Description
This presentation explain professional investors blunder continued.
05/2015
ANGLE
Keep it. Simple.
Message from the CEO
We all make investments mistakes and it’s comforting to know we are in good company. Nick Pawley profiles some great
investors and some of their mistakes. The moral of the story is that it happens and when it does, its important to keep a
clear head.
We’re all on a medical aid and we expect to be covered in full when we make it through the swinging doors of a hospital –
except we often aren’t covered in full and we may get left with large bills despite the huge premiums we pay. Depending
on your scheme, gap cover may be what’s needed. AlphaWealth can now help you with your medical aid issues.
The retirement age of 65 is really a very arbitrary number – particularly as you approach that age fit and healthy. We look
at where that number comes from and how important it is to invest to live very much longer than that.
Many of our clients hold money offshore. What would happen upon death – does your local will cover the distribution of
those assets? Well that depends. Judy Snyman tells you what you need to know.
We’ve noticed a marked uptick in interest in impact investing. If you or your family are philanthropic, consider investing
for social return. We interview an authority about how to get impact investing to work for you.
Keith McLachlan is impressed with Master Drilling Group and he tells you why it’s such a great local investment.
Jacques du Plessis, our chief investment officer is nothing if not thorough. He investigates how to take advantage of ETFs
without the potential pitfalls and comes up with Anti-Benchmark ETFs. And we close with a couple of interesting stock
picks.
Enjoy this month’s selection of articles and as usual we appreciative any feedback.
With best wishes,
Kerry
@kerrywestfynn
JOHANNESBURG |
CAPE TOWN |
DURBAN |
LONDON |
GENEVA |
[email protected]
MAURITIUS |
MALTA |
HONG KONG
03 2015
1
Even professional investors blunder
ANGLE
Nick Pawley, Wealth Manager
It goes without saying that investing is a double edged sword, the possibility of making a return comes at the risk of losing capital. This
is ultimately the risk return dynamic we have all come to know so well. Far too often we hear about professional investors who don’t
seem to put a foot wrong, going from one successful deal to another without losing a cent along the way. We all know there’s more
to it than that. Therefore it is useful to be reminded from time to time, that even highly sophisticated investors get it wrong.
There have been numerous recent blunders we could share; the melt down of African Bank and how that dented the reputations of
numerous top rated asset managers, or the massive underperformance by local value managers who have been invested in local gold
miners.
In this brief synopsis we’ll look at two very well known individual investors, Ivan Clarke and Warren Buffett. I’m not suggesting that I
could have done any better, but rather I’m highlighting that even professional investors with a tremendous amount of experience get it
wrong. It would be unfair to critique either of these icons because everything is easy in hindsight.
Ivan Clarke. One of the most formidable investors who made his presence felt for the most part of the new millennium is Ivan Clarke.
A local icon who came from humble beginnings and worked his way to the top of Grindrod remains one of South Africa’s renowned
investors. Having joined Grindrod in 1977, he rose through the ranks to become CEO, a position he held from 1999 to 2006.
During his time at the helm and along with the help of a strong board, Ivan steered the group from a reported loss of approximately
R66m in 1999 to the number one shipping company in South Africa and one of the top listed shipping companies in the world. Quite
simply, he turned a company with a market cap of just under R100m into a global business worth just over R8 billion with operations
in over 38 countries. His name is synonymous with the success of this shipping giant, but he too has had his fair share of investment
blunders.
In 2011, Clark joined Chemspec, a small paints and coatings group in dire need of a turnaround strategy. Ivan’s investment of roughly
R80m withered away before his eyes as the group failed to turn a profit, despite numerous efforts to restructure the business. Over four
years, Chemspec tapped the market for new capital three times and collectively raised R528m, a figure that dwarfed the market cap of
R100m, before the company applied for business rescue earlier this year.
05/2015
2
Even professional investors blunder continued
ANGLE
Nick Pawley, Wealth Manager
Whilst the outcome of rescue plan is yet to be finalised, it goes without saying that Chemspec has burnt a massive hole in Clark’s pocket
and is an investment which he won’t forget in a hurry.
His loss seems unimaginable, even relative to his net worth which is estimated at R260m. A loss of R70-R80m equates to a drawdown
of 30%, something most retirees can’t handle. Recent comments in the media suggest that Clark is still optimistic that some value will
be extracted from Chemspec, but he admits, he may not be around to see it.
