling at low prices during bear markets, but some of them act quite irrationally by blaming their brokers or advisers for the misfortune.

At the opposite side of the cycle, a dangerous mistake is also made. It is during the last phase of a bull market (see The bull is rampant everywhere, 2 November edition) that Joe Bloggs becomes euphoric about the seemingly easy money that can be made.

Some researchers state that what’s actually happening at that stage is that uninformed market players take profits by selling to other eager uninformed buyers. Well-informed market players will, of course, also sell during this phase of high prices. Sometimes it is referred to as a fools’ market. One fool sells to another and after the last fool buys, the prices implode to far lower levels and only stabilise when the well-informed investors begin nibbling because excellent values (such as in the case of Anglo and Glencore) become available.

The founder of the international Franklin Templeton unit trust group, the late Sir John Templeton, who was in 1999 named “arguably the greatest global stock picker of the century” by Money magazine, says to be

12

finweek 30 November 2017

THE INVESTOR’S PSYCHOLOGICAL CYCLE Greed out of control Enthusiasm: A new era Confidence

Indifference Dismissal Denial Concern

Caution Doubt & Suspicion

Fear Panic Despair

Contempt

Capitulation

successful in share trading, you should turn your head far enough to do the opposite to the norm. To get a bargain price, you’ve got to look for when the public is most frightened and pessimistic.

will fare badly with some of your investments, but diversification will protect you because the others are successful.

■ You attach value to clever expositions that although a market is expensive, things are now “different”. Alan Greenspan, former chairman of the Federal Reserve, said that he’d heard this Some of the other mistakes ordinary statement over many years in the past and that investors often make include: it was wrong every time. It was during the sub■ Buying blindly on a tip. This can cause prime era, which was eventually followed by a great losses. Do your homework, serious crisis, that he said it. even if it means just reading a There are experienced company’s last two annual observers who believe that the reports and studying the next collapse of the market will short- and long-term be caused by cryptocurrencies, graph of its share price. with bitcoin in the lead. Since Most chief executives the beginning of the year, and chairpersons try to bitcoin has increased by close reflect a fair picture of on 700%. Some observers a company’s state and believe that the mother of all prospects. collapses is building up around ■ Many people listen to crypto-units. The Economist points so-called market experts who Sir John Templeton out that if you buy units, you have are free with their tips. They often Founder of the no right – as in the case of shares – tend to do so after they’ve bought international Franklin the share and then hope to boost Templeton unit trust group to the issuer’s profits. It’s almost a given that those rich in shares will the price. become richer as with the collapses in 1987, ■ Never become attached to a share.

2000, 2007 and 2008.

Remember Mr Market, as Warren Buffett calls it, owes you nothing and does not give a ■ Many ordinary people believe the fallacy, damn whether you are going to suffer a loss which probably stems from the euphoria of on a share that initially treated you well. In fact, the third and last phase of a bull market, that it could well be that because the share has a person can become rich quickly by playing treated you well, it has become overpriced. the share market. It’s a mistake that is likely to cost you dearly. ■ ■ You do not spread your capital across various companies and industries. It’s a given that you editorial@finweek.co.za www.fin24.com/finweek

LB 115839L/5

BE ON THE ‘PLUS SIDE’ OF OFFSHORE INVESTMENTS WITH INVESTMENT PORTFOLIO+ With the current focus on offshore investments, there’s never been a better time to move your offshore assets to Investment Portfolio+.

Benefits include: Investing and growing your assets in hard currency Ease of tax administration No UK or USA inheritance tax implications (situs) Appointed beneficiaries have immediate access to capital and can take ownership of the policy or surrender it, all while saving on executor fees

If you’d like to find out more about Investment Portfolio+, please contact your Financial Adviser, your Regional Offshore Specialist, or visit www.oldmutualinternational.com ADVICE I INVESTMENTS I WEALTH

Old Mutual Life Assurance Company (South Africa) Limited is a registered long term insurer and a licensed financial service provider.

market place

>> House View: Long4Life, Woolworths p.16 >> Killer Trade: Vodacom, Coronation Fund Managers p.17 >> Simon Says: Steinhoff, Oceana Group, Brait, Richemont, Purple Group, CIG, Naspers, Group Five, Golden Brands p.18 >> Invest DIY: How to manage concentration risk p.20 >> Investment: Retailers could have investors smiling again p.37 >> Technical study: Fat profits take Kumba to the top p.38 >> Pro Pick: Taking advantage of a highly diversified offering p.40

FUND IN FOCUS: OLD MUTUAL ALBARAKA BALANCED FUND

By Niel Joubert

A less volatile Shari’ah-compliant option This fund is suited to investors wanting moderate to high long-term growth from their Shari’ah-compliant investment, with less volatility in the short term than pure equity.

FUND INFORMATION:

Benchmark:

Fund manager insights:

Fund managers: Fund classification:

45% Customised SA Shari’ah Equity Index, 10% S&P Developed Markets Large and Mid-Cap Shari’ah Index, 40% STeFI Composite – 0.5% & 5% Three-month US-dollar LIBOR Saliegh Salaam, Grant Watson & Warren McLeod South African – Multi-Asset – Medium Equity

Total expense ratio: Fund size: Minimum lump sum / subsequent investment: Contact details:

1.47% R1.8bn R5 000 / R500 0860 234 234 or unittrusts@oldmutual.com

TOP 10 EQUITY HOLDINGS AS AT 30 SEPTEMBER 2017:

1

Compagnie Financière Richemont

3.7%

2

Vodacom Group

3.5%

3

Clicks Group

2.4%

4

Mondi plc

2.2%

5

Mondi Ltd

2.2%

6

Exxaro Resources

2.1%

7

AVI

2.0%

8

BHP

2.0%

9

Cashbuild

1.6%

10

Kumba Iron Ore

1.1%

Total

22.8%

The fund is one of the few balanced funds that is not only Shari’ah compliant, but also has a significant environmental, social and governance (ESG) bias, says Maahir Jakoet, investment analyst at Old Mutual Customised Solutions. “A prominent feature of the global component within the fund is the tilt toward ESG by design,” he says.

The strategy of the fund is to achieve greater return and less volatility compared to the market. As such, the fund has high exposure to internationals, allowing it to achieve greater diversification and a consequent reduction in volatility.

“Through time, equity has achieved greater returns than the other asset classes.

Our high exposure to equities benefits from this and, similarly, within equities we are positioned to achieve lower volatility when compared to the fund’s benchmark,” according to the fund managers.

Jakoet says the fund is for investors with a time horizon of a minimum of three years and who are looking for steady long-term capital growth and have a low tolerance for volatility. Investors saving for retirement, education or any specific goal can consider the fund, he says. “For Muslims this is a perfect fund to save for Hajj (Pilgrimage).”

The fund is managed according to Old Mutual Customised Solutions’ “managed volatility strategy”. The underlying philosophical premise of the managed volatility strategy is that higher risk does not necessarily mean higher returns, he explains.

“Empirical evidence, both locally and abroad, reveals that lower-risk portfolios have outperformed higher-risk portfolios.The key implication of this data is that risk is mispriced.

We exploit this mispricing opportunity by means of our managed volatility strategy,” he says.

According to him the investment style of the fund is objective and systematic.

The strategy does not have a traditional style label, but seeks attractively valued companies and companies with great momentum, simultaneously managing risk.

He adds that any incidental income that is deemed to be non-permissible is accrued and deducted on a daily basis: “These funds are then paid out to an independent charity elected by the Shari’ah Supervisory Board.”

PERFORMANCE (ANNUALISED AFTER FEES)

Why finweek would consider adding it:

As at 30 September 2017: ■ Old Mutual Albaraka Balanced Fund 10

The fund is a Shari’ah-compliant asset allocation fund that offers investors access to local and international asset classes including equity and non-equity securities, such as sukuks (Islamic bonds).

The fund is strictly managed in accordance with Shari’ah (Islamic) law and therefore does not invest in shares of companies whose core business involves dealing in alcohol, gambling, non-halaal foodstuffs or interest-bearing instruments.

The fund is also suitable as a stand-alone fund in retirement products where Regulation 28 compliance is specifically required. ■ editorial@finweek.co.za

■ Benchmark 9.6%

8

8.6%

8.2%

6 4

4.5%

2 0

14

1 year

finweek 30 November 2017

Since inception on 31 December 2010

*Disclaimer: Old Mutual Investment Group (Pty) Ltd is a licensed FSP. The above fund* is a registered collective investment scheme administered by Old Mutual Unit Trust Managers (RF) (Pty) Ltd. The relevant fund’s Minimum Disclosure Document is available on www.omut.co.za

www.fin24.com/finweek

Get supersonic fibre and do unlimited business from only

R799 PM.

Telkom fibre boasts speeds of up to 100Mbps.

Fibre networks are not affected by electrical interference, making communication clearer and more reliable.

As signal isn’t lost over longer distances, fibre is able to carry larger information loads.

Fibre has lower latency, meaning no noticeable information exchange delays, which is particularly useful in communication technologies.

Fibre is considered a “once in a generation” investment, and users will not experience downtime because of theft.

For fast and reliable fibre for your business.

Switch to the best data provider*.

Call 10213 or SMS ‘fibre’ to 32541 Standard SMS rates apply and can be viewed at www.telkom.co.za. E&OE. *MyBroadband article, 29 July 2016.

house view BUY

LONG4LIFE

SELL

HOLD

By Simon Brown

Tempting price

Last trade ideas

a fan of but it generates cash, and as I have Long4Life* has had a short but interesting life, written before, this cash can then be used for hitting 838c back in July when net asset value other businesses or acquisitions.

(NAV) of cash was some 500c. Now with the Very important is that stock at around 424c we’re Long4Life has had a short but while Brian Joffe is looking seeing a much better price. interesting life, hitting to build a powerhouse in With the new shares issued for the mould of a Berkshire Holdsport, the cash NAV per Hathaway, it is not going share is around 170c (we can’t to happen overnight and I know an exact figure as the back in July when net asset value consider this a long-term amount of cash being used for of cash was some portfolio addition. the Inhle Beverages acquisition My exit here will be if Joffe is yet to be finalised). starts recklessly to buy assets The other assets aside with his cash pile and I have from cash are Sorbet, Inhle started building a position at Beverages and Holdsport. The 420c. I am not rushing as we may see further first two are smaller deals, while Holdsport price weakness. ■ is the big deal and was mostly settled with shares. Holdsport is a company I was never *The writer owns shares in Long4Life.

838c 500c.

WOOLWORTHS

BUY

SELL

SELL

Tongaat Hulett 16 November issue

BUY

Sasfin 2 November issue

AVOID

Construction 19 October issue

BUY

Discovery 5 October issue

HOLD

By Moxima Gama

Window of opportunity Fashion and food retailer Woolworths has “and [is] seeing positive results from this been through a tough two years, with its initiative”, it said. Politix, a leading menswear share price about 46% lower since its October fashion business in Australia, was acquired in 2015 peak. It has been one of the worstNovember 2016. performing retailers on the JSE over the past With the Woolworths share price currently 12 months, lagging major rivals like TFG, trading at a price-to-earnings ratio of 13.28 Truworths, Mr Price, Shoprite and Spar. and offering an attractive dividend yield of In a trading statement for the 20 weeks 5.6%, according to IRESS data, the charts are ended 12 November, Woolworths said it indicating growing buying interest – continued to face difficult trading potentially making current levels conditions in both South Africa a good buying opportunity for and Australia, its major the long-term investor. markets. In SA, Woolworths How to trade it: Woolworths Fashion, Beauty and is currently testing key Home saw sales increase support at 5 485c/share. by 0.7% over the period, However, since falling while sales in comparable in August, the threestores declined by 2.4%. week relative strength Retail space grew by a net index (RSI) has been 4.2%. Woolworths Food in forming rising bottoms, SA grew ahead of the market, or positive divergence – a it said, with revenue up 9.3% sign of gradual buying interest.

Pedestrians walking Although investors would be buying compared to the prior period. Retail past a David Jones space grew by a net 8.2%, it said.

Woolworths within its bear trend, a store in Sydney, However, David Jones sales neutral long could be initiated above Australia. declined by 5.3% in Australian dollar 5 855c/share. Revise positions terms, while retail space was reduced by at 6 210c/share and increase longs on a net 2.2% “as we continue to drive space continued buying. A move towards 7 000c/ optimisation”, Woolworths said. Country share could ensue. Alternatively, go short Road sales increased by 8.3% in Australian below 5 485c/share as Woolworths could dollar terms. The group has opened eight retest its prior low at 4 300c/share. ■ new Politix locations in David Jones stores editorial@finweek.co.za 16

finweek 30 November 2017

Last trade ideas BUY

Kumba Iron Ore 16 November issue

BUY

Dis-Chem Pharmacies 2 November issue

BUY

Astral Foods 19 October issue

BUY

Richemont 5 October issue

Gallo Getty Images/Peter Parks/AFP

marketplace

www.fin24.com/finweek

marketplace killer trade

By Moxima Gama

VODACOM GROUP

m

On volatile terrain

obile telecoms group Vodacom recently reported a 4.6% increase in revenue in the six months to end September, with headline earnings per share (HEPS) only rising 1.1% to 445c. It also cut its interim dividend to 390c (compared with last year’s 395c), prompting a drop of nearly 5% in the share price.

The decline is partly because of the issuing of new shares to pay for the acquisition of a 35% stake in Kenya’s Safaricom.

Another challenge is the lack of available spectrum in South Africa, which is pushing up the costs to provide data.

On the charts: After failing to breach the upper slope of its long-term bull channel

VODACOM GROUP

52-week range: R138.52 - R186.99 Price/earnings ratio: 16.03 1-year total return: 8.83% Market capitalisation: R256bn Earnings per share: R9.28 Dividend yield: 5.28% Average volume over 30 days: 2 175 423 SOURCE: IRESS

in August, Vodacom is now teetering on the lower slope of the channel. A negative breakout could soon be confirmed on continued bearishness.

How to trade it: Go short: Because the three-week relative strength index (RSI) is in oversold territory, a bullish reversal is due. However, if Vodacom fails to recover beyond 15 770c/ share and the RSI remains on the bearish end of the red bold

SOURCE: MetaStock Pro (Reuters)

trendline, a negative breakout may well be confirmed below 13 850c/ share. Alarm bells should sound below 14 600c/share – prepare to go short through the 13 850c/ share level. The first downside target would be at 11 495c/share.

Go long: A buying signal would

be triggered above 15 770c/ share, provided that the RSI trades through the red bold trendline and returns to bullish territory. Otherwise, go long above 16 265c/share. Gains to either the upper slope of the channel or 18 700c/share could then follow. ■

CORONATION FUND MANAGERS

c

Set to recover its losses oronation, whose share price remains about 34% off its high at the end of 2014, reported total assets under management of R614bn for the year to end September, a slight increase from the previous year’s R599bn.

The current environment is challenging, it said, with the saving levels of investors impacted by low economic and no employment growth, low levels of confidence, regulatory and policy uncertainty, the potential impact of further ratings downgrades on the economy, and “profound” global political and economic changes.

It reported a 3% decline in revenue from fund management to R3.9bn, with after-tax profit also declining 3% to R1.5bn. Diluted HEPS was 2% down to 437.5c, while it declared a final dividend of

@finweek

finweek

CORONATION FUND MANAGERS

52-week range: R58.82 - R79.72 Price/earnings ratio: 17.21 1-year total return: 8.96% Market capitalisation: R26.33bn Earnings per share: R4.38 Dividend yield: 5.82% Average volume over 30 days: 679 345 SOURCE: IRESS

217c per share (2016: 218c).

On the charts: Coronation recovered at least a third of its share price after plummeting to its long-term support trendline dated back to 2010 and is teetering along a key resistance level – it could recoup more of its losses on continued upside.

How to trade it: Go long: Coronation would overcome a long-term resistance level above 7 925c/share – go long. A recovery towards 9 500c/ share would be possible. Increase

finweekmagazine

SOURCE: MetaStock Pro (Reuters)

positions on continued upside, as resistance at 10 730c/share would then be tested.

Go short: A reversal below 6 595c/share could see Coronation fall back to either its major support trendline or support at 5 680c/share. In this instance, refrain from going long.

A near-term short signal would

be triggered below 6 595c/share.

A negative breakout out of the long-term bull trend would be confirmed below 4 525c/share. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa.

She has been a technical analyst for 10 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

finweek 30 November 2017

17

marketplace Simon says

By Simon Brown

STEINHOFF

Tainted Steinhoff was again the target of claims of dodgy accounting and it again took hours to issue a rebuttal statement on Sens. Even if Steinhoff is innocent, it bothers me that there are so many negative claims against this company. As a result I have no interest in holding the stock.

PURPLE GROUP

Fingers crossed The results of Purple Group, which owns EasyEquities, show a loss, although a lot of this is due to Real People being revalued. Real People is a legacy asset and has not recently been a core part of the group. The GT247 part of the business has seen its profits plummet, as has the asset management business, Emperor, as dwindling returns have seen an outflow of assets under management (AuM). This leaves discount brokerage EasyEquities, with almost 60 000 accounts and revenue of just under R9.5m, as the real hope here. EasyEquities is now three years old, and I remember that it had a three-year target of 100 000 accounts, so it is behind on that. Costs of the division saw a loss of almost R26m. The R100m from Sanlam has been confirmed so it has cash for about another three years as it works to scale the business and ensure its profitability. It is going to be a long, hard road, but I sincerely hope that this business succeeds because in a sense it is the proof of concept on low-cost brokerages. If EasyEquities fails, other brokers will use that as evidence that a low-cost model doesn’t work and we’ll see higher fees. For now, I remain an interested bystander and am not buying the shares. We’ll have plenty of time when the model starts to work and generates profits.

18

finweek 30 November 2017

Simon’s stock tips Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

BRAIT

New Look shocker Brait updated the market on its net asset value (NAV), which is expected to have fallen between 35.7% and 37.7% over the past year.

This is pretty much due to UK fashion retailer New Look being valued at zero – yes, zero. This is an asset for which Brait paid some R37bn a little under two years ago. Just recently, I wrote about how big deals are typically bad, but this exceeds even my expectations of dismal deals.

Now, notwithstanding possible cash injections into New Look, it is unlikely to actually be worth zero. So when Brait finally gets New Look operating, it will value the clothing retailer higher, boosting NAV. But for now, shareholders must be looking on in disbelief. Brait is supposed to be a master dealmaker, but frankly, evidence for that statement is scant.

EasyEquities is now three years old, and I remember that it had a three-year target of

100 000 R26m. accounts, so it is behind on that. Costs of the division saw a loss of almost

OCEANA GROUP

A floundering stock Oceana is a stock I spent a lot of time looking into as a potential investment but I was never quite convinced that it was worthy of my money – fortunately so, as recent results were not great and the stock is off almost a third in the last year. Results saw revenue down 17% and diluted HEPS off 44%. The stronger rand is hurting, but so are lower prices and reduced demand. In short, everything went wrong and this reminds me that investing is not only about finding winners, but also about avoiding losers.

RICHEMONT

Don’t fear the Apple Watch Richemont’s* results were as expected after the trading update, with sales up 12% in constant currency and up 8% after last year’s watch repurchases were taken into account.

Profit and earnings for the period both increased 80% and cash sits at €4.61bn. In rand terms this is some R77bn, about 11% of its market capitalisation. I continue to like the stock, but it has run and I would want to buy on a pullback. I am also again seeing articles (this time in the Financial Times) on how the Apple Watch is a threat to Richemont.

I disagree – a buyer of an expensive luxury wristwatch is not the same person who buys an Apple Watch. Sure, this is also a status symbol, but it’s not on the same level as the truly expensive watches Richemont sells.