Warren Buffett. Warren Buffett is the world’s most respected business magnet, investor and philanthropist. The Oracle of Omaha,
who has amassed a personal multi-billion dollar fortune during his lifetime, is well known for his investing principles which focus on
discipline, patience and value.
Some of his best stock picks as measured by average annual compound return are as follows:
Buffet’s firm Berkshire Hathaway first started buying
Tesco in 2006. In 2012 he increased his stake to over 5%
despite a shock profit warning. But from 2013 through
2014 he slowly started trimming his position as cracks in
the business started to appear. In his own words, “In the
world of business, bad news often surfaces serially: you see
a cockroach in your kitchen; as the days go by you meet his
relatives.”
ANNUAL AVERAGE
COMPOUND RETURN
Petro China
BYD
Freddie Mac
Berkshire Hathaway
Wells Fargo
52 %
41 %
24 %
22 %
21 %
Tesco share price performance over ten years
TOTAL
RETURN
YEARS
HELD
720 %
671 %
1525 %
1745300 %
9417 %
5
6
13
49
24
TSCO LN EQUITY 05/20/2015
500
350
Berkshire’s after-tax loss from the Tesco investment was
$444m, which is roughly only one-fifth of 1% of Berkshire’s
net worth. Although hardly a blemish on an astounding
track record, Buffett himself agrees that “thumb-sucking”
cost him a fortune.
In his 50th letter to shareholders of Berkshire Hathaway,
the 84 year old veteran investor embarrassingly admitted
to selling Tesco shares far too late. “I made a huge mistake
with this investment by dawdling,” he said.
400
400
300
250
220.85
200
150
200M
100M
6039M
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
05/2015
3
Avoid large unpaid accounts when you are hospitalised
ANGLE
Debbie Peckover, Wealth Manager
According to research done by the Council for Medical Schemes, an overwhelming majority of people indicated that they
join a medical scheme to protect themselves from financial ruin brought on by unpaid provider bills after being hospitalised.
Accidents happen and they can, and too often put the entire livelihoods of families at risk. We have all heard of people
being forced to use their life savings to cover costly hospital bills.
To be member of a medical scheme often does not offer sufficient cover. Service providers can charge more than the tariff
the medical scheme pays. Medical scheme members should invest in a gap cover policy to pay the shortfalls for services
rendered by healthcare providers in hospital, or for co-payments or deductibles applicable on some procedures performed
in and out of hospital. Having a good, professional accredited medical scheme broker to advise you on the detail of your
benefits, as well as the shortfalls and pitfalls of your medical scheme option, can therefore help you get the most out of the
medical scheme service you are paying for and can prevent the shock of unpaid bills.
Medical aids have a tariff at which they will reimburse providers, i.e. 100%, 200% or 300% of the scheme rate. For example
your medical aid may specify that they will reimburse a surgeon R30 000 (100%) for a procedure, however he charges
R120 000 (300%), leaving you responsible for the balance. This is where your gap cover will step in as it will reimburse you
for the difference up to five (500%) or six times (600%) the scheme rates dependent on your medical scheme option.
DURING THE LAST FEW MONTHS GAP COVER HAS MADE THE FOLLOWING PAYMENT
TO CLIENTS WHERE THEIR MEDICAL SCHEMES HAVE NOT SETTLED IN FULL:
Product
Procedure
Claimed
Scheme
Gap paid
GapCoMri
Spinal stenosis
R102 521.52
R51 952.49
R50 569.03
Combo
Knee
R36 179.80
R15 333.90
R21 845.90
GapCoMri
MVA
R168 495.28
R81 803.05
R77 426.48
GapCo
Reflux
R12 500.00
R0.00
R12 500.00
GapCoSub
Knee
R30 747.06
R11 056.14
R19 690.92
GapCoMri
Cancer
R21 022.56
R9 394.40
R11 628.16
Investing in a gap cover policy has extensive benefits for
medical scheme members. Policies are available from
only R135 per family per month.
If you would like to find out more about gap cover,
please talk to your wealth manager or medical aid
broker.
05/2015
4
The root of the retirement problem: retirement age
ANGLE
Chris Pretorius, Wealth Manager
It is a well-publicised statistic that only 6.5% of South Africans are able to retire. But why is this the case? Do we lack the necessary
education to make simple mathematical calculations? Have we lost the ability to plan? Has consumerism become so important that
saving no longer has any value and we simply hope that a combination of our children and the state will provide for us in our old age?
The problem of people being unable to afford retirement is however not isolated to South Africans. Only 55% of Americans are able
to retire and 52% of Brits. Given that South Africa’s unemployment rate is 35% and the US and UK unemployment rates are only 5.4%
and 5.5%, it is clear that is not just a South African problem but a global one. This raises the question as to whether there is a more
fundamental problem with the notion of retirement. In attempting to answer this question, I investigated the history of retirement to
see if it provides any answers.
The first country to adopt a formal pension system was Germany in 1889. Chancellor Otto von Bismarck initiated a plan that the state
would provide for non-working Germans over the age of 70. Bismarck’s rationale for adopting the pension system was not social
consciousness but in an attempt to stifle the growth of Marxism that was growing in popularity. It was not until 1916 that that they
lowered the retirement age to 65. This means that the retirement age has not changed for the last 100 years, yet medicine has
advanced and we are living a lot longer. To put this into perspective, the table illustrates the life expectancy of white males in the US
over the last century.
Year
1890
1910
1930
1950
1970
1990
2015
Life expectancy
42
50
59
68
70
75
79
If we apply Bismarck logic to today, he would have made the retirement age 107! Life expectancy
roughly increases by 5 years every 20 years. This means the amount of savings required also increases.
So a 20 year old cannot apply the same formula as their parents to plan for their retirement. I
remember when I was growing up and my mom said she required 15 times her annual salary to
provide for retirement. Today the figure is closer to 25 times. The bottom line is that we need to
either work past our retirement age or save considerably more than our parents to adequately
provide for our retirement.
In the next issue of Alpha Angle, Chris will take look at some of the traditional retirement savings
vehicles and whether they actually work.
05/2015
5
ANGLE
FOREIGN WILLS - HOW DO THEY WORK & WHEN DO YOU NEED ONE?
Judy Snyman, Trust & Fiduciary Specialist
Since the relaxation of exchange control, an increasing number of South Africans have been
investing offshore with important consequences for their estate planning. If you have invested
offshore, consider whether you need a foreign will to deal with your foreign assets on your
death. The general principles to consider are:
01
02
The main reason for creating a foreign will is to avoid delays in winding up your estate. If a South
African resident only has a South African will, the executor of his estate may have to apply for foreign
court orders to recognise his right to deal with the foreign property. This could result in delays, problems
with foreign language and additional administration costs. Having a foreign executor appointed by a
foreign will means that your local estate can be finalised without delays caused by obtaining recognition
in a foreign jurisdiction.
A foreign will dealing with offshore assets will address specific requirements of the relevant jurisdiction(s)
and legal system(s) and simplify the administration of the offshore estate.
03
It is important to specify in the local will that it deals only with local assets, and in the foreign will that
it deals only with the relevant foreign assets.
04
Having separate wills for local and foreign assets will not affect a South African resident’s liability for
estate duty. If resident in South Africa, estate duty is payable in South Africa on all assets, wherever
situated. There may also be estate duty payable in the jurisdiction where the assets are situated and in
such a case, the estate will receive a credit which can be set off against duties payable in South Africa.
05
If the assets consist of foreign investments administered by a South African institution, there is no
need to prepare a separate foreign will.
06
There are jurisdictions, like Switzerland, where it is not necessary to have a foreign will in place for
assets held in that jurisdiction. This is because a South African executor will be recognised by financial
institutions without the need for expensive court applications.
07
08
Joint accounts: in certain jurisdictions two or more people may hold accounts jointly. The effect of this
is that on the death of one of them, the account simply continues in the name of the survivor(s) and a
foreign will is not needed to deal with assets held in such an account.
It is always advisable to have a will where the foreign property is immovable property. This is because
different countries have different laws that deal with the transfer of property and these wills have to be
drawn up by a specialist attorney in that country.
05/2015
6
Master Drilling Group: an amazing business
ANGLE
Keith McLachlan, Small Caps Fund Manager
We recently went on a site visit of Master Drilling ’s Fochville Head Office where they unveiled their latest, largest
drill, the RD8, which is the landmark 100 th rig in their globally-dominant fleet.
It is not often that a South African business is globally dominant in anything. It is even less often that this business is actually a small
cap company (outside of the Top 40). And it is even less often (verging on almost never) that this business has a head office in the
sleepy, mining town, Fochville.
Master Drilling Group Ltd (share code: MDI) is exactly that: operating out of the Group’s head office in Fochville, it services major mining
houses around the world with its global (customised) raise boring fleet that is about three times larger than its nearest global competitor.