Now, since a sane person only wears one watch at a time, some sales may be lost. But this will be picked up by the new rich, so the Richemont market remains intact.

www.fin24.com/finweek

marketplace Simon says

NASPERS

CONSOLIDATED INFRASTRUCTURE GROUP

From bad to worse

Gallo/Getty Images

Qilai Shen/Bloomberg

Jasper Juinen/Bloomberg

The group’s share price has been in decline for just over two years, having peaked just below 3 600c in October 2015. It was trading as low as 265c by mid-November. The sell-off accelerated markedly in the past few weeks as it twice updated the initial 31 August trading update with another on 8 November and then yet another on 14 November. Initially headline earnings per share (HEPS) was expected to be down 25% to 35%; not great, but more or less as expected by most analysts. Then HEPS was expected to decrease by between 50% and 55%. This announcement was followed by the most recent trading update, in which management said it wasn’t sure but HEPS would be down more than 55%. The last update states that previous results may have to be restated, results due by end November are going to be really bad (but nobody is sure just how bad), and the outlook is equally negative. This is not only a reflection on a business having a very tough time, but raises serious questions about management and I do not expect the management team to survive this. As for the company, it still has some good assets with the recent Conlog acquisition having cost more than the current market cap.

But the balance sheet is stretched and for investors my advice would be to stay far away until we see the results and can determine for ourselves just how bad things really are.

Then HEPS was expected to decrease by between 50% and 55%, just to be followed up with the most recent trading update, in which management said it wasn’t sure but it would be worse than 55%. @finweek

finweek

finweekmagazine

The internet in China is huge, growing and generating profits.

The Tencent results sent Naspers soaring, and it expects HEPS to be up between 62% and

67%.

HEALTHCARE STOCKS

A sickly sector Health stocks have had a tough year with Life Healthcare off 23% over the past year.

Netcare has lost 34% and Mediclinic 23% over the period. Netcare had to issue a follow-up Sens to its trading statement after investors wanted more information and the updated statement was not good. The 2006 acquisition of BMI Healthcare still haunts Netcare, while Mediclinic results saw bed nights sold falling in all regions, never a good sign for a hospital group.

GOLDEN BRANDS

Tencent does it again Again, Tencent’s results were impressive.

Singles’ Day, celebrated in China on 11 November and which sees millions flocking to malls and e-tailers, proved to be massive beyond belief, about five times larger than both Black Friday and Cyber Monday in the US. The internet in China is huge, growing and generating profits. The Tencent results sent Naspers** soaring, and it expects HEPS to be up between 62% and 67%. Then Naspers announced the listing of its American Depositary Receipts (ADRs) on the London Stock Exchange (LSE). This is important and could well see the Naspers share price moving even higher. Tencent can be bought in Hong Kong or through its own ADRs in the US. You can also buy Naspers in South Africa or via its US ADR. So up until now LSE investors have had no simple way to get Tencent exposure – and this listing of the ADR will likely pave the way for more investors, driving the Naspers price (and our overall indices) even higher.

GROUP FIVE

Avoid for now

Okay, then…

The results show that Golden Brands is technically bankrupt as current liabilities exceed current assets by almost R20m.

Golden Brands has only been listed for some 18 months and investors should avoid it.

There is never a good reason to own bankrupt companies. If management gets the balance sheet on track again one could take a look – but certainly stay away until then.

Group Five’s new board has done a strategic review of the company and decided to continue doing what generates money and stop doing things that cause a loss. I would have thought this was Business 101 and did not need a strategic review. ■ editorial@finweek.co.za *The writer owns shares in Richemont. **finweek is a publication of Media24, a subsidiary of Naspers.

finweek 30 November 2017

19

marketplace invest DIY

By Simon Brown

FUNDAMENTALS

How to manage concentration risk It is vital to ensure that you don’t have too much exposure to any one stock – if it loses value, it would spell ruin for your portfolio. But what happens if one of the stocks is a star performer? Simon Brown shares some tips on reducing your concentration risk.

c

for a diverse portfolio. oncentration risk is one of the But the problem remains: what biggest risks an active investor do we do when one of them is an faces. Sometimes it’s easy to manage, but at other times this absolute winner?

This happened to me when I first is not the case. bought Capitec. It was around 2 000c a I stress this is mostly an active share and I put it in at 10% of my active investor problem; a passive investor portfolio. Capitec was a star performer, holding an exchange-traded fund (ETF) so much so that it was soon a 50% automatically has a broad spectrum weighting of my individual stocks! One of shares across different industries, stock as half a portfolio is insane risk. geographies and to a lesser degree So how do we manage that risk? I asset classes (as property is likely to sold some Capitec and diverted all new be included). Locally, however, passive money and cash from the sales into other investors investing in the Top40 do stocks. But given the speed at which have some serious concentration risk, Capitec was rising, I was struggling to with Naspers* making up over 20% of manage the weighting and the net result the index, while Richemont** makes up is that, aside from my initial purchases another 10%. This is great when these at 2 000c and 4 000c, and then some stocks are running higher, but when they more at around R205 when African Bank turn things could get nasty. failed, I have spent much of the past This is why I prefer an equal-weighted decade selling Capitec. I’ve been selling ETF locally. The primary local ETF I own my best-performing stock, yet it is still is the CSEW40, which has the exact one of my top holdings percentage-wise. same shares as the Top40, but with a The concern is that selling winners weighting of 2.5% each – significantly is not a great idea, but we do need downweighting Naspers and Richemont. to protect our portfolio from that It does mean that this ETF has concentration risk. What if Capitec had underperformed a vanilla Top40 ETF over crashed while it constituted 50% of the past few years – but I am comfortable my portfolio? If it lost half its value, my with that. portfolio would have fallen 25%.

The point is, we love the concentration So, I have rules in place. I start with a when a stock is running hard.

10% weighting and I am happy We feel smart and of course If you only hold to allow the stock to get to a 30% are making money. But as individual stocks weighting; above that I start selling it runs, it also increases its and no ETFs, then down the position. If the holding weighting within our own is below 20%, I will buy more if it is active portfolio, which means considered cheap by my metrics we are at higher risk due to and does not go above a 20% one single share – something weighting. When the stock hits that runs against the grain stocks are the minimum for a 20%, I stop buying, and over 30% I of portfolio construction. An diverse portfolio. start selling. ideal portfolio should have The truth is that I hate selling at least 10 to 12 shares, and winners, but I need to manage the this is itself very concentrated, but I am concentration risk. ■ assuming that at least half of the money invested into the market is already in editorial@finweek.co.za ETFs, markedly reducing overall *finweek is a publication of Media24, a subsidiary of concentration risk.

Naspers.

If you only hold individual stocks and **The writer owns shares in Richemont, Capitec and no ETFs, then 20 stocks are the minimum CSEW40.

Locally, passive investors investing in the Top40 do have some serious concentration risk, with Naspers making up over 20% of the index, while Richemont makes up another 10%.

20

20

finweek 30 November 2017

www.fin24.com/finweek

FUND FOCUS

YOUR QUARTERLY REVIEW OF SA FUNDS DECEMBER 2017

THE MARKETS AND YOUR MONEY

Gallo Getty Images

Finding your way through the maze

fundfocus introduction

By Leon Kok

OPPORTUNITIES APLENTY

Celebrating another successful year

t

Times are extremely uncertain in the country at the moment. Fortunately, it’s not all doom and gloom for the investment world, if you know where to look.

23 Q&A

his is a remarkably rousing edition of FundFocus in a prevailing climate of widespread policy uncertainty ahead of us. We’re at the proverbial crossroads between inspired free market take-off and being overrun by radical political and economic populism (alias classical Marxism).

Offshore investment currently remains the preferred asset destination of most smart home investors. The weighting, however, could tilt strongly South Africa’s way if Cyril Ramaphosa’s faction of the ANC emerges triumphant in the ruling party’s upcoming leadership election.

And if you’re offshore-orientated, we provide you with a considerable amount of sound advice. Stanlib MultiMangers’ Joao Frasco points to how you should go about exposing yourself to offshore assets; Investec Asset Management’s London-based Philip Saunders provides excellent insight on how you ought to be positioned at the present stage of the investment cycle; Old Mutual’s London-based Ian Heslop reveals how his international investment team remains ahead of the game on performance globally; and PSG’s chief investment officer Adriaan Pask expounds on why select emerging markets offer strong and sustainable propositions.

Allan Gray’s Jacques Plaut firmly warns against investing in virtual currency bitcoin, in spite of the price having risen 500 times during the past five years. He declares that under no circumstances would his investment house be willing to touch it.

We’re delighted that some months ago long-time award-winning portfolio manager Errol Shear moved from Absa to Sasfin to take over the Sasfin Stable Fund from equally astute house chief investment officer Philip Bradford.

Shear gives good practical reasons why

investors should seriously consider investing in this fund.

Incidentally, three years ago Bradford was the first of the Absa luminaries to relocate to Sasfin, was followed by Shear, and they’ve now been trailed by Johan Gouws who heads up Sasfin Asset Consulting.

No less important, we profile the superb Old Mutual Stable Growth Fund, which is managed by John Orford and Alida Jordaan.

It has notched up an incredible 74.8% positive months since its inception in July 2007, with a maximum drawdown of a mere 3.9%.

This is an amazing achievement in lacklustre domestic market conditions.

Stanlib multi-manager Jennifer Henry provides an interesting analysis on how Naspers* influences portfolio returns. It now accounts for 24% of the JSE’s ShareWeighted Index (Swix) and trades at around 140 times its historic earnings.

Given its dominance on the local bourse, regardless of what you think of the stock, you’re going to significantly underperform your peers if you don’t own it, she warns.

But the underlying principle is to understand what you’re exposed to and set appropriate objectives. A great company today, Naspers could be just another company tomorrow.

Finally, I take this opportunity of saluting finweek editor Jana Marais and her editorial, advertising and administrative staff for another superb year in producing FundFocus. Likewise, thank you to our advertisers, commentators and readers for their marvellous input and contributions. It’s greatly appreciated!

May you be blessed with a splendid Festive Season and a happy and prosperous New Year. ■

And if you’re offshore-orientated, we provide you with a considerable amount of sound advice.

22

finweek 30 November 2017

CONTENTS

Leon Kok is an independent writer on public policy and investment markets. *finweek is a publication of Media24, which is a subsidiary of Naspers.

Great tidings in a volatile market

24 Prudential How to protect value in the long term

26 Stanlib Consider your goals when investing offshore

27 Stanlib How Naspers influences portfolio returns

28 Allan Gray The value of bitcoin

29 Old Mutual An excellent vehicle for long-term savings

30 Investec Asset Management Navigating a mature bull market

31 PSG Emerging markets offer opportunities

32 Coronation Fund Managers Avoid the post-retirement income gap

34 Sasfin A practical approach to cautious investing

35 Unit Trusts Economy hampers unit trust performance

36 Last Word Profiting from chaos

www.fin24.com/finweek

fundfocus Q&A

By Leon Kok

MARKET OVERVIEW

Great tidings in a volatile market

a

With tailwinds such as central bank liquidity and share buybacks being removed, what is the outlook for global markets?

significant feature of Old Mutual Global Equity Fund’s* award-winning quants team in London is that it does not forecast macro and nor does it seek to add value relative to its index from country and sector positions.

Ninety percent of its alpha comes from stock selection within sectors, and 10% from sector selection.

This has worked splendidly for it in the past and continues to do so. The fund is currently top of the log in the South African global equity sector and has held that position for the past five years. Leon Kok spoke to awardwinning Old Mutual head of global equities, Ian Heslop:

understand levels of market uncertainty; it is not doing that at the moment, just look at how volatile style returns have been to get a real understanding of uncertainty in markets. So overall we have growth in earnings supporting markets, but with tailwinds being removed in a period where valuations are high in many areas.

Ian Heslop Head of global equities at Old Mutual

What’s your cutting edge?

The key to success for us is two-fold. First, don’t try to forecast if you don’t have to. This is for the simple reason that even if you forecast a variable correctly, you still run the risk of not getting the market right.

The second point is don’t build style-concentrated portfolios given how rotational individual styles are. The past few years have been ones of huge style rotation and, as we always say, the diversified nature of our investment process has been a major benefit to the performance we have achieved. It has also been very important to have a dynamic way to adjust fund style exposures to ensure the portfolio remains correctly set even as the market changes underneath it.

How close is the S&P 500 Index to fair valuation?

I’m pleased to say I don’t have to make that call as I look to find cheap stocks even within an expensive market. Portfolio construction doesn’t try to tilt significantly away from regional exposures held in the index, where country valuation would perhaps play more of a part. However, on many metrics the US equity market is certainly not cheap. It is definitely the case where there are areas of the market that are perhaps beyond fair value due in no small part to ETF flow.

Will the global economic growth momentum be maintained in the foreseeable future?

The current economic climate globally has been supportive for global equities. We see economic growth continuing in the US, leading to robust earnings growth. Unemployment remains low and there is little sign of inflation pressure. Europe is also beginning to move in the right direction after a difficult economic period. The beginning of the end of emergency economic policy will need to be carefully navigated, but the general economic outlook remains benign.

Risks for the current global picture?

Global equities are perhaps at an inflection point as we look forward. The US Federal Reserve is signalling the likely beginning of the removal of the emergency liquidity that central banks have pumped into markets since the crisis. We have also seen a fall in share buybacks in the US, another support for the market over the last few years.

The problem is what are we to make of all these data points? We are in an environment where I would argue it is even more difficult to forecast.

Take volatility as an example. This is normally used by investors to

@finweek

finweek

finweekmagazine

With the recent 30th anniversary of the 1987 stock market crash, any chance of that being repeated in the foreseeable future?

There is always a chance that these events could be repeated.

Current valuations of equities could be classed as “not cheap” and there is a reasonably rosy view of global economic growth. As central banks move to normalise economic policy, there is a risk that sentiment changes rapidly and equity prices unwind just as quickly. This is not likely, but we can’t assert it will not happen.

How do you select stocks for your portfolio?

The process used by our global equity team can be thought of as “Diversified Alpha”, with many different styles embedded in the portfolio and the ability to tilt the portfolio away from those types of stocks unlikely to perform due to the current market environment. Thus our style exposures tend to be temporary and there to capture those stocks likely to perform given the current market environment.

The key to managing through these types of environments is to diversify your alpha sources and avoid double counting. We work hard to ensure that the components we use to pick stocks are truly different from one another to try and reduce the cyclicality of the returns achieved.

How do you track changing market environments?

As you know we don’t explicitly forecast macro variables. You could say we are far more interested in the impact of those variables, alongside everything else going on in the world, on the investors in equities. If investors are optimistic, for whatever reason, they will tend to buy certain types of stocks and avoid others.

Similarly, if the market becomes unstable, with volatility high, this will have an impact on the types of stocks bought. Rising markets have a similar impact, as do changes in dispersion patterns in markets. The key to using this information is constantly taking the temperature of the market, measuring variables that describe the market and then using those to decide when we have seen the current environment before and what the outcome was for our stock selection tools.

Do you see upside opportunity in any broad cluster of companies that you believe have been excessively punished?

The majority of our outperformance comes from picking the best stocks within an industry or sector, so we don’t tend to think in this way. Industry and sector positions within the fund are an amalgamation of investor sentiment towards that area of the market. That being said, only a small amount of our alpha comes from sector positioning. ■ *Disclaimer: Old Mutual Investment Group (Pty) Ltd is a licensed FSP. The above fund* is a registered collective investment scheme administered by Old Mutual Unit Trust Managers (RF) (Pty) Ltd. The relevant fund’s Minimum Disclosure Document is available on www.omut.co.za.

finweek 30 November 2017

23

fundfocus Prudential

By Pieter Hugo

FUND PERFORMANCE

How to protect value in the long term

i

The data shows why investors should stick to funds’ recommended investment periods.

Quarterly net flows

Percentile ranking of fund – 1 year rolling (quarterly)

INVESTMENT FLOWS FOLLOW SHORT-TERM RETURNS nvestors may be tired of hearing the same old cautionary tale to “avoid a short-term view” 0 R3bn or “ignore the market noise” when making investment decisions. Yet there is good R2bn reason why asset managers insist on repeating this principle: all the data shows that trying to 25 chase the top-performing funds by switching R1bn into them based on their short-term past performance is actually one of the best ways to destroy the long-term value of your portfolio.

50 R0 Equally damaging is selling a fund when it experiences short-term underperformance.

-R1bn Yet unfortunately, the data confirms that this destructive behaviour is strikingly prevalent 75 among South African investors.

-R2bn The accompanying graph illustrates how local investment flows are closely following the previous one-year relative performance of -R3bn 100 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4 a typical conservative balanced fund over the past 10 years. It highlights that the fund’s short2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ‘17 ‘05 2006 term returns have driven net investment flows Fund net flows Popular multi-asset fund, 1-year rolling return ranking in the subsequent quarters.

SOURCE: Morningstar, Association for Savings and Investment South Africa (ASISA) Starting from 2006 we can see how the fund’s strong one-year relative performance performance over most periods: those investors means that these funds returned nearly 70% in 2005/06 (ranking high in the top quartile who stayed in it for the entire 10-year period more than what the average investor in those against its peer funds, in the top band of would have received a return of 12.6% per same funds actually enjoyed over the period 0%-25%) attracted positive net inflows in annum (after fees), making it one of the – a powerful example of how investors are 2006/07, but these shrank and turned negative highest-ranked funds in its category. destroying long-term value by reacting to shortin 2008 after its 2007 performance fell off.

Based on the continual flows into and term performance and switching in and out of This effect is even more dramatic in out of the fund, the average investor actually different funds. the period from 2009 to 2011: we see its experienced a return of 10.1% per annum (after It’s important for investors to remember very strong 2008/09 performance attract fees), which is 2.5% per annum less than the that fund returns are cyclical (as depicted in the large inflows in 2009, only to reverse to net fund return. While this differential may not graph), since they reflect not only the financial outflows in 2010/11 when the fund’s relative seem like a lot, investors who stuck with the and economic cycles of their underlying assets, performance dropped off sharply into the fund during the downturns ended with an but also the style of their fund managers. bottom quartile of its category. This pattern astounding 53% more than the average client Fund managers like Prudential have clearly continues through the present, with big who switched in and out again over time. perfected their investment processes over many swings in one-year performance soon mirrored Unit trust industries around the world years in order to overcome these cycles and by investment flows. consistently report this negative differential deliver to each fund’s investment objective over Importantly, the data also between the return experienced its specified investment horizon. Investment Investors who stuck with the confirms that the investment by investors, termed the “moneyviews that are implemented in funds take fund during the downturns flows do not follow longerweighted” return, and the fund (or time to pay off, and this can, and often does, ended with an astounding term three- or five-year fund “time-weighted”) return, largely contribute to short-term underperformance performance, despite its strong caused by investor switching before they actually do deliver. This is why most relative returns over these periods behaviour. This is beyond the funds have recommended investment periods and out to 10 years (although impact of fees, which are already that investors should stick to. this is not captured in the graph). more than the average client taken into account.

While it can be uncomfortable staying in who switched in and out Yet these longer periods would In SA, a sample of 10 of the an underperforming fund, choosing a fund again over time. be more appropriate timeframes largest multi-asset unit trust manager with a strong long-term track record on which to base investment decisions, as they funds (representing R438bn in assets or 21% can give investors more confidence, and a would coincide with the investment horizon of total industry assets) had an average return financial adviser can also help ensure you stay targeted by the fund’s manager. differential of -3.5% per annum over more than the course. ■ In fact, the fund delivered excellent 16 years since their respective inceptions. This Pieter Hugo is the managing director of Prudential Unit Trusts.