Raise boring is used in underground mining to create a circular hole between two levels utilising an initial drilling process that is then
aggressively widened with a reaming head to make it the exact size required. Traditionally these shafts are used for ventilation, but the
technology is improving rapidly (pioneered by Master Drilling, of course) and it is not unimaginable to see these shafts eventually being
used for people and plant (i.e. becoming “access shafts”).
All technicalities aside, raise boring eliminates the need for explosives and is often cheaper, faster, more accurate and safer for
underground mines than other alternatives. These metrics ultimately sell themselves in the dangerous, messy and cost-sensitive world
of mining. Founded by the current CEO and majority shareholder, Danie Pretorius in 1986, Master Drilling has built itself from a single
drilling rig into a global force in raise boring. The group even designs its own drills and rigs in-house, sources and manufactures the
components (mostly out of its Chinese subsidiary) and assembles the finished rigs. This allows it to constantly (and cost effectively)
grow and improve its fleet without competitors having access to these highly-guarded engineering secrets, another key competitive
advantage in the market place.
We were invited to a site visit at their Fochville head office where they unveiled the RD8, which is both their 100th rig in their fleet
and amongst the largest drills in the world. An incredible feat in engineering, the RD8 will be used in a multi-year contract on the
Palabora mine. Even if the contract expires without it being renewed, the RD8 (as with basically all of Master Drilling’s fleet), can be
disassembled and moved to another contract anywhere in the world. It should have a useful life of more than 20 years.
05/2015
7
Master Drilling Group: an amazing business continued
ANGLE
Keith McLachlan, Small Caps Fund Manager
Used drill bits that are sent
back to Master Drilling’s
Fochville operations for
reprocessing. These drill
bits are a large expense
and the ability to reprocess
and reuse them a major
advantageous cost-saving.
Master Drilling’s 100th
drill in its fleet, the
RD8, is among the
largest drills in the
world and will be used
on the Palabora mine in
South Africa.
The recently consolidated
spare part warehouse
in
Fochville.
Similar
warehouses are established
in various geographies
around the world and even
on major contracts, as
they provide operational
continuity while returns to
scale make them efficient.
This mobility allows Master Drilling to move where the demand is, profiting out of the commodity market without any real commodity
spot price risk. The fact that the world’s natural resources are becoming deeper and deeper underground creates tailwinds that help
fuel the long-term demand for the group’s services, but in the short-term, the fact that the majority of their revenues come from
operational drilling helps create a stable revenue base (ventilation shafts are steadily drilled as an operating mine’s shafts progress).
It is not just the geographic mobility that is impressive, but the entrepreneurial drive in the business. Master Drilling identified that
their core competency lies in drilling holes in the ground, so they began to look for other applications for these services. The applications
for raise boring are numerous, from construction sector “piling” to hydro-electric projects. In fact, the latter is what the group picked
up in terms of a large contract for drilling for a major hydro-electric project in Columbia.
And the future?
Master Drilling’s recent fleet expansion and upgrading (they have been steadily automating) is almost complete, its move into parallel
industries is progressing with the hydro-electric win as an example, and they are progressively opening a new territory or two each
year across the world. All these initiatives are scaling the group, improving its profitability and de-risking its business model, while the
lower forward capex requirements means that the group will soon be able to pay dividends. Master Drilling is doing all of this when the
mining and commodity markets are arguably experiencing the toughest times in recent memory. I believe Master Drilling is an amazing
business earning hard currencies in a globally-dominant position that comes with high barriers to entry, deep competitive advantages
and a clear, achievable growth strategy.
I would say that an investment into Master Drilling comes with a “free option” on the commodity and mining sector, but the stock is
trading on an 11.4x price earnings! I believe that you aren’t even paying full price for the business at this point, let alone getting any
extra free option on mining recovery in the future.
It is simple: Master Drilling is an amazing business and their shares are cheap. Hence, we hold it in the AlphaWealth Small Cap Fund.
05/2015
8
Impact investing offers good returns as well as social change
ANGLE
Marc Hosiosky, Chief Financial Officer
Your investments can generate both financial returns and measurable social and/or environmental impact. That’s the premise
behind impact investing, an area that’s quickly gaining traction among socially aware investors. Studies conducted over the last three
years indicated that investors are increasingly satisfied with impact investing and plan to invest more money in the future. If you or your
family are keen to generate not only income but social change, please talk to your wealth manager or Marc Hosiosky, chief financial
officer of AlphaWealth who has a great deal of experience in this sector for families as well as individuals. They can tell you more about
new tax incentives and structures that are useful for this type of investment
This month, Marc talks to Filipe Santos, visiting professor of Social Entrepreneurship at INSEAD about social entrepreneurship and
impact investing and how families can best engage in this growing investment sector.
?
WHAT IS SOCIAL ENTREPRENEURSHIP?
Social entrepreneurs throughout the world match clever solutions to neglected societal problems to achieve a strong impact.
Social entrepreneurship, a nascent field since the early 80s, became a mainstream area in 2006 when the Nobel Peace Prize was
awarded to Muhammad Yunus and his pioneering bank for the poor people in Bangladesh – Grameen which had by then spun a global
micro-finance industry with 150 million clients and $25 billion in loans.
?
But beyond the well-known example of microcredit as a business innovation to alleviate poverty, thousands of social entrepreneurs
are developing innovative solutions to some of the world’s most intractable problems, including long-term unemployment, youth
citizenship, access to basic services for disadvantaged populations, affordable housing, and knowledge access and sharing.
WHAT ARE A FEW EXAMPLES?
Among the social entrepreneurs whom I have met over the last few years to explore their business innovations, there are those using
the powerful sense of smell of rats to locate war mines in Africa and thus save countless lives www.apopo.org, disseminating physical
education to elderly people in France thus increasing well-being and lowering health costs www.sielbleu.org, fitting river boats as
hospitals in Bangladesh to provide health care to under-served populations www.friendship-bd.org, using technology to engage and
empower close to a million youngsters from favelas in Brazil www.cdi.org.br, and using theatre projects to empower long-term young
unemployed people in Germany and placing 60% of them back into a professional career www.projektfabrik.org .
05/2015
9
Impact investing offers good returns as well as social change continued
ANGLE
Marc Hosiosky, Chief Financial Officer
?
?
IS SOCIAL ENTREPRENEURSHIP BUSINESS OR CHARITY?
Interestingly, social entrepreneurship is closer to business than to charity. Social entrepreneurs mobilise resources and develop
sustainable solutions to important societal problems, often perfecting their solutions at a local level before replicating and disseminating
them nationally or even globally. Instead of focusing on profits (which is a measure of how much value they are able to capture), social
entrepreneurs care about and focus directly on value creation for society. Thus they are motivated to operate in areas that do not seem
profitable at first and are therefore ignored by commercial entrepreneurs (usually due to low ability to pay by clients or to a high level
of value spillovers).
WHY IS INTEREST IN SOCIAL ENTREPRENEURSHIP RISING?
Many of the areas which social entrepreneurs focus upon serve localised segments of the populations and are outside the reach
of governments, even if well-endowed and well-intentioned. Furthermore, problems in our society are increasingly complex and
interconnected and we need the innovative potential of thousands of social entrepreneurs trying to solve them, not a central government
dictating solutions which are not always effective.
Thus, social entrepreneurship is critical for the proper functioning of the capitalist system. It is driven by mankind’s interest for others
as opposed to self-interest. The rise of social entrepreneurship comes at the right time, since the capitalist system is increasingly being
challenged due to the inequalities that it generates and the gaps that it exhibits.
Alongside the mainstreaming of social entrepreneurs, we are now seeing the rise of an investment market to support them. The field
of impact investing aims to identify entrepreneurs and organizations that can achieve substantial impact while offering a return on
investment. A related field, called venture philanthropy, is less concerned by financial return, but rather maximizes the societal impact
of the investments.
?
HOW CAN FAMILY BUSINESSES FUND SOCIAL ENTREPRENEURS?
New funds focusing on impact investing or venture philanthropy are appearing in every country, many of them inspired and funded
by family foundations. There are two main reasons why family offices should care about social entrepreneurship and impact investing.
First, these areas are fully aligned with the long term view and societal concerns of family businesses. Family business leaders invest for
the next generation, not the next quarter, and their success depends on thriving and engaged communities, both at a local and national
05/2015
10
Impact investing offers good returns as well as social change continued
ANGLE
Marc Hosiosky, Chief Financial Officer
level. Social entrepreneurs act as catalysts to engage with and improve communities, be it in the favelas of Rio, the suburbs of Paris, or
the villages of India. Their solutions are more sustainable than charities and international aid, and usually focus on the underlying causes
of societal problems, not merely their symptoms. Second, these areas make excellent business domains to engage the next generation
of the family. Either as social entrepreneurs or as investors in social businesses, engaging with the field of social entrepreneurship will
teach the next generation of the family about clever and innovative businesses, at the same time as they build character and values
that can become a foundation of the next generation’s involvement with the family business. Strategic philanthropy around social
entrepreneurship can also become a rallying point for family union and the reinforcement of family values.