53%

24

finweek 30 November 2017

www.fin24.com/finweek

fundfocus Stanlib

By Joao Frasco

GOALS-BASED INVESTING

Consider your goals when investing offshore

w

Rather than measuring performance purely based on returns or benchmarks, investors should also consider investment specific goals. The same principle applies for offshore investments. hen you decide how to invest, you should start with your end goal in mind in order to ensure that you are not distracted by short-term noise, such as a weakening or strengthening exchange rate or another Cabinet reshuffle. Goals-based investing, where an investor identifies specific goals and focuses their investments on achieving them, has shifted thinking to considering liabilities, not just assets, when investing.

Investors traditionally have put too much focus on relative performance to the wrong reference points, focusing on indices or peers as their benchmarks. We are finally seeing a concerted shift by financial advisers and service providers to focus on measuring performance relative to investors’ goals.

Many investors now start their investment process with their goals: how much money do I need for my goal of retiring comfortably, buying a car, or sending my child to university? Liabilities represent the cash flows of the goals you are aiming to achieve. Although this may be the start of the investment process, the financial planning process must start long before you get to this point, and investors would be well served by seeking professional financial planning advice.

Let’s consider an example. If you plan to retire offshore, investing 100% in South Africa means you will be exposed to the exchange rate at retirement when you need to transfer your money out of the country. Clearly, you have no idea what the exchange rate will be in the future, so even if you knew how much you would need in the foreign currency, you wouldn’t know how much you would need in rand.

Currency-matching your liabilities means ensuring that if you are going to incur retirement living expenses in a foreign currency, you account for that with investments in that currency, or at least with exposure to that currency. Investing in euros if you are planning to retire in Europe may be more sensible than having your offshore exposure in US dollars or all locally in rand.

For most South Africans, retiring in SA is a more likely goal and you know your living expenses will be rand denominated. But this doesn’t

mean you don’t need offshore exposure. Consider what a retirement basket may look like many years into the future.

You may think that the goods and services you consume on a daily, weekly and monthly basis are all proudly South African and not influenced by exchange rates. But with oil priced in US dollars, which affects the price of petrol and diesel, almost everything in your basket has an element of currency exposure.

According to SA’s Agricultural Business Chamber, fuel makes up around 11% of production costs for grain farmers. The latest petrol increase pushes prices to their highest levels in three years, affecting not only the production costs of farmers but also the transport of agriculture. Eighty percent of maize is transported by road.

The next important consideration is how and when to invest offshore. Rand-cost averaging involves investing regularly and building up exposure over time, minimising the impact of price volatility or, as it’s referred to when investing offshore, exchange rate volatility. Ideally, one would prefer to exchange money into foreign currency when the rand is strong and to bring it back to SA when the exchange rate is weaker. However, it is almost impossible to time this correctly on a consistent basis.

Rand-cost averaging gives you a disciplined and methodical approach to achieving offshore exposure, without the worry of getting the timing “right”.

Once you have decided to invest offshore, you should simply move money regularly and consistently, and follow broadly the same approach when disinvesting.

Successful investing is often about discipline and patience, and having the control to not panic or change your investment strategy based on market volatility.

Goals-based investing is about aligning your investments with your life. Performance is measured by the progress you have made towards achieving your stated goal. And risk is viewed as failure to reach your goals. This shift from relative market performance – where the focus is on indices and peers that have no relationship to the goals you are trying to achieve – to goals-based performance can help you stay “true” to your investment objectives and help you achieve financial freedom. ■

Shutterstock

Currency-matching your liabilities means ensuring that if you are going to incur retirement living expenses in a foreign currency, you account for that with investments in that currency, or at least with exposure to that currency.

26

finweek 30 November 2017

Joao Frasco is chief investment officer at Stanlib Multi-Manager.

www.fin24.com/finweek

fundfocus Stanlib

By Jennifer Henry

BENCHMARK RISK

How Naspers influences portfolio returns

a

Internet and media giant Naspers makes up almost a quarter of the JSE’s Share-Weighted Index. What does this mean for those wanting to beat the market? s a multi-manager, I have seen the effect of the rising Naspers* share price on fund managers’ investment returns.

Some managers were early in and early out, especially when the share price hit a high and managers took profits. Those same managers subsequently bought back into the stock at even higher levels.

Many managers look for what they deem to be “value” in the share. Value shares are those that can be bought cheaper than what a manager thinks its true value can grow to. Many would consider Naspers expensive because it trades at around 140 times its historic earnings.

To compare, the JSE’s Share-Weighted Index (Swix) trades at about 21 times.

Naspers now accounts for 24% of the Swix and the question on many managers’ minds is what happens if the share price continues to go up. When Naspers’s share goes up by 70%, which it has done over the past year, a portfolio with zero exposure lags in performance by almost 16.8%. What this means is that the fund manager is starting with a 16.8% handicap versus the benchmark. Even a brilliant fund manager would find it difficult to offset that disadvantage.

As investors have become more aware of how the market is performing, they are comparing managers to market benchmarks like the Swix. Even contrarian managers or “unconstrained” managers are being influenced by Naspers’s dominance. A material number of contrarian managers who weren’t invested in Naspers before now have exposure to the stock. They call this managing “benchmark risk”. In other words, increasing exposure to a stock because of its dominance in a benchmark, not necessarily because of the stock’s business case.

As fund performance surveys have become more widely available, investors now also compare managers to their peers. Given the dominance of Naspers in South African equities, regardless of what you think of the stock, if you don’t own Naspers today you could significantly underperform your peers.

Unfortunately, sometimes the comparisons

@finweek

finweek

finweekmagazine

NASPERS Cents

400 000

52-week range: R1 924.63 - R4 142.99 Price/earnings ratio: 163.15 1-year total return: 89.5% Market capitalisation: R1.809tr Earnings per share: $1.79 Dividend yield: 0.14% Average volume over 30 days: 1 131 966

300 000 200 000 100 000

SOURCE: IRESS

0 2013

2014

2015

2016

require complex analysis and can be misleading for uninformed investors.

But even fund managers who love the stock have had their nerves tested. Would you like to have 24% of your portfolio exposed to just one share? As one manager said to me a couple of years ago: “If I hid the name of the share and showed you that much exposure to one company, would you consider it prudent portfolio construction for your clients?”

Stock concentration is not something new. The Swix was introduced in 2003 because of a dominance of dual-listed shares on the JSE All Share Index (Alsi). A similar scenario played out where managers were “underperforming” the benchmark due to the dominance of shares such as BHP and Anglo American that were primarily listed on an international exchange, with only a small percentage of shares available in the local market.

To address Naspers’s dominance in the Swix, a number of managers are now shifting their benchmark to the Capped Swix, which was introduced in November 2016. It rebalances every quarter to cap stocks at 10% of the index, creating less single-stock concentration.

Naspers is an interesting investment case because it reminds us why it’s important to follow your own investment objectives.

2017

If your objective is to beat the market, then you should be cognisant of the weight of Naspers in the benchmark. A healthy allocation to Naspers is needed otherwise you are taking the view that Naspers is likely to underperform the index. But it is prudent to remind investors that while Naspers has delivered excellent returns, it is subject to market sentiment like any other share. It can go down!

Investors who set their investment objectives against a goal such as beating inflation by a certain margin to achieve their income, or growth expectations, often don’t need exposure to Naspers, or any other specific share, to achieve their desired outcome.

Naspers as an investment case on its own brings other dimensions to a portfolio.

Through its investment in Tencent, it allows South African investors to gain exposure to the vibrant global technology sector. Its offshore businesses, which are largely based in Eastern Europe and Australasia, mean that its earnings are better off when the rand weakens.

Today it is Naspers dominating South African equities, tomorrow it may be another company. The underlying principle is to understand your own investment requirements and set appropriate objectives.

That should be where investors focus. ■

Many would consider Naspers expensive because it trades at around 140 times its historic earnings.

Jennifer Henry is a portfolio manager at Stanlib Multi-Manager. *finweek is a publication of Media24, a subsidiary of Naspers.

finweek 30 November 2017

27

fundfocus Allan Gray

CRYPTOCURRENCIES

The value of bitcoin The total market value of all bitcoins is $123bn, which is more than the value of Richemont and triple that of Anglo American. Jacques Plaut discusses how Allan Gray applies its valuation techniques to virtual currencies, and bitcoin’s suitability as an investment.

i

n many ways the virtual currency bitcoin is like electronic Monopoly money, says Jacques Plaut, portfolio manager at Allan Gray.

“Except the price is up 300 times in the past five years.”

At the time of writing you could exchange one bitcoin for $7 400.

“Does this mean a bitcoin has intrinsic value of $7 400? In one sense, yes: any asset is worth what you can sell it for. In another sense, no: market prices change – especially in the case of bitcoin – and at times bear no resemblance to intrinsic value.”

It could be argued that bitcoin has zero intrinsic value, says Plaut, because ones and zeros on a computer, in isolation, are of no use to anyone. “But by the same argument a dollar also has zero intrinsic value. A dollar is only valuable as long as someone will exchange it for some real-world good or service.”

(1980), Japanese assets (1990) and internet stocks (2000).

Plaut says there is always some underlying justification, or “story” – at least at the start. Such as the scarcity of bulbs, the Florida climate, gold’s virtue as an inflation hedge, the wisdom of Japanese policymakers, or the internet’s ability to change the world.

“The problem comes in when people stop connecting the price of the asset to any underlying economic reality. If you believe the story, no price is too high.”

In the case of virtual currencies, the “story” capturing the public imagination is blockchain technology – a way of enabling the digital transfer of money between two parties without an intermediary. “The idea has lots of potential, and virtual currency is only one of many possible applications. But this does not make bitcoin worth Jacques Plaut anything, just like the existence of the internet was not Portfolio manager Is bitcoin an asset, or a currency? enough to make Pets.com a valuable asset,” he notes. at Allan Gray “The usual methods for valuing an asset are not readily “I don’t know whether bitcoin deserves to be classed applicable to bitcoin. We usually look at cash flow, historical prices, with episodes like Tulip mania. I see some similarities with previous supply/demand analysis and relative scarcity of assets to determine bubbles, but all the signs are not yet there. For example, the abuse of their value,” explains Plaut. debt in some form is a standard feature of any bubble. I’m not aware Many believe that bitcoin will eventually that people are using it to buy bitcoin, yet!”

Plaut cites three more factors to consider: become the world’s reserve currency, saying that 1. Bitcoin is not a friend of the environment. the price of bitcoin is headed to several hundred “According to one estimate, the total amount thousand dollars. But Plaut is not convinced. of electricity consumed by processing bitcoin “The underlying technology is somewhat transactions is enough to power 1.6m US clunky and there is lots of competition from households. Bitcoin uses more electricity than other virtual currencies,” he says. “Also, people Lebanon or Cuba.” tend to value stability in their reserve currencies.

2. Some blame central banks for the rise of One that is rapidly increasing in value will cause virtual currencies. Because the US Federal people to hoard it; one that is decreasing will Reserve is keeping rates low and printing cause people to spend.” money, it is said that investors are putting their Furthermore, he adds the current system faith in other assets. “I’m sceptical of this explanation. Bubbles can of central banks managing the stability of the currency by altering the happen in any interest rate environment. When the price of gold peaked supply of money, has worked quite well for a hundred years. in 1980, US interest rates were 14%.”

“Governments will presumably have a say in all this, and might not 3. The idea of an alternative currency is not new. Before Lincoln signed approve. It was illegal for US citizens to own gold from 1933 until 1975.” the National Banking Act of 1863, the US had hundreds of currencies, Currencies, Plaut explains, are normally valued by looking at price issued by individual banks. They were often backed, to varying extents, history, quality and track record of the issuing central bank, amount of by gold. Those that weren’t, tended to end in collapse. foreign reserves, the fundamentals of the sovereign, and the Big Mac Index. These are not easily applied to bitcoin.

“The problem comes in when people stop connecting the price of the asset to any underlying economic reality.

If you believe the story, no price is too high.”

Plaut believes that behavioural psychology could give us insight into bitcoin, and refers to the frantic speculation in the price of tulips in Holland in 1637. There have been many similar episodes, involving, for example, Florida real estate (1926), gold 28

finweek 30 November 2017

“Regulations do not currently allow this for most of our funds. But regulations aside, we are always looking for good ways to preserve capital and earn returns for our clients. We do not think bitcoin is an instrument which will enable us to do this; indeed, we see material risk of capital loss,” concludes Plaut. ■ www.fin24.com/finweek

Shutterstock

Would Allan Gray own bitcoin for clients?

Tulips

fundfocus Old Mutual

By Leon Kok

CAPITAL PRESERVATION

An excellent vehicle for long-term savings

p

The fund, which is currently overweight global equities, aims not to lose capital over any running 18-month period.

olicy uncertainty and low economic growth may or may not continue to plague SA’s investment markets for some time to come. Conversely, global equity markets could continue to rise gradually. And it is often difficult to make sense of these and other contradictory trends.

This is where a multi-asset low-risk portfolio such as the Old Mutual Stable Growth Fund** comes to the fore, especially for those seeking to outperform inflation while preserving capital and earning a modest income.

It takes away the hassle of trying to make sense of having to decide how much to invest in equities, fixed interest, cash, property or offshore.

Managed by John Orford and Alida Jordaan, the Old Mutual Stable Growth Fund has notched up 74.8% positive months since its inception in July 2007, with a maximum drawdown of a mere 3.9%.

The fund’s mandate permits it to invest in all major asset classes, with a maximum 40% in equities and 25% offshore.

Derivatives may also be used for protection against serious currency and other moves.

It’s designed, says Orford, to have a strong capital preservation focus and is ideal for those close to or already in retirement, for instance, who need to grow their wealth in real terms but also can’t afford to lose capital over a relatively short period of time. The fund endeavours not to lose capital over any running 18-month period.

The fund, in fact, has stacked up well against its overall performance target of CPI + 2% to 3% net of fees. The annualised return as at 31 October has been 8.4% since inception, 8.8% over five years, and 7.9% over three years.

This compares to annualised inflation of 6.1% since the fund’s inception, 5.5% over five years and 5.3% over three years. In other words, the fund has consistently delivered or exceeded its real return target.

Importantly the fund has also outperformed cash over all meaningful periods including

one, three and five years and since inception, underscoring the importance of being invested in a diversified portfolio that has exposure to growth and offshore assets. The highest rolling 12-month return has been 18.6%, the average 8.4%, and the lowest -5.3%.

Among the biggest worries currently facing many investors is the near-term outlook for South Africa, Orford concedes. For local assets clearly much will depend on the outcome of the upcoming ANC elective conference. There is considerable uncertainty on policy direction and where the political economy is going.

“This makes the situation more challenging to navigate, though often problems can also provide opportunity,” he points out. “It follows, for instance, that there could be significant gains for local assets if the ANC leadership outcome is good.

Opportunities will arise in due course.”

If not, the fund is well hedged to provide reasonable returns over the next two to three years.

It’s currently overweight in SA cash, money market and corporate credit at a weight of 30.9%. The fund is overweight international equities (18.3%) and underweight SA equities (15.5%), although it also has exposure to South African property (8.6%).

The fund is underweight government bonds with 11.8% exposure to nominal government bonds and 5% to inflation-linked bonds.

Orford says that the fund is overweight global equities, which offer the best riskadjusted returns across the major asset classes.

“The global economy is enjoying a period of synchronised economic growth which is resulting in a recovery in global corporate earnings. This should continue into next year, underpinning global equity performance.

“Domestically, we favour cash and property over bonds, which in our view need to offer a higher risk premium given the medium-term risks facing local bonds due to the deterioration in the government’s fiscal position,” Orford says.

The biggest local equity holding is Naspers*, which offers “unique global growth”,

“There could be significant gains for local assets if the ANC leadership outcome is good.”

@finweek

finweek

finweekmagazine

John Orford Fund manager of the Old Mutual Stable Growth Fund

Alida Jordaan Fund manager of the Old Mutual Stable Growth Fund

at 1.8% of the fund. Other equity stakes include Anglo American, Glencore, Sasol, Old Mutual, British American Tobacco and Barclays Group Africa.

MTN was added to the portfolio during the past quarter as Orford and Jordaan gained confidence in the new management team’s ability to affect a turnaround in the company’s core markets of Nigeria and SA. The 30.9% cash component has actually been a plus for the fund in the relatively flat equity environment during the past two or three years, Orford points out.

Further, the cash is working hard to earn its keep in the fund, with most of it invested in money-market instruments offering yields over 8% and high-quality corporate credit, which offers a decent yield pick-up over cash without taking significant duration or interest rate risk.

The fund is underweight local equities but has a significant holding in local property. While the sector is struggling under difficult domestic operating conditions, yields on local property companies are attractive and they should offer some growth over the next few years.

“Overall, the portfolio is well-diversified with cash available to invest when attractive investment opportunities arise,” says Orford.

“Over the years this investment style has worked very well for us.” ■ *finweek is a publication of Media24, a subsidiary of Naspers. **Disclaimer: Old Mutual Investment Group (Pty) Ltd is a licensed FSP. The above fund is a registered collective investment scheme administered by Old Mutual Unit Trust Managers (RF) (Pty) Ltd. The relevant fund’s Minimum Disclosure Document is available on www.omut.co.za.

finweek 30 November 2017

29

fundfocus Investec Asset Management

By Philip Saunders

MARKET CYCLES

Navigating a mature bull market

h

The current bull market has been unusually extended, raising concerns over valuations of the US equity market in particular.

So what should investors do at this point in the market cycle? aving been fearful about macro risks throughout the current market cycle, global investors’ concerns have shifted squarely to valuations. We hear a continuing refrain about excessive valuations of the US equity market – as if other equity markets would be immune from a serious sell-off in US equities – and talk of bond bubbles.

Shocks and recessions come in as the primary Interestingly, history suggests that valuation is rarely triggers the primary cause of equity bear markets. In fact, only one since the 1920s – the crash of 1987 – can be so ascribed.

Shocks and recessions come in as the primary triggers 25% and 50% of the time respectively, whereas tighter credit conditions, at more than two-thirds, are the real bull and market killers.

So are valuations a problem at the moment? In an equity context it depends to some extent on the bias of the “eye of the beholder”. Valuations are clearly elevated, of the time respectively, but are they worryingly so? Longer-term measures, whereas tighter credit which include the inflationary 1970s, would have us conditions, at more than believe so, but others, which take greater account of two-thirds, are the real bull persistently low inflation and interest rates, suggest market killers. more moderate overvaluation.

What is undeniable is that this has been an unusual and unusually extended cycle. Most of it has been driven by declining interest rates but since the correction of 2015/16, earnings dynamics and momentum have led the charge, which is much more typical of late-cycle market environments.

Fundamental factors have improved significantly and the growth environment is ostensibly supportive. Global growth is synchronised and self-reinforcing, which in turn has boosted top-line revenue growth to levels that have generally been absent in this cycle, which has been more about cost reduction.

Earnings growth has been and is likely to remain, for now, robust and broad-based. The US Federal Reserve has announced that it will start to shrink its balance sheet and other key players such as the European Central Bank (ECB) are initiating tapering.

However, these developments, coupled with an economic recovery, don’t yet seem to have constrained liquidity.

High-yield credit spreads, normally the best candidate for the proverbial canary in the coal mine, have continued to narrow and the dollar has weakened. Money supply growth is broadly supportive and inflation is notable in its absence, much to the surprise of the central bankers whose attempts to increase its level have largely been frustrated.

So what should investors do at this point in the market cycle? First, it doesn’t seem to be a good environment, in our

Shutterstock

25% 50%

30

finweek 30 November 2017

view, to start to get carried away and chase returns aggressively.

We believe it is probably wise to be progressively counterbalancing exposure to growth assets with selective defensive positions. In our view it is still right to keep “skin in the game”. The best periods for returns in growth assets are at the beginning of a new cycle or towards the end of an old one.

In our view, investors could consider the following actions: ■ Improve portfolio liquidity. Now is not the time to be sacrificing liquidity.

■ Take advantage of broad opportunity sets to generate returns that don’t depend so much on the directional behaviour of the primary asset class.

■ Resist the siren song of cheap, broad-based passive exposure and be increasingly selective in terms of the exposures within asset classes that are likely to show more resilience if times get tougher.

Positioning of the Investec Global Strategic Managed Fund Bearing the above in mind, we do believe that some caution is warranted, especially as the current ageing bull market cycle grows ever longer. As a result, while we remain optimistic for the prospects for growth assets, given ongoing fundamental improvement, the positioning of our flagship global multi-asset fund, the Investec Global Strategic Managed Fund, is somewhat more cautious than it was a year ago, as we build in defensive positions.

A long position in US 30-year Treasuries is an example of a recently introduced defensive position. A yield of approximately 3.2% at the time of the trade was attractive relative to our neutral rate forecast of 2% to 2.5%. We consider that this position will likely provide a positive return in the event of an equity market decline. We have also progressively raised the liquidity of the assets in the fund by having no small-cap exposure and selling out of high-yield credit exposure.

We do still, however, see opportunities for return such as our exposure to Japanese equities. We consider that Japanese companies are cheap relative to their global peers, that the end of a long deleveraging cycle is resulting in much better Japanese economic performance, and that they have been under-owned by overseas investors. Our exposure has been specifically focused on companies with strong or improving corporate governance, which are either committed to improving total shareholder returns through higher dividends and buybacks or have a strong restructuring story. ■ Philip Saunders is head of multi-asset growth at Investec Asset Management.

www.fin24.com/finweek

fundfocus PSG

ACTIVE MANAGEMENT

Emerging markets offer opportunities

a

Active managers can truly perform if they focus on emerging markets. How can investors capitalise on this?

PSG WEALTH GLOBAL CREATOR FUND OF FUNDS: ctive management offers a PERFORMANCE SINCE INCEPTION strong and sustainable value Time period: 2012/11/07 to 2017/09/30 $160 proposition in emerging markets, $150 PSG Wealth Global Creator FoF ($159.60) believes Adriaan Pask, chief GIFS Global Large-Cap Blend Equity ($146.80) $140 investment officer at PSG Wealth. $130 $120 “Emerging markets can potentially generate $110 higher returns than their developed-market Adriaan Pask $100 Chief investment officer counterparts, but these markets also offer $95 at PSG Wealth unique risks and portfolios need to be carefully Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Sep 2017 SOURCE: Morningstar Direct managed to control these risks,” he says.

Because emerging-market companies invested offshore (including a 5% allocation to philosophy, with its strong emphasis on in-depth are not as well researched as their developedAfrican assets). The biggest part of retirement research, provides an advantage to investors market counterparts, active global managers/ fund assets therefore must remain invested when it comes to exploring the opportunities mandates have an opportunity to outperform. domestically. This limit remains relevant despite offered by emerging markets. This is especially The key to success in emerging markets, the fact that some JSE-listed SA companies also the case since emerging-markets assets are far however, is to focus on quality research and offer indirect emerging market exposure. less researched than the perennial favourites like careful risk management to help unlock market For many investors, retirement funds account Amazon, Apple, Johnson & Johnson, Microsoft opportunities. for a substantial portion of their total portfolios or IBM. This means that mispricing imbalances Pask points out that investors need to and therefore they should consider this limitation can arise more frequently and may offer a larger consider their portfolio construction holistically on their overall asset allocation. Local investors window of opportunity for active managers. to ensure optimal diversification. Emerging should bear these restrictions in mind and should With this in mind, active managers increase their markets enjoy structural advantages (like not simply shy away from including additional likelihood of successfully taking advantage of growing populations and modernising emerging market and global exposure in the mispricing in these markets. economies) that mean they are likely to discretionary component of their portfolios.

Investors wanting to unlock the experience higher economic growth and thus “I would argue that, given the asset opportunities should partner with experts who offer potentially better returns. Exposure to allocation constraints on retirement funds, understand how to actively manage the tradesome companies listed on the JSE already notably from Regulation 28 of the Pension off between risks and returns. The PSG Wealth offers some emerging market Funds Act, generally investors Global Creator Fund of Funds, for example, Individuals can invest R1m offshore annually without tax exposure (outside of South should consider including offers exposure to a selection of high-quality clearance, and take an additional more foreign assets in their Africa) as these have moved active managers that can allocate capital in a beyond our borders to take discretionary portfolios – so that regionally unconstrained manner to suitable advantage of other fast-growing the overall asset allocation of opportunities globally. This fund mandate allows markets or sectors (for example their portfolios is appropriately for actively managed exposure to emerging Naspers*, British American structured given market markets as the opportunities arise, and to offshore per year, once they have obtained the necessary tax opportunities,” Pask states.

Tobacco, Anglo American and allocate more to developing markets if the clearance from the South African MTN, to name a few).

He however cautions that managers believe these offer better prospects.

Revenue Service.

In addition, South African emerging markets have unique The graph shows how the fund’s approach investors are not limited to SA only and characteristics that mean portfolio risks should – and PSG’s philosophy – has paid off. The foreign exchange controls have been relaxed be carefully controlled. Corporate governance and PSG Wealth Global Creator Fund of Funds has considerably in recent years, making it easier to transparency remain significant challenges, as do outperformed its benchmark, the GIFS Global hold offshore diversified portfolios. Individuals market volatility and liquidity constraints.

Large-Cap Blend Equity, comfortably since can invest R1m offshore annually without “Careful portfolio construction, driven by inception (until 30 September 2017). tax clearance, and take an additional R10m quality research, can help to mitigate the risks of “We believe including suitable emergingoffshore per year, once they have obtained investing in emerging markets,” Pask continues, market exposure as part of an overall balanced the necessary tax clearance from the South “provided you also actively manage portfolios as portfolio will offer active managers the African Revenue Service (Sars). new risks emerge.” Active management for him ability to potentially sweeten returns for their However, investors should consider that means remaining well-informed, gaining insights, investors – but in doing so they will need to foreign exchange controls impact retirement and using these to unlock opportunities for carefully balance potential risks with potential funds’ asset allocation. Retirement funds are investors on a continuous basis. returns,” Pask concludes. ■ *finweek is a publication of Media24, a subsidiary of Naspers. limited to a maximum of 30% of their assets He believes that PSG Wealth’s research

R10m

@finweek

finweek

finweekmagazine

finweek 30 November 2017

31

fundfocus Coronation Fund Managers

By Pieter Koekemoer

RETIREMENT

Avoid the post-retirement income gap

iÂ

Investors in income and growth funds often have unrealistic expectations of the returns they'll receive on their investments. What should investors in such funds keep in mind to ensure a comfortable retirement?

nvestors in income and growth funds may be dissatisfied with their recent returns due to a confluence of factors.

First, until recently, the markets were going nowhere.

Equities, bonds and cash have barely beaten inflation over the three years to end September. Further, with the three asset classes having delivered similar returns (roughly 7% per annum) over this period, investors were not compensated for taking on additional risk.

This has resulted in a subdued performance over recent years, which may have been experienced as particularly painful due to an additional factor: unrealistic expectations. Notwithstanding forewarnings from ourselves and other investment managers, many investors did not expect the sharp slowdown in market returns over the past three years. In fact, a recent client survey showed that the return expectations for these funds remain on the high side.

The survey found that the average annual return expectation for income and growth funds of 11.6% is almost similar to the 12.4% expected for long-term growth funds – an unrealistic assumption given that income and growth funds take on significantly less risk. In our view,

a more realistic return expectation for a higher-equity income and growth fund (such as our Coronation Capital Plus fund) is CPI plus 4% and CPI plus 3% for a lowerequity income and growth fund (such as our Balanced Defensive fund). Unfortunately, in the recent past this was a near-impossible target to achieve, given the mediocre returns delivered by the underlying building blocks.

In reaction, many frustrated investors across the industry have moved their savings away from income and growth funds that have exposure to shares (equities). An estimated R20bn has been withdrawn over the past year, and a lot of the money has ended up in more conservative options, including managed income funds and cash deposits.

After all, why take on more risk by investing in shares if you can get the same level of return from lower-risk options? Recent performance provides part of the answer: markets rally when you least expect it.

At the time of writing, the 7% average return from equities over three years mentioned earlier has morphed into 10.4% per annum, while cash and bonds are still at 7% per annum.

Conservative investors need some exposure to growth

Conservative investors need some exposure to growth assets to be able to maintain their spending power through retirement.

Key considerations for income and growth investors If you are invested in income and growth funds, there are some vital issues you need to keep in mind as you near retirement.

Ensure the drawdown rate is appropriate Studies have shown that if you can get through the first 10 years of retirement with your real capital intact, you will have a high probability of maintaining your standard of living in the second half of retirement.

The table on the right plots hypothetical return expectations versus drawdown rates. The highlighted numbers in the middle show the number of years you have left before you will start eating away at your retirement capital (assuming inflation of 6%).

As we highlighted earlier, many retirees are expecting returns in the region of 12.4%, and drawing an income of 5% to 7.5%, believing their capital will comfortably last for a full retirement. However, they may not be aware just how sensitive their income security is to a change in expected return of as little as 2.5%, reducing the sustainability of their retirement

32

finweek 30 November 2017

income dramatically.

The prudent recommendation remains for initial drawdown rates to be set in line with the rates quoted for CPI-linked underwritten annuities, which is currently in the region of 4% to 5% for those starting to draw an income in their early 60s.

You need enough exposure to risk assets Investors requiring an income over a long time horizon need enough risk asset exposure to achieve reasonable real growth over time, but not so much that a near-term market correction impairs your capital base. Coronation Capital Plus (with a 70% growth asset limit) and Coronation Balanced Defensive (with a 50% growth asset limit) are managed in a manner that is consistent with this requirement.

Beware your investment horizon Your investment time horizon is key, especially given the short-term-focused world in which we find

ourselves. Even post-retirement, life expectancy continues to increase, meaning most retirees need to plan for the possibility of spending three decades or even longer in retirement. Your key objective must be to sustain your standard of living over a full retirement. The most appropriate investment solution in most cases will be one that is long-term in nature.

The following considerations may prove useful when considering the difficult trade-offs you need to make in retirement: 1. Have reasonable and prudent return expectations: Target a real return consistent with an appropriate risk budget and do not anchor off very favourable historic returns.

2. Manage inflation risk: While inflation is currently relatively low, it remains a real risk given the uncertainties inherent in a small, open and fragile economy on the southern tip of Africa. You need to ensure that you have healthy allocations to growth and international assets to give you the best chance

www.fin24.com/finweek

fundfocus Coronation Fund Managers

ACKNOWLEDGE THE EXPECTATIONS GAP 12%

Client expectation:* 11.6%

10%

Realistic expectation: 9.1% (CPI + 4) 50:50 model portfolio:** 7.7%

8%

assets to be able to maintain their spending power through retirement. Ultimately, we strongly believe that the key risk that more conservative income and growth investors need to avoid – counterintuitively – is not taking on enough risk.

(See box.)

Also, we see better days ahead for shares. We are more upbeat about domestic equities than we were three years ago when the market was expensive. There are many South African businesses for which the expected returns going forward look better than they have for quite some time. Most of that has to do with the fact that the base is so low.

If our macroeconomic outlook improves just a little bit, and companies are able to improve their top line only by a small margin, one can easily expect to see a decent improvement in earnings.

Further, investors should avoid falling into the trap of chasing returns, as is clear from the adjacent graph.

Investors tend to commit capital when returns have been good and withdraw after they experienced a tougher time.

We do not believe this to be an appropriate investment strategy for long-term investors. Ultimately, one requires the patience to look beyond any short-term pain and avoid locking in any losses by selling low and buying high. ■

Expectation gap: 2.5%

6%

Market enviroment: 1.4%

4%

CPI: 5.1% 2% 0

Income and growth SOURCE: Coronation

*Average return expectation for existing investors in our income and growth funds who participated in a survey conducted during June and July 2017. **50:50 model portfolio used as proxy for income and growth fund, with asset allocation set at 35% local equity, 10% global equity, 5% local property, 35% local bonds and 5% local cash.

DO NOT FALL INTO THE TRAP OF CHASING RETURNS

25% 20% 15% 1%0 5%

Pieter Koekemoer is head of personal investments at Coronation Fund Managers.

Rolling 12-month return of Coronation Balanced Defensive

■ Inflows

Jul ‘17

Feb ‘17

Aug ‘16

Feb ‘16

Aug ‘15

Feb ‘15

Aug ‘14

Feb ‘14

Aug ‘13

Feb ‘13

Aug ‘12

Aug ‘11

Feb ‘12

Feb ‘11

Aug ‘10

Feb ‘10

Aug ‘09

Feb ‘09

Aug ‘08

Feb ‘08

0

SOURCE: Coronation

Income rate and return analysis – years before your income will start to reduce if inflation is 6% NOMINAL NET INVESTMENT RETURN P.A.

Selected income rate per annum

of achieving inflation-beating returns in the long run.

In addition, by investing with a manager that can deliver alpha over the long term, you may obtain a sweetener over and above the market return.

3. Manage the sequence of returns risk: A big market drawdown can have a material impact on your portfolio and your standard of living post-retirement.

Managing sequence of returns risk is thus important.

Don’t be lulled into misplaced complacency by the low volatility of the post-crisis years into underestimating the importance of downside protection.

4. Manage longevity risk: The likelihood of living longer must be taken into account when drawing up your retirement plan. Insuring longevity risk, moderating initial drawdown rates, or working a little longer are all more appropriate responses to managing this risk than naïvely setting unrealistic return expectations from your investment portfolio. ■

2.5% 5.0% 7.5% 10%

2.5% 21

5.0% 30

Many retirees are drawing 5% to 7.5% and expecting returns of 12%.

6

8

Note how sensitive their income security is to a 2.5% decline in expected return!

7.5% 50+ 19

10% 50+ 33

12.5% 50+ 50+

15% 50+ 50+

10 6

13 7

22 9

50+ 20

12.5%

2

3

3

4

5

7

15%

1

1

2

2

2

3

17.5%

1

1

1

1

1

1

SOURCE: Asisa Standard on Living Annuities with additional calculations by Coronation

@finweek

finweek

finweekmagazine

finweek 30 November 2017

33

fundfocus Sasfin

By Leon Kok

CAUTION ADVISED

A practical approach to cautious investing

a

Investors should tread carefully in uncertain times. One of Sasfin’s offerings is particularly suited for those requiring a certain level of income, retirees, or those nearing retirement. t the cusp of what may or may not be a better political disposition for South Africa in the foreseeable future, investment markets remain mired in uncertainty.

The problem is not new. On the one hand, the JSE All Share Index (Alsi) shot through an all-time high in November. On the other hand, domestic business and consumer confidence are at considerable lows.

And given this backdrop, the question arises of what cautious investors should do.

Key, says Sasfin Asset Managers’ Errol Shear, is not to do anything silly, keep your investments simple, don’t place all your eggs in one basket, avoid losing money over any 12-month period, keep up with inflation, and ensure that your costs are not too high.

This is all encapsulated in the Sasfin Stable Fund, he believes, having recently taken it over from Sasfin’s head of investments Philip Bradford.

Shear, of course, is a luminary in his own right.

With 30 years’ investment experience and as a winner of several industry awards, he was previously with Liberty Asset Management headed by the iconic Roy McAlpine, followed by several years at Stanlib, and then moved to Absa Investments for a decade.

At Stanlib and Absa he managed the absolute return portfolios and at Liberty he was responsible for the active life fund portfolios as well as certain segregated funds.

The Sasfin Stable Fund is particularly appropriate for retirees, individuals approaching retirement, or investors requiring a certain level of income, Shear submits. Further, it lends itself to being incorporated in investment vehicles such as living annuities or preservation funds.

The fund’s portfolio value is R220m, the minimum lump sum investment R25 000, the minimum monthly investment R1 000, and the annual performance fee 80 basis points. The cumulative return since inception (March 2013) has been 39.6% and the three year-return 26.3%.

“What we aim to do is produce solid, reasonable returns over time,” Shear emphasises. “We avoid doing anything risky or unorthodox. Our formal objective is to achieve real inflation-beating returns by delivering relatively high income with a measure of capital growth over the medium to long term.

“The portfolio targets a real rate of return (after inflation) of 4% a year over any three-year rolling period, while preserving capital over any 12-month rolling period. It’s also designed to produce higher returns on average than one would get on call accounts, which, in

34

finweek 30 November 2017

any event, are taxed.

“One way of ensuring high returns is the minimisation of costs,” he points out. “I’d much rather stick to a simple low-cost value-for-money proposition with a diversified portfolio, without performance fees, and with some protection on the downside. And that’s what the Sasfin Stable Fund is all about.”

The portfolio is restricted to maximum 40% equities, has a high level of fixed interest investments, comprises about 10% listed property and providing good yields, has about 15% offshore exposure, and has a sprinkling of inflation-linked assets.

Nominal bond exposure is upwards of 30% with attractive yields of between 8% and 11%, and in sharp contrast to the same in developed countries, says Shear. Interestingly, in spite of SA’s political adversities, foreigners bought a net R69.5bn of South African bonds in the year to end September 2017.

The country’s current 10-year bond yield at 9.4% is more attractive than most of its emerging-market peers, including Russia, India and Indonesia, which offer yields of 7.7%, 7% and 6.6% respectively.

Expectation versus outcome Bradford also made several focal points in our meeting with him, saying that private expectation is invariably different to outcome. “It’s very easy to get caught up in something that is performing very well, such as bitcoin, which is the ultimate kiss of death. For me, it’s important to really get the client to understand what he or she is getting into.

“Most people who run balanced funds in SA, for instance, are very strong equity people, stock pickers, whilst I would suggest that the more rational way of managing asset allocation is to first determine the best lower-risk investments that can be found to avoid unnecessary risk.

“If, however, it’s evident that they’re unlikely to generate adequate returns, then one needs to ensure that the alternatives more than compensate for the risk.

This is the way that a lower-risk or cautious fund needs to be managed,” he says.

Highly respected in broad asset management circles, Bradford has been with Sasfin for the past three years.

Previously he was with Investec Bank as a bond and interest trader as well an as adviser to ultra-high-networth clients, and at Absa Wealth as chief investment officer. He is a former president of the CFA Society SA and a member of the FTSE/JSE Index Advisory Committee. ■

Errol Shear Fund manager at Sasfin Asset Managers

“The portfolio targets a real rate of return (after inflation) of

4%

a year over any three-year rolling period, while preserving capital over any 12-month rolling period.”

Philip Bradford Head of investments at Sasfin Asset Managers

www.fin24.com/finweek

fondsfokus effektetrusts Deur Leon Kok

BELEGGING

Ekonomie knel effektetrustprestasie

o

Hoe vaar die verskillende effektetrusts wat tot Suid-Afrikaners se beskikking is?

ns is hoopvol dat die volgende twee of drie jaar baie beter vir Suid-Afrikaanse beleggers sal wees, veral diegene wie se aftreebesparings grootliks in effektetrusts belê is.

Tans is baie mense dalk geneig om te glo dat met die JSE wat nuwe hoogtepunte bereik, hulle heelwat beter daaraan toe is as wat hulle drie of vyf jaar gelede was. Nie so nie, blyk uit ’n ontleding van die effektetrustbedryf se driejaarvertoning. In reële terme (wanneer inflasie in ag geneem word) is talle beleggers slegter daaraan toe as wat hulle etlike jare gelede was.

Daar is nie te ontkom aan die laegroeistrik waarin ons ons bevind nie, ten minste nie voordat ’n verligte politieke bestel en politieke sekerheid bereik is nie, gesteun deur ’n dramatiese verbetering in huishoudelike en internasionale sakevertroue. Onderstaande is ’n “regstaan-berekenaar” vir effektetrustbeleggers om te meet waar hulle tans staan.