?
WHAT ARE SOME OF THE BEST PRACTICES TO ENGAGE IN SOCIAL ENTREPRENEURSHIP?
First, instead of a scattered approach, it is best to focus on a particular domain of action, ideally connected to the core business of
the family, or to an area strongly aligned with its values, or to a particular geography tied to the family identity. If your business is civil
construction, affordable housing provides a very interesting growth area. If it is in retail, then ethical and sustainable supply chains
provides a fertile field for engagement. Or maybe your family has a particular set of values around the importance of education or the
fight against long-term unemployment. These are thriving areas of action for social entrepreneurs. Or maybe the goal is to promote
sustainable development in impoverished regions where the family business was founded.
In summary, a focused approach, particularly in areas of strong capabilities or identity of the family, will allow leveraging and
strengthening the family core values and skills, providing more value to society beyond the financial resources mobilized.
Second, involvement in social entrepreneurship should be seen as more than a stand-alone project. Instead, it may demand the building
of a portfolio of activities through a fund, or a network of support with different partner organisations. It should involve the engagement
and collaboration of different generations of the family, or even be used as a platform to collaborate with other business families that
operate in the same region or have similar values and societal concerns. This will strengthen the family business networks and the sense
of union in large families particularly beyond the second generation.
05/2015
11
Anti-Benchmark ETFs the answer to underperformance
ANGLE
Jacques du Plessis, Chief Investment Officer
?
When we started the process of researching the building blocks for our new offshore equity fund, Iconic Aggressive, there were
a number of factors to consider give the prevailing market environment. A key focus within the group has always been to select
active managers that consistently produce above market returns and to maximise the diversification benefits by using a small group of
managers with different approaches. However we also need to take into account the growing strength of the exchange-traded funds
(ETF) market and the attractive proposition of fees and predictable return outcome. So we scoured the world, considering all options
available to meet our mandate requirements.
The growth of US-based exchange-traded funds (ETFs) has significantly exceeded every other asset management category. By the end
of 2014, the total number of index-based and actively managed ETFs had grown to 1,411, and total net assets were $1,974 billion. Of
these, 111 were actively managed ETFs with $16.5 billion in total net assets. In more than 20 years since the product’s inception, ETFs
have been used by most managers as a purely passive tool, designed to provide broad market exposure.
ETFs continue to garner significant flows for this use and continuous product innovation and a
steady progression toward value-added strategies have also helped fuel the recent expansion.
One of our major concerns about a traditional ETF that tracks an equity index is reflected in the
graph to the right. With most of the traditional indices following a capital-weighted approach,
we were concerned about the risks of this approach. In a capital-weighted index allocation
investments are made based on the size of the company. Therefore as the share price of a stock
appreciates, the greater their weighting in the index and conversely so when the prices declines.
This graph shows the relative weighting of the different sectors in the S&P 500 over time. What
is very noticeable is the dramatic changes. This means that an index is not actually a passive
investment strategy but a dynamic strategy that evolves over time. What concerned us most
is that this dynamic approach would mean that we would be allocating more to the expensive
stocks/sectors that performed best in the recent past and less to the stocks/sectors that offered
the most value. This would result in our risk increasing whilst weightings are determined,
lowering our return expectations.
S&P 500: Large Cap Equity Sector Weights
S&P 500: Large Cap Equity Sector Weights
Energy
Raw Materials
Industrials
Consumer Cyclicals
Consumer Staples
Financials
Technology
Telecom
40%
30%
20%
10%
0%
Jan-67N
Jan 67
ov-72S
Nov
72
ep-78J
Sept
78
ul-84M
July
84
Investor rationale for investing in ETFs rather than active funds, is that it removes the risk of under-performance since so few funds
outperform their benchmark indices after fees. However, investing via an ETF also removes any chance of outperforming the index.
Furthermore, buying the index only makes sense if the large constituents of the index are under-valued. Unfortunately, after six years
of rising stock markets, that may no longer be the case.
ay-90M
May
90
ar-96J
Mar
96
Janan-02
02
Nov
07
Nov-07
Source : Factset, Russell, Standard & Poors; CRSP January 1967 - November 2007
05/2015
12
Anti-Benchmark ETFs the answer to underperformance continued
ANGLE
Jacques du Plessis, Chief Investment Officer
These concerns led us to investigate the growing universe of active ETFs that offer many of the benefits of a conventional ETF, like low
costs, transparency of process and predictable outcome but with the benefit of active management process.