WÊRELD- ALGEMENE AANDELE Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 13,51% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Absa Global Feeder Fund, 15% Vooruitsig: Sien bladsy 23.

Fondse waarvan ons hou: Old Mutual Global Equity, Allan Gray-Orbis Global Equity Feeder, Stanlib Global Equity, Coronation Global Opportunity Equity, Investec Global Franchise en PSG Wealth Global Creator.

WÊRELD-MULTI-BATE AANPASBAAR Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 10,33% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: MI-Plan Global Macro, 14,81% Vooruitsig: Goed. Die wêreldekonomie het vanjaar aansienlik verstewig en in die tweede kwartaal teen ’n stewige 3,8% geannualiseerd gegroei. Opwaartse momentum op kort termyn sal klaarblyklik voortduur.

Fondse waarvan ons hou: PSG Global Flexible, Marriott International Feeder en Foord Feeder.

Vooruitsig: Langtermynvooruitsigte is besonder aantreklik betreffende ontwikkelde markte, gegewe die OM’e se aantreklike demografiese dinamika. Boonop verhandel OM-ekwiteite teen ’n diskonto van sowat 30% tot ontwikkelde markte op ’n prys-tot-opbrengs- sowel as ‘n prys-tot-boek-grondslag.

Fondse waarvan ons hou: Old Mutual Global EM, Coronation Global EM Flexible en Stanlib EM.

SA ALGEMENE AANDELE Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 7,19% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Anchor BCI Equity-A, 10,19% Vooruitsig: ’n Markhergradering is hoogs onwaarskynlik, gegewe die huidige swak fiskale situasie, laer ekonomiese groei, onderprestasie van ondernemings in staatsbesit en die impak van moontlike kredietafgraderings.

Fondse waarvan ons hou: PSG Equity, Investec Equity, Allan Gray Equity, Coronation Equity, Prudential Equity, Prudential Dividend Maximiser en Old Mutual Managed Alpha Equity.

SA GROOTKAPITALISASIE Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 3% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Absa Large Cap, 4,65% Vooruitsig: Dieselfde as die vorige kategorie.

Fondse waarvan ons hou: Die meeste fondse in hierdie kategorie is Top-40- Indeksvolmagfondse.

SA MEDIUM- EN KLEINKAPITALISASIE Top-7 gemiddelde 3-jaar- geannualiseerde opbrengs: 2,1 % No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Nedgroup Entrepreneur, 6,61% Vooruitsig: Dieselfde as die vorige kategorie.

Fondse waarvan ons hou: Nedcap Entrepreneur, Old Mutual Mid & Small, Coronation Smaller Companies en Investec Emerging Companies.

ALGEMENE ONTWIKKELINGSMARK(OM) FONDSE

SA hoë ekwiteit (gebalanseerde fonds)

Top-3 gemiddelde 3-jaar- geannualiseerde opbrengs: 3,7% No 1 gegradeerde fonds en vergelykbare nominale opbrengs: Old Mutual Global OM, 7,48%

Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 7,99% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Centaur BCI Balanced-A, 9,17%

@finweek

finweek

finweekmagazine

Vooruitsig: Dieselfde as die vorige kategorie.

Fondse waarvan ons hou: Investec Managed, Investec Opportunity, PSG Balanced, Allan Gray Balanced, Old Mutual Balanced A en Coronation Balanced Plus.

SA INKOMSTE Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 8,6% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Fairtree Flexible Income Plus Prescient, 9,66% Vooruitsig: Kan dalk beter as aandele wees vir die volgende jaar of wat.

Fondse waarvan ons hou: Fairtree Flexible Income Prescient, Coronation Strategic Income, Efficient BCI Fixed Income, PSG Diversified Income en Investec Diversified Income.

SA GENOTEERDE EIENDOM Top-10 gemiddelde 3-jaar- geannualiseerde opbrengs: 16,2% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: Absa Equity Property, 24,87% Vooruitsig: Kan waarskynlik SA ekwiteite uitpresteer, spesifiek omdat plaaslike eiendomsmaatskappye wêreldwyd uitbrei en internasionale eiendomsmaatskappye tweeledige noterings verkies.

Fondse waarvan ons hou: Absa Equity Property, Catalyst Property Equity, Investec Property Equity, Stanlib Property Income en Prudential Enhanced SA Tracker.

SA HULPBRONFONDSE Top-9 gemiddelde 3-jaar- geannualiseerde opbrengs: -5,7% No. 1 gegradeerde fonds en vergelykbare nominale opbrengs: NewFunds S&P GIVI SA, 2,77% Vooruitsig: Mynwese gaan waarskynlik aanhou met sy wipwaentjierit. Dit is ’n landskap wat wissel van berigte oor hoër internasionale kommoditeitspryse en sterker balansstate tot die Chinese vraag vir kommoditeite wat verminder kan word. Plaaslike mynwese word ook benadeel deur ’n ongunstige regulatoriese omgewing.

Fondse waarvan ons hou: Old Mutual Mining & Resources, Coronation Resources en Investec Commodity. ■ * Alle berekeninge is gedoen op geannualiseerde opbrengste, met gebruik van Profile Data-syfers tot 30 Junie 2017.

finweek 30 November 2017

35

fundfocus last word

By Leon Kok

OUTLOOK

Profiting from chaos

s

Where will South Africa head after the ANC’s elective conference in December? Will it see further economic decline? And what can investors do to safeguard investments, no matter the outcome?

iboniso Nxumalo, joint head of Old Mutual Investment Group’s Global Emerging Markets boutique, put forth a good argument in October for continued investment in select emergingmarket (EM) funds.

The essence of his message was that while several leading EMs have been shaken by political uncertainty, corruption, money laundering, racketeering and major downgrades in recent years, they’ve also offered excellent pockets of value.

I don’t disagree with him.

Nxumalo specifically cited Brazil and noted that EMs Siboniso Nxumalo Joint head of Old Mutual have generally outperformed developed markets over the Investment Group’s Global longer term.

Emerging Markets boutique One related concern I have, however, is a potentially dangerous supposition that if several EMs have made dramatic comebacks, South Africa ought to be able to do the same. I’m not so sure. In fact, I’ll believe it when, In Brazil’s recent populist experience, economic growth like Brazil and South Korea, SA’s rogue leaders and their reversed from cohorts have been tried, prosecuted and received their just desserts.

Nor do I necessarily believe that impeachment at the top would solve our problems. On the contrary, it could usher in a period of continued instability that in 2010 to a contraction of will make them worse. The crisis facing us is a political one, not necessarily a failure of our institutions.

The South African Reserve Bank and judiciary, for instance, have been superb. last year.

In any other level-headed parliamentary democracy, the president would have been brought down overwhelmingly by a no-confidence debate, or would have resigned, as Iceland’s prime minister honourably did last year. Yet our president has gritted his teeth and consolidated his grip on power.

My concern furthermore is the toxic fallout that could follow after 2017, masked as “radical transformation”. In Brazil’s recent populist experience, economic growth reversed from 7.5% in 2010 to a contraction of 3.6% last year. It was long one of the fastest-growing EM economies in the world.

Cyril Ramaphosa Deputy President In spite of all its positives, Brazil is still finding it extremely hard to recover and expects a growth rate of a mere 0.5% this year.

The optimists anticipate that if Cyril Ramaphosa takes the reins of power, capitalism will take hold once more and the JSE will take off. That certainly happened in Brazil’s case, where inflation is falling, interest rates have been lowered and financial conditions have eased. R100 invested in the Brazil bovespa in January last year would be worth about R244 today.

Nkosazana Dlamini Zuma But if, say, the Zuma faction’s preferred candidate, Former AU chair Nkosazana Dlamini Zuma, takes control of the ANC, the outcome may be very different. Not only might she be seen

Gallo/Getty Images

7.5% 3.6%

36

finweek 30 November 2017

to be carrying much of her ex-husband’s baggage, but business and consumer confidence levels are likely to recede further, real private investment will continue to drop, and we could be plunged into a serious recession again.

Large numbers of SA’s international clients will hold back on making investment decisions until they are certain of dramatic change for the good. And whilst fiscal adjustment is the mother of reforms, higher taxes will not necessarily be the answer to fiscal slippage.

Knowing both Brazil and Argentina reasonably well, my worst fear is that we could fall into an Argentinian populism (Peronist) type trap. Latin America’s second-biggest economy, it convulsed for almost two decades under what were described as non-sensical policies, gross economic mismanagement and serious corruption.

Two years ago centrist businessman Mauricio Macri was elected president, but he inherited an impossible situation.

Argentina faced serious stagflation, 40% inflation and major hits on industrial output, exports and consumer confidence.

No other country in Latin America, save Venezuela, faced worse inflation.

Macri’s focus naturally has been to restore his country’s economy to some semblance of prudence, including reform of fiscal, tax, labour and capital market laws, with the aim of making it more competitive.

The bottom line for unit trust investors domestically is clearly to await the outcome of the upcoming ANC conference, and then make their broad pickings. If the outcome is favourable, invest across the board in SA Inc. If it appears to be disaster territory, opt for the best available offshore funds, which indeed could include excellent EM funds such as the Coronation Global EM Flexible Fund and the Old Mutual Global EM Fund. Both would admirably serve as proxies for a better SA. They’re managed in such a way as to deliver the best possible returns over the long term. An investment horizon of 10 years or more is ideal. The Coronation Fund has delivered an annualised 15.9% and the Old Mutual Fund an annualised 15.8% over the last five years (as at 31 October).

The country allocations of both are similar, clearly based on the MSCI Emerging Market Index. In Coronation’s case, leading countries are China (18.78%), SA (18.33%), India (11.79%), Brazil (10.8%), and Russia (9.94%). It’s had 57.6% positive months since inception; the maximum annual return has been 49.7%, and the lowest annual return -37.5%.

Principal holdings in both portfolios include home favourite Naspers*, Brazil’s Kroton and Russia’s Magnit.

Kroton is one of the world’s largest education companies with more than 1.9m students and revenue of $419m in the third quarter. Magnit is Russia’s biggest food retailer with 2 495 locations and quarterly revenue of $4.5bn. ■ *finweek is a publication of Media24, a subsidiary of Naspers.

www.fin24.com/finweek

marketplace investment

By Schalk Louw

STOCKS

Retailers could have investors smiling again

i

The biggest companies in the retail sector – Mr Price, Massmart, TFG, Truworths and Woolworths – are trading at an average of 25% below their intrinsic valuations.

As from 1996, the general retail sector was trading at an average of 97% of the price-to-earnings ratio (P/E) of the JSE. It is currently trading at 72% of the JSE’s P/E. These levels are quite interesting, because we’ve only seen them on three previous occasions since 1996: the 1998 correction, the great unrest in GENERAL RETAILERS’ P/E RELATIVE TO JSE Mean = 0.969138

1996

1998

2000

2002

Standard deviation = 0.26099

2004

2006

2008

General retailers’ P/E relative to Alsi

@finweek

finweek

2. Intrinsic values are looking very attractive Most of the top five biggest retailers traded at a premium to their intrinsic value until 2015, but these valuations have since turned the other way, with these companies now trading at an average of 25% below their intrinsic valuations.

3. Return on equity Despite the fact that the past 12 months certainly haven’t been kind to these companies, I do believe that they remain good-quality ventures. Their average return on equity amounts to 27%, which will definitely train a magnifying glass on any further possible declines in share price movements.

Despite the fact that the past 12 months certainly haven’t been kind to these companies, I do believe that they remain goodquality ventures.

1. Valuations seem very reasonable

138% 130% 120% 110% 100% 90% 80% 70% 60% 50%

2001 and the great correction of 2008. But it’s the expected forecasts that make this even more interesting. By only looking at the five largest companies in this sector (Mr Price, Massmart, TFG, Truworths and Woolworths), you will see that analysts’ one-year expected P/E currently trades at 13 times compared to the JSE’s 21 times – roughly 35% cheaper than the average since 1996.

finweekmagazine

2010

2012

2014

2016

SOURCE: IRESS & PSG Old Oak

4. Dividend yield There will always be a strong attraction towards high dividend yields, and at an average dividend yield of 4.7%, the bell is definitely ringing. I will be keeping a close eye on this figure for the next 12 to 18 months to make sure that they will be able to uphold these dividend payments, and if they do, it will be further proof that these are quality companies.

5. Even analysts remain optimistic With Bloomberg’s 12-month consensus forecasts for the JSE currently trading at 5.5% expected growth, these five companies seem to have somewhat better prospects with forecasts indicating 9.5% expected growth.

Analysts are less optimistic about Mr Price, indicating negative expected growth, and if we exclude Mr Price from these figures, the average consensus growth for Massmart, TFG, Truworths and Woolworths amounts to an expected average of 14% growth for the next 12 months.

All things considered, the retail sector definitely doesn’t come without its risks. The South African economy is still struggling and the solution isn’t necessarily a quick fix. I do think, however, that this sector’s prices were negatively influenced by the challenging economic environment and I believe that investors may slowly but surely start to add these shares to their portfolio shopping trolleys. My personal preference is Woolworths, with TFG as a possible second choice. ■ editorial@finweek.co.za Schalk Louw is a portfolio manager at PSG Wealth.

finweek 30 November 2017

37

Image: Shutterstock

recently cautioned investors against constantly swimming upstream in the investment world (Analysts predict more upside for the JSE, 16 October, see http://bit.ly/2zSDraP). It always makes me think of the joke about the man who was driving on the N1 highway when he suddenly got a call from his wife on his cellphone, warning him that she just heard on the radio that a motorist was driving in the wrong direction on the same highway, causing havoc with oncoming traffic. He impatiently snapped that it wasn’t just one motorist, but hundreds of them driving in the wrong direction.

I don’t want to contradict myself in this column, but sometimes you have to swim upstream to find value. In this case, I’m referring to the general retail sector listed on the JSE. I doubt whether you’ll find a more “upstream” view than what’s reflected in this sector, because while the FTSE/JSE All Share Index (Alsi) grew by more than 20% over the past 12 months (until 31 October), the retail sector managed to decrease by 4%.

Before I continue, however, I want to point out that there are quite a few good reasons why this sector is under severe pressure, ranging from the strong rise in the number of online retailers to the immense pressure placed on our local economy for several years. While the retail sector’s returns declined, the fact remains that not unlike with the resources sector roughly two years ago, such negativity is often exaggerated.

This week I would like to look at a few reasons why this negativity may be exaggerated.

marketplace technical study

By Lucas de Lange

JSE

Fat profits take Kumba to the top

m

Since its bear market low in January 2016, it’s risen by 1 150%.

r Market, as Warren Buffett refers to share markets in imitation of Benjamin Graham, the father of value investment, is an erratic, moody individual, which is certainly being confirmed by Kumba Iron Ore. Not only is it the strongest share among the top 100 large-cap shares on the JSE, but its strong runs since its low in January 2016 mean that it has increased by some 1 150% in under two years. This is music to the ears of its biggest shareholder, Anglo American.

Kumba’s feat of being at the top of the list of the strongest shares came about despite comments from analysts that iron ore prices will come under increasing pressure owing to new production reaching the market.

That these reports do in fact matter is apparent from the following consensus opinion among analysts: 11 sell, one hold and one buy.

Whether it is time to lock in profits, fully or at least partially, is a question that is widely debated. And the commentators are in agreement on one thing and that is that the answer lies in China – something that’s difficult to determine given the Chinese penchant for keeping the cards close to their chest.

In the meantime, it is agreed that large commodity producers are making money hand over fist with some of their products. This is probably the true reason for Kumba’s strength. That some of the other groups are also doing well, is apparent from the fact that six out of the top 10 shares on the list are resources companies.

Brait, which is currently the weakest among the weak, reflects the market’s disillusionment with the problems it experienced since it took over the New Look womenswear chain in the UK. New Look is a strong brand and is regarded as the largest fashion house in the UK for women under the age of 35. But in its latest report for the 26 weeks to September, the company admits that it’s lost its way. Among

38

finweek 30 November 2017

other things, owing to: ■ Too much emphasis on fashion, while at the same time it’s moved too far away from value.

■ Its image is too young and too edgy.

■ The group was too slow in adopting some fashion trends.

■ There has been a lack of flexibility and speed, while its offering has had too many options. At the same time, it was too slow in getting rid of the previous season’s stock.

Management has mentioned that all the problems have been tackled with zest and there are analysts who believe that should it succeed, Brait would be regarded as a strong turnaround candidate given that it has declined by about 75% since reaching its high of R174 in December 2015.

Of concern are the warnings in the report that market conditions in the UK, where most of its shops operate – 592 out of 872 – are difficult. It’s hoping to eventually establish a strong chain in China.

Among the shares that have broken through, Old Mutual is probably the most interesting. The graph of its price/ volume trend (PVT), which indicates the percentage change in the price multiplied by the volume, shows an upward trend. It’s an indication of accumulation of the share in the midst of reports on the progress it’s making in splitting the group into four companies.

Barclays Africa caught the eye with a strong increase after an extended period of being one of the dogs in the banking sector. Its underperformance since reaching its high of R203.71 in January 2015 is apparent from the fact that it currently stands at some 32% lower.

Food and beverage group AVI remains a consistent winner, and its gradual upward trend since the beginning of 2015 continues, supported by a positive PVT graph. ■ editorial@finweek.co.za

STRONGEST SHARES*

COMPANY KUMBA IRON ORE NASPERS-N** ASSORE EXXARO RESOURCES ASTRAL FOODS ANGLO AMERICAN CAPITEC DISCOVERY IMPERIAL ARM GLENCORE SOUTH32 DIS-CHEM RESILIENT MR PRICE AMPLATS FORTRESS-B BARLOWORLD SANLAM BHP CLICKS SAPPI SPAR CORONATION SASOL PSG RICHEMONT GRINDROD THARISA STANDARD BANK KAP GOLD FIELDS SHOPRITE MTN GROUP STEINHOFF BAT FIRSTRAND NORTHAM MERAFE PAN AFRICAN BIDVEST ASPEN RMB HOLDINGS PPC M&R HOLDINGS VUKILE REINET AVI SANTAM OLD MUTUAL LIBERTY HOLDINGS ATTACQ TFG WBHO AB INBEV SUPER GROUP BARCLAYS AFRICA FORTRESS-A TIGER BRANDS

% ABOVE 200-DAY EXPONENTIAL MA 42.3 36.2 28.0 26.2 24.6 21.4 17.7 17.3 15.6 15.5 15.3 14.6 13.7 12.5 12.4 12.3 11.8 11.0 10.3 10.0 9.7 9.5 9.5 9.2 8.8 8.8 8.0 7.1 7.0 6.8 6.8 6.8 6.6 6.5 6.3 6.3 6.2 6.2 6.1 5.7 5.3 4.2 4.2 3.3 3.3 3.2 3.2 3.0 2.8 2.3 2.0 2.0 1.8 1.5 1.5 0.9 0.9 0.7 0.3

WEAKEST SHARES*

% BELOW 200-DAY EXPONENTIAL MA BRAIT -50.2 LONMIN -30.3 TELKOM -23.2 ARCELORMITTAL SA -22.9 FAMOUS BRANDS -21.8 ASCENDIS -18.4 RAUBEX -17.1 SIBANYE -17.1 OCEANA -15.6 MPACT -15.1 WOOLIES -13.9 PIONEER FOODS -13.6 TSOGO SUN -13.5 NETCARE -12.9 RHODES -12.5 LIFE HEALTHCARE -11.7 NAMPAK -11.3 HARMONY -9.9 SA CORPORATE -9.6 ADCOCK INGRAM -9.0 MMI HOLDINGS -8.6 CHOPPIES -7.4 TONGAAT HULETT -7.3 REBOSIS -7.2 HYPROP -7.0 IMPLATS -6.6 MASSMART -6.2 TRUWORTHS -5.6 RBPLAT -5.2 VODACOM -5.0 INVESTEC PLC -4.5 REMGRO -4.2 MONDI LTD -3.8 MONDI PLC -3.7 EMIRA -3.6 ANGLOGOLD ASHANTI -3.6 BIDCORP -3.5 DRDGOLD -3.4 NEDBANK -2.6 CAPCO -2.3 TRANSACTION CAPITAL -2.1 REDEFINE -2.1 PICK N PAY -1.8 GROWTHPOINT -1.8 RCL FOODS -1.8 RMI HOLDINGS -0.7 COMPANY

BREAKING THROUGH*

COMPANY AVI SANTAM OLD MUTUAL TFG WBHO BARCLAYS AFRICA

% ABOVE 200-DAY EXPONENTIAL MA 3.0 2.8 2.3 1.8 1.5 0.9

*Based on the 100 biggest market caps

Lucas de Lange is a former editor of finweek and the author of two books on investment. **finweek is a publication of Media24, a subsidiary of Naspers.

www.fin24.com/finweek

marketplace invest DIY

By Simon Brown

FUNDAMENTALS

Rights issues: Putting investors in a tricky position

t

When a company issues more shares, those who already own some can either buy more or do nothing.