TOBAM’s Anti-Benchmark stood out as a clear leader in
the space. They were established in 2005 and have over $4bn
in assets under management. Their approach is designed to
maximise the degree of diversification when selecting the
weighting of assets in the portfolio allocation process. The
Anti-Benchmark equity portfolios generated by this approach
have been shown to provide greater returns than market cap
weighted benchmarks over a market cycle. These portfolios
typically also have significantly lower volatility than the market
cap weighted benchmark. Our research indicates that the
systematic returns available from equity markets is higher than
previously estimated using market cap weighted benchmarks,
and are also far more stable through time.
PERFORMANCE SINCE INCEPTION
MDP AB WORLD SHARE CLASS A
MSCI DAILY TR NET WORLD USD
LIVE DATA
The overall benefit of TOBAM alternative beta
strategy is even more apparent when we blend it
with the portfolio of active alpha seeking equity
managers in the Iconic Aggressive Fund. Within one
defined asset class like global equities, it is extremely
difficult to get meaningful diversification and it is
diversification that enables us to offer an investment
solution with a better risk adjusted return profile than
the index.
05/2015
13
ANGLE
Stock News
Andrew Flavell, Wealth Manager & Chris Ball, Investment Analyst
Short news snippets from some of the local and global stocks we monitor. If you’d like to discuss any in more depth, please contact your
wealth manager.
Charter Communications Inc
The company is seeking to remake the US cable television industry by acquiring larger rival Time Warner Cable Inc for $56
billion and will try to skirt the regulatory obstacles that helped sink Comcast Corp’s earlier bid for Time Warner Cable. The
combined company would control a big swath of the cable and Internet markets, marking a huge step toward industry
consolidation, long advocated by cable pioneer John Malone, Charter’s biggest shareholder. Reuters
On the back of this research, analysts have upgraded Charter Communications to a buy with analysts from Raymond
James and Wells Fargo indicating the stock will outperform the market. UBS have a target price of USD220 for the stock
indicating 20% upside in 12 months. On the back of this news, Time Warner Cable jumped 15% and now trades at a
market cap of USD51 billion, USD5 billion discount to the proposed acquisition price. AlphaWealth
Zooplus
Zooplus, which sells online in 13 European countries, including France, Germany, Italy, Spain and the United Kingdom, says
Q1 sales will be a record for the company. “The total sales of EUR 169 million in the first quarter of 2015 are well above the
target we set for ourselves and also mark a new record high. The sales growth of 36% is again greater than the growth rate
of 33% for the full year 2014,” said Cornelius Patt, CEO of Zooplus. “Particularly remarkable is the acceleration of growth
in the German-speaking region. A major driver of the positive sales performance was once again the high rate of customer
retention, which was again over 90% in the first quarter of 2015. Furthermore, new customer business is growing across all
regions.” Internet Retailer
On the back of a roadshow hosted by AlphaWealth for Astellon, a prominent and unique money manager, that form part
of our offshore hedge fund strategy, it became clear that their favourite pick Zooplus offers significant upside. The online
pet food retailer is one of a select few online retail stores that has a positive free cash flow yield and continues to justify
the earnings multiple by providing shareholders with significant growth. AlphaWealth
05/2015
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Stock News continued
Andrew Flavell, Wealth Manager & Chris Ball, Investment Analyst
Tiffany & Co
Better than expected sales and profits over the quarter ended 30 April 2015 caused luxury jeweller Tiffany & Co’s share
price to jump 11.5% to its highest point since January. International Business Times
This is a significant turnaround after the company posted disappointing Christmas trading results. The company attributed
the “earnings beat” to new products that were launched during the period and price increases. The CT60 Watch and the
T jewellery line have been able to successfully boost margins and sales growth. While not cheap (trading in line with peer
multiples) the growth and cash generated from operation was impressive to see in the results. AlphaWealth
Michael Kors
Michael Kors’ brand of luxury populism may be hitting some limits. The accessories brand, which grew rapidly by offering
luxury to the masses, said sales at existing stores fell 5.8% in the three months ended March 28, driven by a 6.7% decline in
North America and a 5.6% drop in Europe. The drop was partly due to a slowdown in spending by tourists because of the
strong dollar and weak euro, but also reflected a sharp falloff in the company’s watch business. Wall Street Journal
The company fell 21% on the back of the news to USD47 per share. Analysts and investors were alarmed by the negative
company outlook for sales growth as well as the decline in the two major trading regions. This is the biggest intraday
decline since the company’s IPO in 2011. AlphaWealth
05/2015
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Disclaimer
This document is intended to provide general information regarding AlphaWealth, its affiliates and Group companies (“AW”) and its
solutions; products and services. The opinions expressed in this article do not constitute investment, tax or other advice and you should
consult your professional advisor before you make any decision, or take any action which might affect your personal finances or business.