Neither option may be appealing, but how should investors respond?

aste Holdings is doing another rights issue, this Most often smaller investors don’t really concern time to raise R398m by way of new shares at 90c themselves with this dilution, but it is real. The bottom each. This equates to some 442m new Taste shares line is that any future dividend will be a quarter of what while there are currently just over 459m shares in you expected. If you opted to not take up your rights, you issue. In other words, massive dilution if you don’t follow could have sold them (though many priced below the your rights. current share price had no value), and this would have This is also the company’s fifth netted some income, reducing your initial Let’s assume you never partook rights issue in as many years. It raised R3m investment. But not by a lot. in any of the rights issues that R226m in late 2015, issuing 75m The alternative would have been to followed. You’d still have the shares at 300c a share. There was also support each of the rights issues as per your 1m shares, but after this latest the September 2014 issue that raised allocation of new shares, but that would have rights issue there will now be around 935m shares in total.

R180m, with 60m shares also placed required you investing another R4m or so.

Your holding now only represents at 300c each, R95m in April 2015 with Now, your holding in the company would still 0.1% of the company, and your 31m shares at 305c each and finally, be around 0.4%, but you’d have had to more investment is worth around earlier this year it raised R120m by way than double the initial cost of your investment.

R800 000 as I write. Your initial of 80m new shares at 150c each.

So, an investor is between a rock and a holding in the company has reduced by I want to use Taste as an example hard place: either you pay up or you get less. of how rights issues increase the Neither is great, but then it boils down to the number of shares in issue and as such why of a rights issue. put shareholders in the position of I’ve had two rights issues in recent years either having to add more money into on shares I hold. Woolworths* raised money from 0.4% to 0.1%. the investment by taking up their for its David Jones deal, which in hindrights, or seeing themselves diluted as sight has been a disaster of a transaction. I shareholders of the company. followed my rights and did not get diluted, If we go back to mid-2014, but the current share price is below the before any of these rights issues, take-up price for the rights issue and Taste would have had some the business is struggling.

245m shares in issue. If you The other was issued by were a large investor and Discovery* a few years ago. bought, say, 1m shares at Here I again paid up to follow 300c each, you’d have my rights. The share price has owned some 0.4% of finally started moving and I the company, while the am well in the money. market capitalisation So perhaps the lesson would have been is simple. If the rights issue around R735m. is to “save” the company as Now let’s assume we’re seeing with Taste, it is you never partook in any often best left alone and to of the rights issues that rather take the dilution (or, even followed. You’d still have the better, consider exiting the share).

1m shares, but after this latest But if it is to grow a solid and strong rights issue there will now be around company, maybe it’s worth adding to the 935m shares in total. Your holding now investment, but that is still not without risk, only represents 0.1% of the company, and your as the Woolworths example demonstrates. investment is worth around R800 000 as I write. Your The bottom line is that you shouldn’t just shrug off a initial holding in the company has reduced by 75% from rights issue; it has an impact, even for a smaller investor. ■ 0.4% to 0.1% and as such you have fewer rights over editorial@finweek.co.za profits and dividends. *The writer owns shares in Woolworths and Discovery.

Shutterstock

75%

@finweek

finweek

finweekmagazine

finweek 30 November 2017

39

marketplace pro pick

By Shaun Murison

REMGRO

Taking advantage of a highly diversified offering

i

If diversification is what you’re after, Remgro might be a good option. Its holdings operate in a variety of sectors, from healthcare to insurance and consumer products.

f you are looking for a diversified portfolio with exposure to the financial, banking, consumer product, insurance, industrial, infrastructure, media and sport sectors, then Remgro might be of interest to you.

Remgro’s listed investment portfolio includes stakes in Mediclinic International, Rand Merchant Insurance Holdings (RMI), Rand Merchant Bank Holdings (RMBH), FirstRand, Distell, RCL Foods and Grindrod.

Healthcare

Banking Investment holdings include a 28.2% interest in RMBH and a 3.9% interest in FirstRand, making up around 23% of the group’s NAV. RMBH’s main asset is a 34.1% interest in FirstRand, and its performance is therefore primarily related to that of FirstRand.

RMBH also holds a 27.5% interest in Atterbury Property Holdings, a 34.1% interest in Propertuity Development, and a 40% interest in Genesis Properties, although these investments only contribute to about 1% of headline earnings for the company.

In the past financial year, FirstRand and RMBH performed well in an uncertain economic climate. The banks have proven to be a stable and growing (albeit more modestly of late) contributor to Remgro’s earnings.

Healthcare makes up the largest section of the Remgro portfolio, at around 29% of the group’s intrinsic net asset value (NAV).

Mediclinic provided the largest negative contribution to Remgro’s NAV in the last financial year, as Mediclinic’s market value declined more than 40%. This was due to one-off costs relating to the Abu DhabiInsurance based Al Noor Hospitals takeover and Remgro’s exposure to the insurance sector reverse listing, difficulties with its Middle is its 29.9% holding in RMI, which makes up East healthcare integrations, Healthcare makes up the largest roughly 12% of the company’s part of the Remgro portfolio, and regulatory setbacks in NAV. The underlying listed at around Switzerland and the UAE. investments of RMI include These factors are relevant, Discovery (25.1% interest) but it does appear as if worstand MMI Holdings (25.7%). case scenarios have been priced The unlisted investments into the share, perhaps leaving of the group’s intrinsic net asset include OUTsurance (88.5%), it undervalued. Management value (NAV). Mediclinic provided Hastings (29.9%), RMI the largest negative contribution Investment Managers (100%), remains confident about the to Remgro’s NAV in the last long-term growth opportunities AlphaCode and its first two financial year. in the Middle East. next-generation investments, The Mediclinic International healthcare Merchant Capital (25.1%) and Entersekt. operations now see about 72% of revenue, Headline earnings from continuing and around 68% of earnings before interest, operations for RMI grew at 16.4% in the 2017 tax, debt and amortisation, from outside of financial year with standout performances from Africa, suggesting a rand hedge defence. The Discovery (normalised earnings +8.7%) and healthcare sector also provides a defensive OUTsurance (normalised earnings +25.7%). sectoral play to an investment portfolio.

Mediclinic made an offer to acquire the Consumer products remaining roughly 70% it didn’t already The consumer products investment holdings own of UK private hospital group, Spire account for around 21% of the group’s Healthcare. At a 29% premium to a severely NAV and include listed food and beverage depressed Spire share price, the offer was counters RCL Foods and Distell, and an rejected. Speculation is that Mediclinic will unlisted equity holding of Unilever. This make another higher offer soon. Should the department has been a negative contributor acquisition manifest, it would add about 1% to to earnings and NAV in the year to June 2% to Mediclinic’s earnings.

2017. RCL Foods has seen poultry imports

29%

40

finweek 30 November 2017

adversely affecting earnings, while sugar and milling have gained over the year. Distell earnings have been flat to marginally lower, while Unilever earnings have been negatively impacted by restructuring costs.

Remgro has also announced the sale of its 25.75% stake in Unilever SA back to Unilever in exchange for R4.9bn in cash and Unilever’s Spread business, which appears to provide a logic fit to the foods business. The R4.9bn could free up further cash for investment (or return to shareholders?).

Infrastructure Infrastructure investments include Grindrod, SEACOM and Community Investment Venture (CIV). While Grindrod and SEACOM have been negative contributors to earnings for this portion of the portfolio, CIV has been strong and in turn aided a positive earnings contribution overall for Remgro.

CIV, whose major investment is Dark Fibre Africa, has seen its contribution to Remgro’s headline earnings increase a massive 72%, to R110m.

There could be a decent value unlock in the near future from Grindrod, should the freight and shipping divisions be separately listed as has been proposed.

Investment case The diversity of sectors and companies, both public and private, that Remgro provides is attractive. It exposes market participants to defensive and rand-hedging attributes, while being cash generative and holding pockets of potential value yet to be unlocked.

The share currently trades on a forward price-to-earnings ratio of 13 times, which is significantly cheaper than the Top40 Index (around 21 times).

The more material figure when valuing investment holding companies is the discount to NAV, which for Remgro is currently around 20%, larger than the usual historic discount of 15% to NAV. A cherry on top for investors would be the 2.4% dividend yield. ■ editorial@finweek.co.za Shaun Murison is a senior market analyst at IG.

www.fin24.com/finweek

cover story stock tips

Small mall l stocks,

By Marcia Klein

big potential bi t

Just because a company has a small market cap doesn’t mean investors should avoid it. While small- and mid-cap companies may be less liquid, there are a number of stocks that investors should consider beyond the JSE’s Top40.

i

nvestors have lost their appetite for small– there are plenty that do. But in general, and mid-cap shares as the rand takes a small- and mid-cap shares are more aligned battering, South Africa’s economic and to the South African economy. political outlook seems increasingly bleak “There has been a significant rotation out and the big rand hedge stocks recover. of South African stocks and small-cap and But there are investment opportunities (less so) mid-cap stocks have felt the brunt, so beyond the JSE’s Top40. valuations are favourable,” explains McLachlan.

The Top40 shares on the JSE make up If SA’s political and economic situation roughly 80% of its total market cap, but they gets worse, the fact that a share may be are just 40 of the roughly 400 stocks listed cheap may not result in it being a good on the JSE, says Keith McLachlan, fund investment, and the market is pricing in the manager of the Alpha Wealth Prime Small & risk of this outcome.

Mid Cap Fund.

If SA recovers, locally focused shares will Small- and mid-cap companies make do best, partly because they are linked to up a huge proportion of the number the economy but also because they have of listed companies, so by only been marked down to such low investing in the Top40, “there is valuation levels. “So if you are The Top40 shares on the a large part of the market you willing to swallow some risk, this is JSE make up roughly are ignoring, and you may have not a bad place to selectively pick a concentrated and lopsided stocks,” he says. portfolio in the Top40 space”.

Many small- and mid-cap Investors should be looking companies have also spread of its total market cap, but they are beyond the Top40 but there their wings offshore. “Ten to 20 just 40 of the roughly 400 stocks are some important things they years ago, it was a rarity to find a listed on the JSE. should take into account. small-cap company with foreign First, small- and mid-cap shares are a lot exposure, but now a good percentage less liquid than the Top40 shares. “You have have gone offshore or have some exposure entry and exit risks in terms of building your offshore,” says McLachlan. “But most are investment and exiting your investment, and still weighted towards SA Inc.” you may get caught short,” warns McLachlan.

Second, many small- and mid-cap Tough economy companies are more locally focused than Peter Takaendesa, portfolio manager at their larger peers, which are to a large extent Mergence Investment Managers, says rand hedges. “Not to say that smaller investors in small- and mid-cap stocks companies don’t go offshore or into the rest must keep in mind that given the economic of Africa and have rand-hedge capabilities backdrop, the near-term outlook might

Keith McLachlan Fund manager of the Alpha Wealth Prime Small & Mid Cap Fund

80%

@finweek

finweek

finweekmagazine

Peter Takaendesa Portfolio manager at Mergence Investment Managers

finweek 30 November 2017

41

cover story stock tips

Wayne McCurrie Senior portfolio manager at Ashburton Investments

DATATEC

8 000 7 000 6 000 5 000 4 000 2013

2014

2015

2016

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2017 R42.51 - R64.99 22.85% R12.06bn -$0.09 1.06% 571 874 SOURCE: IRESS

GRINDROD

3 000 2 500 2 000 1 500 1 000 500 2013

2014

2015

2016

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2017 R10.25 - R15.75 10.56% R10.53bn -R0.28 1 168 836 SOURCE: IRESS

42

finweek 30 November 2017

Anthony Clark Analyst at Vunani Securities

remain bleak.

Small-cap companies also don’t tend to be large brands that can sustain a big shock in the economy because they do not have substantial offshore earnings.

Takaendesa suggests investors look for stocks that have specific actions, developments and events on the horizon that unlock or add value.

Small and mid cap should not be terms that, in themselves, make your investment decision. Ashburton Investments' senior portfolio manager Wayne McCurrie says: “It is incorrect to say the size of the company determines what the share price does – and investors must be cautious to make decisions based on size.”

But investors should be aware that largecap companies do, however, have some advantages as they have strong balance sheets and are well-diversified. Smaller companies have advantages too and there is an opportunity to pick up an investment that has been somewhat ignored.

Anthony Clark, an analyst at Vunani Securities who specialises in small- and mid-cap companies, says that within the constraints of operating in SA, there are always areas of opportunity depending on the nature of the company. Investments in smaller companies in sectors like manufacturing and mining may have lost investors money this year as external conditions translated into pressure on revenue and earnings. Some companies in the food sector, on the other hand, have benefitted from a high maize output, which led to a dramatic drop in input costs.

“Looking at the current underlying economy, it is difficult for anyone to believe the domestic economy will improve over the next 12 to 18 months – companies in the industrial space will find it tough,” Clark says.

Some promising small- and mid-cap companies that have been selected by analysts and fund managers follow.

Lester Davids Trading desk analyst at Unum Capital

Many of them are deriving an increasing percentage of revenue and earnings offshore, are showing signs of recovery, are significantly undervalued or have specific events in the future that will unlock value.

DATATEC International information and communications technology (ICT) solutions and services group Datatec is a global company with operations in 50 countries, with SA only accounting for about 5% of its earnings.

Results in the six months to August were poor, with revenue marginally up and earnings before interest, tax, depreciation and amortisation (ebitda) down at $7.7m, from $24.4m in the previous year.

However, it has sold Westcon Americas and 10% of Westcon International and the Dutch unit of Logicalis, and it plans to return $350m in cash to shareholders, while the outlook for Logicalis, which contributed most of profits, is increasingly positive.

“It has just sold the American division and will make about $630m from it, and that represents a big percentage of its market cap,” says Takaendesa.

Datatec was rolling out a SAP programme, and that affected sales and delayed sales momentum, “but it managed to unlock a lot of value selling one of its divisions, and with cash of over $630m the market is at this stage not putting so much value on the business. It is currently trading at around R60, but if you add the sum of the parts plus cash, we get to about R80 at fair value, and the cash is already there, and it is planning a big dividend in the next few weeks.”

There is also a clear line of sight as to how value will be delivered, he says.

GRINDROD Grindrod, a freight services, shipping and financial services group and former darling and high performer on the JSE, is www.fin24.com/finweek

cover story stock tips

If SA recovers, locally focused shares will do best, partly because they are linked to the economy but also because they have been marked down to such low valuation levels.

recovering from a series of setbacks.

SUPER GROUP Transport and logistics company Super Results for the six months to June show Group is the current preferred stock of revenue at R13.4bn from R11bn previously, Lester Davids, trading desk analyst at and ebitda up strongly, with earnings Unum Capital. excluding its rail assembly businesses at “After nearly collapsing under a heap R126.2m from a prior year loss of R367m. of debt a decade ago, management Taking into account the rail has positioned the business to be assembly loss, it recorded a headline well-diversified geographically, loss, which does not reflect the focusing on making bitecontinued improvement in sized, strategic acquisitions its business with higher over the past seven volumes on the back years,” he says. These of higher commodity At the June year-end, the include ventures in Europe, prices and the effect of group’s non-South African which may have some the completion of a new businesses contributed economic runway and where dredging project at the Port fundamentals are improving, of Maputo. in Australia, which has a Grindrod’s dry-bulk strong economy, and terminal utilisation has of revenue and 61% of in the UK, which is less increased to 65% from 40% ebitda, although the strong strong, “although its home a year before, and capacity in rand affected results. base of South Africa currently its Matola (Mozambique) and faces serious headwinds”.

Richards Bay dry-bulk terminals is fully “However, if the current environment is contracted for the rest of the year. seen as a long-term trough, then like the UK “The cycle is good for Grindrod,” says any upswing should contribute positively.”

Takaendesa. The oversupplied shipping Davids says the business is wellmarket has normalised and commodity diversified, with revenue and ebitda prices have recovered, so volumes have increasingly being sourced from outside been strong, he says.

SA, providing a rand-hedge component.

There has been a huge increase At the June year-end, the group’s nonin volume at its dry-bulk terminals in South African businesses contributed 40% Richards Bay and Maputo, and the dryof revenue and 61% of ebitda, although bulk index is showing strength, at around the strong rand affected results. Revenue 1 400 points for an average of 400 last was up 15% to R29.9bn for the year, and year, says Takaendesa. headline earnings were up just 1%, although “On the shipping side there has been core headline earnings increased 8%. some softness, but we are starting to see On a valuation basis, the share trades a strong pickup in terms of volume.” at a discount to the broader market, Grindrod has announced plans to Davids says. unbundle its shipping business. “They strongly believe the shipping business is not priced correctly,” he says, and there will SANTOVA be an unlocking of value on unbundling.

Santova, which is also a supply chain and Most of its revenues and earnings are logistics company, is earning two-thirds of in US dollars, and while it is not as strong profit (up from 58% last year) outside SA, a rand hedge as Datatec, it has strong says McLachlan, with a growing presence rand-hedge qualities. in the UK, Europe, Asia and Australia.

40%

@finweek

finweek

finweekmagazine

SUPER GROUP

5 000 4 000 3 000 2 000 1 000 2013

2014

2015

2016

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2017 R33.24 - R44.10 13.37 -2.04% R14.33bn R2.88 779 763 SOURCE: IRESS

SANTOVA

500 400 300 200 100 0 2013

2014

2015

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2016

2017 R2.72 - R3.59 8.06 -0.56% R543.22m R0.42 1.84% 391 329 SOURCE: IRESS

finweek 30 November 2017

43

cover story stock tips

“There is a [chicken] shortage currently and demand is growing as we go into the Christmas period and at the same time supply is constrained. This is why Astral is doing well – it is about scale and positioning.”

MASTER DRILLING

2 000 1 750 1 500 1 250 1 000 750 2013

2014

2015

2016

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2017 R12.55 - R18.74 7.19 -3.78% R2.18bn R0.14 2.07% 174 088 SOURCE: IRESS

ASTRAL FOODS

“It may have started in Durban and may have a market cap of [just over] R500m. It is a small company but it is a global enterprise.”

In the six months to August, headline earnings rose 13% and it made a number of strategic moves. These included the acquisition of the remaining 25% of Santova Australia, which facilitates further expansion and development in the region. It has invested in upgrading infrastructure and operational capacity which it says will facilitate further growth in Australia, Germany, and the UK. It started deploying its nextgeneration logistics software in Europe and the UK. It has also invested in its courier (TradeNav®) in those markets, as well as putting money into its client sourcing and procurement management divisions, which it says offer long-term revenue enhancing opportunities and where there was strong revenue growth this year.

20000

MASTER DRILLING

17 500 15 000 12 500 10000 7 500 2013

2014

2015

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2016

2017

R118.77 - R207.68 10.72 70.29% R8.73bn R18.99 5.18% 143 130 SOURCE: IRESS

44

finweek 30 November 2017

Master Drilling, a company that makes world-class drilling machines for the mining sector, earns less than 25% of its revenue from SA. “Three-quarters of the group is global,” says McLachlan, and its key assets are mobile.

It has a market cap of R2bn so is extremely small, but it is, in fact, a world leader and its nearest global competitor has a fleet a third of its size, he says.

Master Drilling (and Santova) are good examples of South African small-cap companies that have hedged against macro problems locally and gone global, he says.

In the six months to June, the

company raised revenue 12.5% to $60.5m due to the contribution of two new machines, but operating profit decreased 9.6% to $12.1m, with the company saying it reflected investment “in people and capabilities to drive future growth”.

Results indicate a large order book and various opportunities beyond the mining sector.

Master Drilling is recognised as a world leader in the drilling services industry and it has operations around the world, from Africa to Europe and Latin America.

Ashburton's McCurrie also favours Master Drilling, saying it has superior technology. “There seems to be very good demand for its technology throughout the world, and it has a good business plan.”

ASTRAL FOODS Dumping of chickens in South Africa and avian flu have done little to deter investors of SA’s major chicken producer Astral Foods, whose share price is up over 50% so far this year.

“The higher maize crop is providing strong benefits to the poultry sector and the food sector,” says Vunani’s Clark. “I would still be investing in Astral Foods – underlying demand is strong, input costs have dropped sharply, and it is poised for strong earnings growth.”

Clark says there are still concerns about cheap imports and avian flu in the sector, but import duties have had an impact on the number of products entering the country from the EU, and some smaller local producers have gone out of business, resulting in a chicken shortage in www.fin24.com/finweek

cover story stock tips Excavation of a hard coal mine using a support system and drilling machine.

It has a market cap of

R2bn, so is extremely small, but it is, in fact, a world leader and its nearest global competitor has a fleet a third of its size.

SA. “There is a shortage currently and says. The benefits of a Pioneer recovery demand is growing as we go into the will flow through to Zeder, whose other Christmas period. At the same time, assets are discounted and have value. supply is constrained. This is why Astral is Clark says concerns about its exposure doing well – it is about scale to the drought-stricken Western Cape and positioning.” are unfounded. “Most of its agricultural Astral surprised investors by updating companies are nationally diversified. The an already bullish trading update (that Western Cape will have an effect on some earnings would be up by at least 65%) earnings in the group, but the rest are with a further, even more bullish update doing quite well.” that headline earnings would be up by Zeder said in its results that there between 80% and 100%. is “inevitable cyclicality”, but the This was attributed to excellent trading agribusiness industry should offer results and the fact that it incurred no attractive long-term returns and that it further losses as a result of the outbreak had a defensive portfolio mix. of avian flu.

Things did not look as good at the RHODES FOOD GROUP March interim stage, when revenue Food companies have had a terrible time dropped marginally and headline earnings recently, but there are businesses in the dropped 54% as lower volumes and sector that are worth investing in. drought-related cost increases took their Rhodes Food Group’s Rhodes brand toll. New brining regulations affected the is excellent and it is providing premium company’s product mix, products to Woolworths, sales volumes and average says McCurrie. “Rhodes is “Rhodes is sales realisations. not just a food producer – it value to its products,” not just a food adds ZEDER INVESTMENTS he says.

As with Astral, higher The group has been producer – it maize production is making acquisitions, including adds value to its Pakco and Ma Baker, and likely to benefit Zeder Investments, which has growing regionally in subproducts.” been a poor performer in Saharan Africa. the PSG Group.

In the year to September, Zeder, with investments in the likes of according to a trading update, sales Pioneer Foods, Kaap Agri and Capespan, in sub-Saharan Africa including SA has a R14bn portfolio of various were up 21.4% and, according to the agribusinesses. Half of this value reflects company, it gained market share in key Pioneer Foods, which dropped headline product categories, but the stronger rand, earnings by 54% in the six months to reduced demand for industrial pulp and March largely due to an “unfavourable” purée products, foreign pricing pressure maize procurement position. It is, mainly in Asia, and increasing costs on however, on the road to recovery. canned fruit because of the drought saw “Given that input costs have fallen international sales drop 18.1%. Group dramatically, Zeder is poised for an turnover increased by 10.8% for the year. earnings recovery in 2018 after a torrid Headline earnings will drop by between 2017 when everything went wrong,” Clark 17% and 22%. @finweek

finweek

finweekmagazine

ZEDER INVESTMENTS

1 000 800

600 400 200 2013

2014

2015

2016

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2017 R5.40 - R8.10 -8.37% R10.38bn -R0.57 1.82% 1 536 316 SOURCE: IRESS

RHODES FOOD GROUP

3 000 2 500 2 000 1 500 1 000 Jan '15 Jul '15

Jan '16

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

Jul '16

Jan '17

Jul '17

R17.50 - R29 20.24 -31.82% R4.8bn R0.93 2.23% 233 937 SOURCE: IRESS

finweek 30 November 2017

45

cover story stock tips

“Hulamin will benefit quite nicely from the rising aluminium price and it is virtually a 100% rand hedge.”

HULAMIN

1 000 800 600

HULAMIN Hulamin is the only major aluminium rolling operation in sub-Saharan Africa, and one of the largest exporters, accounting for more than 60% of sales.

Resource-related companies are looking interesting, says McCurrie, but there are investment risks.

“Hulamin will benefit quite nicely from the rising aluminium price and it is virtually a 100% rand hedge, even if it sells aluminium in South Africa, because its product is priced in dollars,” he says, adding that investors should see the results of efficiency gains.

A recent strategic update indicated that it planned to build on continued improvement in its operational performance over 2016 and 2017. The company has made progress in inventory efficiency, utilisation of scrap metal and reducing manufacturing costs.

In the last financial year, to December 2016, headline earnings a share were up 222% on record sales of 232 000 tonnes, and Hulamin recorded strong cash flow of R415m.

At the year-end, the aluminium price was $1 713 per tonne – it is currently over $2 000. By the June 2017 interim, results were more subdued, but order books for

rolled products were healthy.

400

ADVANCED HEALTH

200

With healthcare costs mounting, day hospitals could well be the hospitals of the future. McCurrie, who likes Advanced Health, which has 10 hospitals in SA and Australia, does warn, however, that this is a risky investment “and people must put only a small proportion of portfolio into this investment”.

“It is rolling out day clinics at a furious pace. I have not seen its operating performance, but the concept is so good – a far cheaper health offering,” he explains.

Losses in the year to June and a rights offer may not give potential investors much comfort.

The results showed a good increase in revenue, wiped out by operating costs. There was a slow growth in patient numbers as large competitors adopted “anti-competitive strategies”, according to the company. Its hospitals are all in start-up phases, incurring costs and taking time to build up capacity.

“It may be too early [for investment] and the company may not even be successful,” says McCurrie, “but the concept is sound.” ■ editorial@finweek.co.za

MIXED VIEWS

2013

2014

2015

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

2016

2017 R4.85 - R7.60 5.54 41.92% R2.26bn R1.27 2.13% 409 969 SOURCE: IRESS

ADVANCED HEALTH

300 250 200 150 100 50 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

R0.65 - R1.65 -54.38% R191.62m -R0.22 177 460 SOURCE: IRESS

Analysts hold divided views on some small- and mid-cap companies.

Long4Life, former Bidvest CEO Brian Joffe’s new company, listed to some excitement in April, and it has since bought Holdsport and Sorbet.

Brian Joffe CEO of Long4Life

46

finweek 30 November 2017

Those who are bearish say investors are buying into its cash and Joffe’s deal-making ability, but that is not enough of a reason to invest. “Holdsport was separately listed and if we did not like it then, why should we like it now,” one says.

On the other hand, Joffe has proved to be an astute investor and identifier of value, and with cash on hand he is in a good

position to make the most of any investment opportunity that arises. “This is for investors who have faith in what management is going to do with the money they have got – it has made two acquisitions and has a lot of cash to burn,” one commentator says.

Blue Label Telecoms’ investment in Cell C “has potential to take it to the Top40 in the next few

years,” according to one of the commentators. But another says that in an ex-growth mobile sector, smaller companies like Cell C and Telkom will have to spend huge amounts of money to compete and still won’t impact the big players. He says the sector is ex-growth, and while data revenue is increasing, it is just replacing voice revenue and data prices are going to come down. ■ www.fin24.com/finweek

in depth mining

S D E I F I S DIVER UR O V A F N I K C BA

e to take a closer look at diversified tim it’s nk thi ts lys ana and g tin foo r The mining market is on bette glo American and BHP. mining companies like Glencore, An

By David McKay

i

t’s long been acknowledged that trading in gold shares is a job for the professionals. For the rest, there’s the diversified mining firms, or “houses” as they used to be called, which are less prone to market volatility owing to the diversity of their metals and geographies. And, until recently, their balance sheet strength.

These firms – Glencore, Anglo American and BHP – were badly hit by the climb-down in metal prices from about 2011 until early 2016. Without exception, they were found to be overindebted while their return on investment trended well below that of other asset classes.

The two-year self-help or remediation that followed has changed that. In order of market capitalisation, Glencore, BHP, Anglo American, and a fourth, the relatively newly created South32, all exist in the realm of Johannesburg’s Top40 Index. (There are two other mining companies in the Top40 – the Anglo subsidiaries and pure-play options Anglo American Platinum and Kumba Iron Ore.) Anglo American has resumed dividend payments after a two-year break, and BHP is delivering an effective payout of 65% to 70%.

Since the mining market has regained some of its former poise, a process underway for most of the year, analysts now feel bold enough to recommend investors take a fresh look at the diversifieds which they think haven’t responded sufficiently enough to metal price and self-help improvements.

While they have fixed up their balance sheets and have firmly established a commitment to yield, they are yet to respond to the growing likelihood that

@finweek

finweek

finweekmagazine

there aren’t enough new projects to fill growing metal demand in the medium to long term. The question being asked is which of the large mining houses has an in-built growth strategy without recourse to merger and acquisition activity.

The answer is Glencore and BHP, according to some of the major banks and brokerages.

Low exploration spend The 2004-12 mining super-cycle was driven by the mismatch in timing between Chinese demand growth and global supply growth, observed US bank and commodity trader Goldman Sachs in a recent report. “We contend that we are again in a period of mismatch between demand growth and supply growth which could facilitate a period of strongerthan-normal commodity prices,” it said. On this occasion, however, supply rationalisation in China and by major Western mining companies would fuel that growth rather than the double-digit demand growth that drove the super-cycle.

According to the bank, exploration spend as a proportion of metals market revenue is at its lowest level since 1990. From an absolute spend, 2016 expenditure was about $8bn, which is back down to 2005 levels. “Exploration success is the genesis of the mining industry – assets can’t be mined until they are found – and thus the underspend on new project discovery may be sowing the seeds for future production challenges,” said Goldman Sachs.

Commenting during the firm’s annual general meeting in Melbourne, Andrew Mackenzie, CEO of BHP, articulated the new-found confidence of most

Andrew Mackenzie CEO of BHP

Ivan Glasenberg CEO of Glencor

finweek 30 November 2017

47

in depth mining

Despite the confidence expressed at the AGM, BHP’s Mackenzie is still not entirely finished rationalising the group’s portfolio after it decided this year to dispense with its North American shale assets. As for Anglo, it’s hard to say whether its structure is exactly right, especially its exposure to the bulk minerals in SA. And Rio Tinto was as recently as September selling out of some of its coal assets in Australia.

Glencore, however, is moving in the opposite direction. “While Glencore Glencore’s latest move is mooted to resumed dividends this year, it be the creation of a new base metals appears to be the most growthroyalty company following a focused of the diversified majors with an informal ‘business combination’ approach to Bunge (a soft commodities deal with the Ontario trading company) and over Teachers’ Pension Plan. $4bn of potential transactions announced (a list that includes the purchase of a stake in Chinese coal company Yancoal, Volcan and Chevron SA),” said Investec Asset Management.

Glencore’s latest move is mooted to be the creation of a new base metals royalty company following a $700m deal with the Ontario Teachers’ Pension Plan in which Glencore will bring royalty agreements for about ten mines in return for $350m in capital from the pension fund to buy new royalty streams. For a firm dealing in teacher pensions, this is a significant vow of faith in commodities and Glencore’s ability to take advantage of the market. ■

$700m

editorial@finweek.co.za

48

finweek 30 November 2017

Mine access shaft lifting gear at the South Deep gold mine, operated by Gold Fields, in Westonaria southwest of Johannesburg.

Try as it might, Gold Fields is struggling to make ends meet at South Deep, its South African gold mine. Earlier this year, it downgraded forecast gold production by up to 10% after promising previously it could reach 90 000 ounces per quarter.

According to analysts, not even the downwards adjusted production performance can be maintained as it’s been driven by, as it’s described in the mining industry, “grade”. This is where parts of the orebody being mined yield more of the desired mineral per tonne than you’d expect to see on average, known as the reserve grade. In the case of South Deep, the reserve grade is 5.8 grams of gold per tonne (g/t) compared to recent grades of 6.3g/t. It all adds up to a lack of sustainability.

South Deep is an interesting case study explaining why supply of minerals is so fickle.

As explained by Goldman Sachs in its commentary of the future supply/demand, as reported in the main article, it’s no easy matter switching on supply when a deficit develops, even when there are projects to be developed. South Deep is a case in point: the mine is premised on a hugely rich orebody, but extracting the gold profitably has

been a nightmare.

“We now think the FY18 [2018 financial year] target is challenging and [we] are also having reservations about our steady-state outlook of 380 000 oz/year,” said Adrian Hammond, an analyst for Standard Bank Group Securities. This compares to Gold Fields’ own target of 500 000 oz/year, which it said it would make after spending another R2.5bn on the mine (which has already absorbed more than R30bn in investment over the years).

Gold Fields is at risk of failing to maintain gold production, falling to about 2m ounces per year from the current 2.2m oz/year target. As a result, Hammond believes Gold Fields needs to find another new project, notwithstanding spend of R11.3bn unveiled in February in both new and replacement gold reserves and described by Gold Fields CEO Nick Holland as “evolutionary”.

“In our view, a catalyst for change would need to come from a new good project. Group production can remain steady until 2023, hence management has time,” said Hammond, who also commented finding the gold would “not be easy” and the balance sheet constraints would also be a factor. ■

www.fin24.com/finweek

www.bhp.com

Glencore’s growth focus

TROUBLE AT SOUTH DEEP

Gallo Getty Images/Waldo Swiegers/Bloomberg

major mining companies. “Population growth and the rise in living standards will drive demand higher for energy, metals and minerals for decades to come,” he said. “New demand centres will emerge where the key levers of industrialisation and urbanisation are still immature, such as India.”

Macquarie thinks there’s enough new production capacity for the next three years with a copper equivalent compound area growth rate of about 2.3%. After this date – about 2021 – metal volumes are expected to decline as capital expenditures remain well below depreciation charges. “In the case of Anglo and South32, the upside [to respond to this] is limited. [...] For BHP, Rio [Tinto] and Glencore the upside is more significant and we reiterate our ‘buys’,” it said.

“In our view, BHP has the highest upside potential in driving returns combined with a well-stocked pipeline of project options to choose from when the sector returns to focusing on growth,” said Macquarie. “Alongside Glencore, which continues to have the highest near-term growth, we elevate BHP as our top pick in the sector,” it said.

on the money

on the money spotlight

THIS WEEK: >> Tech: Saudi Arabia’s plans for its futuristic mega-city p.51 >> Management: Networking for business owners p.52

CEO INTERVIEW

By Natalie Greve

The reluctant CEO While he initially had to be persuaded to take the position, Alphamin CEO Boris Kamstra is now fully at home in his role overseeing the development of the Bisie tin mine in the DRC. He tells finweek about the challenges associated with developing a mine in the middle of the Congolese jungle in a region once ruled by armed rebel groups.

b

@finweek

finweek

finweekmagazine

Congolese mines police patrol the mine.

Photos: Natalie Greve

oris Kamstra’s aversion to disappointing people almost resulted in him turning down a job that he now clearly adores. Named by a Dutch father with a particular penchant for Slavic names, the Alphamin CEO is, however, today evidently at home in the position that requires skills as varied as wooing potential investors in a Toronto boardroom to navigating the rutted 38km-long dirt road to Alphamin’s Bisie tin mine in the Democratic Republic of Congo.

Saying he initially fought “tooth and nail” against being placed in the position that would involve managing the development of the Bisie mine, Kamstra was concerned that his engineering background had not equipped him to deal with the public relations (PR) demands required of the CEO of a Toronto-listed group.

“I’m an engineer, and an engineer’s userface is written in MS-DOS. We’re not great in terms of PR. And yet, within me there was this turmoil because I believed in this project right from the outset – as soon as we’d started to get some traction during the due diligence process.

“I realised this was going to be a challenge and I really wanted to be a part of it. More so than sitting in an advisory position. They eventually said to me, ‘Right, you’re it,’ and I’m absolutely thrilled they did,” he told finweek during an October

The original exploration tunnel at the Bisie mine.

media visit to the Bisie project.

Kamstra’s involvement with Alphamin began in 2012 when, as an investment executive for Rob Still’s Pangea Exploration, he undertook a due diligence on Alphamin and its proposed tin mine in North Kivu.

After assessing the venture, Pangea made an investment in the company a year later, kicking off Kamstra’s immersion in Bisie.

Initial trepidation But Kamstra admits to some earlystage reservations. Bisie is, after all, a prospective tin mine located in the heart of the Congolese jungle historically controlled by violent militia groups. It is also 180km away from the closest city – Goma – and, at the start of development,

lacked any real infrastructure.

At the start of development, the hillside upon which Alphamin planned to develop the first phase of its mine was also home to around 4 000 artisanal miners who had yet to be convinced of the merits of formalising the extraction of tin and showed little interest in surrendering their hard-earned exploration shafts.

Even today, the national road between Goma and the start of Alphamin’s dirt track to the mine resembles little more than a potholed farm road.

“Before I came here, I did what everyone did – typed in Bisie and what came spewing out of my computer wasn’t exactly friendly. I was a little concerned, but I came out here to establish if we finweek 30 November 2017

49

on the money spotlight

could put in a road to the mine.

“Among the local community it was a warm welcome, but in the broader community there were elements that were naturally very against us coming in, and that was less welcoming. It took us a while to get our street cred up, but the locals around us have always been receptive,” he says.

Since then, Alphamin has made impressive progress on site. According to a 14 November press release, the box cut for the underground portal of the mine has been completed and the decline has already progressed 50m into hard rock. First production of tin is expected in early 2019, with steady state production of 10 000 tonnes a year of tin to be reached by the end of that year.

Photo: Supplied

Making the grade When Kamstra talks of the investment appeal of the project, he frequently returns to emphasise its tin grade. With an average grade of 4.49% and a 4.6m tonne resource, his excitement over the potential of the mine comes into clearer view.

“In mining, you always need margin for error. You need to have sufficient capacity to deal with unexpected things. And the only way a mine can really do that is through grade. Here, if we bring a tonne of rock to the surface, it’s worth four-and-a-half times more than what the next best tin project in the world is worth,” he tells finweek.

It is this rich deposit that drew informal miners to the hill and created an industry in which the political ambitions of Congolese rebel leaders were financed through the trade in tin, and it was only after the 2010 introduction of the Dodd-Frank Act that local tin traders found an unwilling international market for their metal.

Since the publication of Dodd-Frank, companies that use metal in their products are required to publish due diligence on the origin of metals used from the DRC and surrounds. The introduction of the legislation also had an impact on the number of informal miners at Bisie, with around 380 currently remaining on site.

The Bisie operation currently employs around 800 unskilled workers, at least 25% of which are former artisanal miners.

Alphamin, in conjunction with the local mines ministry, has agreed to open up other sites on the larger Bisie tenement for the remaining miners, providing them water and road access. Some have also been incorporated into formal mining 50

finweek 30 November 2017

BISIE MINE IN THE DRC

DRC

• Five permits covering • • •

1 268km2 in North Kivu Province, DRC Permits 100% owned Primary focus on tin 180km from regional center of Goma (border with Rwanda)

operations or have left to search for alluvial gold and diamonds in the nearby rivers.

North Kivu minister of mines Professor Anselme Paluku Kitakya believes that the manner in which Alphamin has worked with the artisanal miners has set a precedent for relations between mining companies and communities in the DRC going forward.

“Alphamin represents the emergence of a real mining sector in North Kivu.

It represents a resurrection of an industry that failed before owing to management problems.

“We see the project will generate employment and tax revenue and Alphamin’s potential for success goes against the perception that the DRC isn’t a good place to invest,” he told journalists during the media visit to the country.

Market outlook SOURCE: Alphamin Resources Corporation

Boris Kamstra CEO of Alphamin

About Boris Kamstra Currently reading: The Silk Roads: A New History of the World by Peter Frankopan.

Favourite meal: A nice steak and a glass of red wine.

Sports/hobbies: Mountain biking, surfing, and offroad motorcycling.

Kamstra indicated his intention to ride his motorbike from Bompas Road in Johannesburg to the Bisie mine.

Favourite holiday spot: Port Alfred. ■

Kamstra also expresses confidence in the global tin market, saying that recent EU legislation requiring lead solder to be phased out of consumer products has opened up demand for tin as a replacement.

Alphamin’s estimates are based on a long-term real tin price of $21 400/t, which Kamstra says is far below the International Tin Research Institute’s (ITRI’s) predicted long-term equilibrium price of $25 000/t.

The ITRI also forecast in a recent press release that there would be a global tin shortfall of 60 000 tonnes until 2018.

Says Kamstra: “The industry would thus be experiencing extreme stress before we would be placed under duress.”

Despite the project’s location, Alphamin has already raised $140m for the mine, most recently through an $80m credit agreement in early November. It also plans to list on AltX by the end of the year through a secondary inward listing to raise the final $31.4m required to complete construction. With $10m of this already committed in principle, Kamstra is confident that the company will receive the balance of required capital.

“The first thing that people battle to get their head around is that North Kivu is no longer the centre of bedlam and chaos that it once was. It rightfully earned that label, but that label is dated and there are a large number of people here who really want to see this mine prosper,” he says. ■ editorial@finweek.co.za *The writer travelled to the Bisie mine in the DRC as a guest of Alphamin.

www.fin24.com/finweek

on the money technology

By Lloyd Gedye

ARTIFICIAL INTELLIGENCE

A robot-run megacity – technological wonder or horror?

The Middle Eastern kingdom of Saudi Arabia is trying to diversify in order to become less reliant on oil. Its answer to this dilemma – an automated, highly advanced metropolis – may not be quite as utopian as its backers believe.

i

n Saudi Arabia, as part of the kingdom’s Vision 2030 initiative, the So this idea of a robot underclass is not as science fiction as government is proposing the development of a utopian city on the Neom sounds. However, the robot underclass is so central to the shores of the Red Sea. Neom vision that in October at the inaugural Future Investment Neom – which is a combination of the Latin neo, meaning Initiative conference in Riyadh, it was announced that a robot new, and the Arabic mustaqbal, meaning future – is envisioned named Sophia had been granted Saudi citizenship. as a city that will be bigger than Dubai; its slogan is “The world’s This was the first time an artificial intelligence (AI) robot has most ambitious project”. It is projected to been granted citizenship of a nation. cost more than $500bn and is imagined Sophia, who is an AI android from the Hanson It is projected to cost more than as a liberal international trade centre, a Robotics lab in Hong Kong, is modelled on business hub with advanced manufacturing, Audrey Hepburn. She is said to have 62 facial biotechnology and media industries. expressions, she can memorise your face during a As its website proclaims, Neom will be an conversation and has been described as “chatty” and is imagined as a liberal “aspirational society that heralds the future after a journalist interviewed her on stage at the international trade centre, a business of human civilisation”. Central to this vision Future Investment Initiative conference. hub with advanced manufacturing, biotechnology and media industries. are the armies of robots that will be serving While many technology advocates would the residents of Neom. It is envisioned that have been excited at the prospect of an AI being there will be more robots than humans. granted citizenship, to many Saudi women and migrant labourers Crown Prince Mohammed bin Salman says the city’s main working in the kingdom it must have been a slap in the face. robot will be named “Neom Robot Number One”. “Everything will To even conceive of the idea that a robot be given rights in a have a link with artificial intelligence, with the Internet country where so many humans are denied theirs is a warped of Things – everything,” Bloomberg reported the vision of the future. prince as saying.

For generations, migrant labourers in Saudi Arabia Neom will occupy an area now known as Ras have been denied citizenship, while women are Sheikh al-Hameed, a peninsula jutting about restricted in terms of employment options and 50km into the Red Sea. The total site covers from appearing in public spaces with men. an area of 25 900km2 and will stretch into Women are unable to get a passport or Jordan and Egypt, with the latter having to travel outside the country without the Sophia, the robot made signed a treaty to give the Saudis two islands permission of a “male guardian”, which could be a

by Hanson essential to the project. The area was chosen father, husband, brother or son.

Robotics. because of its proximity to international Women who have protested this system have shipping routes. been arrested, interrogated and thrown in jail.

Construction is set to begin in late 2019 and In June 2018, Saudi women will be allowed to phase one is set for completion by 2025. drive for the first time; however, they may still have to But it is unlikely that this ambitious project will result get the permission of their male “guardians” to drive. There in job creation. “It’s not Neom’s duty to create jobs for Saudis,” have been suggestions that this could still be very restrictive, with Prince Mohammed said according to the Bloomberg report. potential curfews to stop joyriding.

“Neom’s duty is to be a world hub for everyone in the whole world.”

The thought that Saudi Arabia is trumping up its innovation While I must admit that I find the idea of a city run by AIs and status by granting an AI android citizen status, when it has so robots kind of terrifying, this tech is actually already all around us. much work to do to grant its human citizens equal rights, is Some time ago, an acquaintance told me he had discovered distasteful and morally reprehensible. there was an AI software app that could put a number of people at Sophia, the AI android, may be a world first, but for many women his company out of a job, just like that. He was disturbed at the idea, she is just another example of how technology and patriarchy are knowing it was only a matter of time until his bosses woke up to the intimate bedfellows. ■ cost-saving potential and started retrenching people. editorial@finweek.co.za

Gallo/Getty Images

$500bn

@finweek

finweek

finweekmagazine

finweek 30 November 2017

51

on the money management

By Amanda Visser

How to build valuable networks Networking is vital for entrepreneurs if they are to grow their businesses. Unfortunately, many people feel uncomfortable approaching strangers. Here the experts provide some tips on how to emerge from your shell and expand your network.

www.thebalance.com/susan-ward

www.cbordertalent.com/asanda gcoyi

b

uilding social networks may sound easy, but a host of skills is necessary to build networks for a purpose.

Many business owners find the thought of “networking” quite daunting. Some even shy away from it altogether and hide behind the excuse that they are “introverts”.

TJ Malamule, professional speaker and brand & business strategist, says networking is every entrepreneur’s currency.

“The saying goes that your network equals your net worth.”

You could be offering the best product or service, but if you cannot connect with people, they will not buy it. People do business with those they like and who made an impression on them. They find you “worthy” to be in their network. The more you network, the more you create opportunities for people to do business with you, he says.

Asanda Gcoyi, CEO of CB Talent, says networking is interaction with a purpose. It is about building relationships that become useful at a later stage.

Impressions count and when people meet face-to-face in an informal environment, such as business lunches or at meetings organised by business groups, they are able to form such an impression.

“We tend to think that building relationships or networking depends on whether we are introverts or extroverts. For me it is all about being a person of value. In whatever you do, you need to be valuable,” she says.

What you can offer is of importance, not whether you are an introvert or extrovert.

The question you need to ask is why you need to build a network.

“If you are unable to answer this question, your efforts will be wasted, no matter whether you are an introvert or extrovert,” says Gcoyi.

Malamule says networking is about serving and not selling. People are tired of having things “sold” to them. They are quite happy to receive anyone who is ready to “serve” them. “Every business is supposed to

52

finweek 30 November 2017

be serving in order to make profit,” he says.

How to network

TJ Malamule Professional speaker and brand & business strategist

Powerful business networkers use a strategy to hook anyone in their network by identifying what it is the network needs.

They position themselves as a solution to satisfy the need, he explains.

“Think about it like your first date. You certainly do not start talking about all your achievements if you want the second date. You have to show you are genuinely interested in them for them to be interested in you,” Malamule says.

It is important to be “approachable, sincere, authentic and polite”.

Gcoyi says naturally charming people find it easier to network. “Not everyone can naturally be a good networker. Simply dishing out business cards at events to anyone who is willing to take them is really meaningless.”

One of the best traits of an introvert is their ability to listen. Use it. It is important to make eye contact and ask open-ended questions that allow the conversation to flow. Be conscious about the person in front of you rather than focusing on yourself, she advises.

What is ‘the right’ network?

Asanda Gcoyi CEO of CB Talent

Susan Ward Business writer and co-owner of Cypress Technologies

According to Gcoyi, one can never know if the network is completely what you need. At each stage of a business’s journey, it will be necessary to tap into different networks.

As a start-up, it is necessary to identify the people who need to know about you.

Reach out to them, and build relationships in areas which complement your business.

“It is not about building a network and being confident that it is the right one.

You have to be continuously building relationships, improving your networks to get them to work for you,” Gcoyi says.

Susan Ward, Canadian business writer and co-owner of Cypress Technologies, writes in an opinion piece published by The Balance that networking helps to identify opportunities for partnerships, joint ventures, or new areas of expansion for your business. www.fin24.com/finweek

on the money quiz & crossword

You could be offering the best product or service, but if you cannot connect with people, they will not buy it.

This week we are giving away a copy of Jacques Pauw’s explosive book The President’s Keepers – Those keeping Zuma in Power and out of Prison. To be put into the draw, complete the online version of this quiz, which will be available on fin24.com/finweek from 27 November.

1 True or false? Reports have surfaced claiming that Brian Molefe is now a member of the South African National Defence Force.

6 True or false? Emmerson Mnangagwa is the former vice president of Uganda.

7 In which Western European country did coalition talks collapse recently, plunging it into political uncertainty?

2 Who is Queen Elizabeth II’s husband?

■ King Charles ■ Prince Albert ■ Prince Philip

“In an ever-changing business climate it is important to keep up with the target market conditions as well as overall trends in your industry. Knowing the market is the key to developing a successful marketing plan. Attending seminars and networking with your peers and business associates on a regular basis will help you stay current,” she writes.

Social networks such as LinkedIn, Facebook and Twitter are brilliant tools for communicating with customers and business associates.

However, Gcoyi says nothing beats faceto-face interaction if the purpose of building a relationship is to get new business and to sign that contract.

Where to network Most business people are optimistic and positive, says Ward. “Regularly associating with such people can be a great morale boost, particularly in the difficult early phases of a new business,” she writes.

“If you are not naturally outgoing, regularly meeting new people can also boost your confidence and on a personal basis you may form new friendships with like-minded people.”

In South Africa there are numerous events and organisations that offer opportunities to meet face-to-face, such as sectorial organisations that focus on specific industries and commerce and industry associations.

Start-ups can tap into innovation hubs that organise events where like-minded people can meet and share their information, says Gcoyi.

She adds that there is a tendency to over-use terms like “networking”. When they merely become buzzwords, they lose their significance.

Businesses must understand the importance of social capital and what it means for future growth. Without it the business does not have the muscle it needs to flourish. ■ editorial@finweek.co.za @finweek

finweek

8 True or false? DStv is planning to stop broadcasting ANN7 next year.

3 On what date did Black Friday fall this year?

9 From which city does Idols Season 13 winner Paxton Fielies hail?

4 True or false? As featured in the previous issue of finweek (16 November edition), Yoco is a producer of organic chocolate.

10 In which country is Singles’ Day celebrated?

■ China ■ Brazil ■ Egypt

5 Which country is to host the 2023 Rugby World Cup? CRYPTIC CROSSWORD

NO 697JD

ACROSS

DOWN

1 8 9 11 12

2 3 4 5 6

Cruella, evil lepidopterist? (3,6) Woman very out of date (3) Performer front of stage? (7,4) Free English gin (7) Lies involve blighted character from beginning to end (5) 13 Declare group illegal (6) 15 Plantations in Thailand offer a service to extract rubber (6) 17 Positive about nonsense man! (5) 18 Establish within Florida, perhaps (7) 20 Dine in style, the French not partaking?

(3,4,1,3) 22 Sour fellow lacking humour (3) 23 Brief study of French criminal dens (9)

Put away in state institution (3) Head-on charge (5) Cornered young sheep, half-bred (6) Early caller’s roll has a second egg in it (7) Gets musical instrument that’s high-pitched (6-5) 7 Is released with no charge? (5,4) 10 A diversity of great men ran the organisation (11) 11 Pledges no charges written below the line (9) 14 Fail with a 75% mark – that’s inconsistent (7) 16 Force principal to reverse judgment (6) 19 Riddle is back to the name of the hypothesis (5) 21 Displeased at being disqualified from heat (3)

Solution to Crossword NO 696JD ACROSS: 1 Accent; 4 Aboard; 9 Condescension; 10 Precede; 11 Aches; 12 Stars; 14 Beset; 18 Avail; 19 Acquire; 21 Animalisation; 22 Yonder; 23 Kennel

DOWN: 1 Accept; 2 Concentration; 3 Niece; 5 Bandage; 6 Arithmetician; 7 Danish; 8 Acted; 13 Release; 15 Salary; 16 Basic; 17 Vernal; 20 Quake

finweekmagazine

finweek 30 November 2017

53

Piker

On margin A trip to the hairdresser As Rob Temple explains in his latest book, More Very British Problems, it’s “not easy having a haircut”: 1. Insisting the temperature is “fine” as what must be water from a kettle is poured over your head.

2. Never feeling more tense than when fighting against the pleasant feeling of the head massage.

3. Showing a photo of you when you were 10 years younger and three stone lighter and asking, “Can you make me look like this, please?”

4. Accepting a complimentary drink as if you’ve just been offered £500 in cash.

5. Being gripped by the sadness of having to assess your own face for ages in the hairdresser’s mirror.

6. Rearranging your hands and accidentally looking like you’re doing something devious under the cape.

7. Being thrilled at seeing the back of your head for the first time since your last haircut.

8. Feeling consumed by guilt as you’re encouraged to stand up and cover the

clean floor with bits of hair.

9. Being mystified as to how “What have you done?” somehow leaves your mouth as “Excellent, thank you very much!”

10. Waiting until you’re at least 50 strides away from the building before you completely restyle your head in a coffee-shop window.

In brief An accountant is someone who solves a problem you didn’t know you had in a way you don’t understand. ______________________________________________ Why did the accountant cross the road?

Because she looked in the files and did what they did last year. ______________________________________________ A stockbroker is a man who is always ready, willing and able to lay down your money for his commission. ______________________________________________ Interviewer: So, tell me about yourself.

Me: I’d rather not... I kinda want this job. ______________________________________________ Communism sounds good on paper... ...unless you’re reading a history book.

Verbatim

Vinny Lingham @VinnyLingham If you need a break from trading cryptocurrencies, I highly recommend you engage in some lower-risk activities like roulette, craps and blackjack during your downtime.

Prophet Cynic @CynicHarare Mugabe is suddenly a real Zimbabwean; an adult with several degrees just sitting idly at home.

Man’s Not Barry Roux @AdvBarryRoux Brian Molefe’s 2017 achievements - Eskom CEO - ANC MP - Eskom CEO (again) - SANDF Colonel Before December he will be the Bafana Bafana coach because it seems like he knows everything.

Ben Karpinski @followthebounce This Bok backline is like Malusi Gigaba. Wears the right clothing, but ultimately unfit for the job.

Sarah Britten Pillay @Anatinus Woolies has produced a snack that sounds like satire: organic raw activated buckwheat & quinoa with seeds, kale & moringa. Tastes like satire too.

Sam Leith @questingvole My word of the year is Finnish. Kalsarikännit: “To get drunk at home in your underwear, with no intention of doing anything else.”

Dr. Justin Tarte @justintarte The top two things most people complain about: 1. The way things are.

2. Change.

“I’m always fully invested. It’s a great feeling to be caught with your pants up.” − Peter Lynch, American investor, mutual fund manager and philanthropist (1944- )

“...and send these down to creative accounting.”

54

finweek 30 November 2017

www.fin24.com/finweek

SUBSCRIBE

NOW

FINWEEK IS SOUTH AFRICA’S LEADING INVESTMENT AND FINANCIAL MAGAZINE. WE DELIVER IN-DEPTH REPORTING ON BUSINESS AND THE ECONOMY, EQUIPPING OUR READERS TO MAKE SOUND INVESTMENT AND BUSINESS DECISIONS. SPOTLIGHT

GOVERNANCE

WHY COMPETITION COMBATS CORRUPTION

CLIFFORD ROSS ON 25 YEARS OF RUNNING CITY LODGE

INVESTMENT

DON’T BET ON LAST YEAR’S WINNERS FIND US AT: fin24.com/finweek

ENGL ISH EDIT ION

ECONOMY

INVESTMENT

BULLETPROOF YOUR BUSINESS

EVERY TWO WEEKS 2 November - 15 November 2017

SIBANYE-STILLWATER: OWTH ALL ABOUT (GLOBAL) GR

SHARE VIEWS ON:

WHY SIMON BROWN FAMOUS BRANDS DOESN’T OWN CHOPPIES NASPERS SHARES CLICKS

ENGLISH EDITION

FIND US AT: fin24.com/finweek

16 November - 29 November 2017 EVERY TWO WEEKS

RETIRE

IN STYLE

MINI BUDGET:

+ ADVICE FOR THE LATE STARTER + HOW MUCH SHOULD YOU

DEBT, DEFICITS & DOWNGRADES

BE SAVING?

page 32

+ 10 MISTAKES TO AVOID + WAYS TO BOOST YOUR

SA: R29.90 (incl. VAT) Namibia: N$29.90

SA: R29.90 (incl. VAT) Namibia: N$29.90

RETIREMENT INCOME

FUND

DIS-CHEM RLD, PICK N PAY, RICHEMONT, SHARE VIEWS ON: BARLOWO

PRINT EDITION SUBSCRIPTION OPTIONS*: 3 MONTHS R188.00 - 7 ISSUES 6 MONTHS R310.00 - 13 ISSUES 1 YEAR R560.00 - 25 ISSUES Offer expires on 31 December 2017. *Includes all postage or delivery costs, South Africa only.

TEL: 087 740 1019 FAX: 086 298 3809 SUBS@FINWEEK.CO.ZA

INSIDE BERNARD SWANEPOEL’S LAST MILE

DIGITAL EDITION SINGLE ISSUE R23.92 3 MONTHS once-off R145 - 7 ISSUES W AT BUY NOS.C A .Z O 6 MONTHS once-off R290 - 13 ISSUES MYSUB 1 YEAR monthly R45 - 2 ISSUES 1 YEAR once-off R499 - 25 ISSUES Offer expires on 31 December 2017.

TEL: 087 741 3177 WWW.MYSUBS.CO.ZA