Please be advised that this is not a full disclosure of the risks involved in making an investment in any financial solution, product, stock
or fund referred to in this report. The value of currencies, securities or investments and the price of shares which might be mentioned
in this newsletter could fall as well as rise. Investment performance is not guaranteed in any way and past performance is not a
guarantee of future returns or indicative of future performance. Returns are dependent on the values of underlying investments, which
are subject to fluctuation and may be volatile. An investor may not get back the full amount invested. Any performance information
included in this report is unaudited. The returns shown are calculated net of fund management costs only. Other costs and taxes may be
applicable. Certain strategies employed may include unregulated investments. All information as set out in this document is provided
for information purposes only and no responsibility or liability of any kind or nature, howsoever arising (including in negligence), will
be accepted by AW, its officers, employees and agents for any errors contained in, or for any loss arising from use of, or reliance on this
document. All rights, including copyright, in this document shall vest in AW. No part of this document may be reproduced or amended
without the prior written consent of AlphaWealth (Pty) Ltd. Alpha Wealth Proprietary Limited and its group companies are licensed
financial services providers in terms of the Financial Advisory and Intermediary Services Act, 2002. FSP no, 13808 and 534.
05/2015
16
doc_354959574.pdf
This presentation explain professional investors blunder continued.
05/2015
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Keep it. Simple.
Message from the CEO
We all make investments mistakes and it’s comforting to know we are in good company. Nick Pawley profiles some great
investors and some of their mistakes. The moral of the story is that it happens and when it does, its important to keep a
clear head.
We’re all on a medical aid and we expect to be covered in full when we make it through the swinging doors of a hospital –
except we often aren’t covered in full and we may get left with large bills despite the huge premiums we pay. Depending
on your scheme, gap cover may be what’s needed. AlphaWealth can now help you with your medical aid issues.
The retirement age of 65 is really a very arbitrary number – particularly as you approach that age fit and healthy. We look
at where that number comes from and how important it is to invest to live very much longer than that.
Many of our clients hold money offshore. What would happen upon death – does your local will cover the distribution of
those assets? Well that depends. Judy Snyman tells you what you need to know.
We’ve noticed a marked uptick in interest in impact investing. If you or your family are philanthropic, consider investing
for social return. We interview an authority about how to get impact investing to work for you.
Keith McLachlan is impressed with Master Drilling Group and he tells you why it’s such a great local investment.
Jacques du Plessis, our chief investment officer is nothing if not thorough. He investigates how to take advantage of ETFs
without the potential pitfalls and comes up with Anti-Benchmark ETFs. And we close with a couple of interesting stock
picks.
Enjoy this month’s selection of articles and as usual we appreciative any feedback.
With best wishes,
Kerry
@kerrywestfynn
JOHANNESBURG |
CAPE TOWN |
DURBAN |
LONDON |
GENEVA |
[email protected]
MAURITIUS |
MALTA |
HONG KONG
03 2015
1
Even professional investors blunder
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Nick Pawley, Wealth Manager
It goes without saying that investing is a double edged sword, the possibility of making a return comes at the risk of losing capital. This
is ultimately the risk return dynamic we have all come to know so well. Far too often we hear about professional investors who don’t
seem to put a foot wrong, going from one successful deal to another without losing a cent along the way. We all know there’s more
to it than that. Therefore it is useful to be reminded from time to time, that even highly sophisticated investors get it wrong.
There have been numerous recent blunders we could share; the melt down of African Bank and how that dented the reputations of
numerous top rated asset managers, or the massive underperformance by local value managers who have been invested in local gold
miners.
In this brief synopsis we’ll look at two very well known individual investors, Ivan Clarke and Warren Buffett. I’m not suggesting that I
could have done any better, but rather I’m highlighting that even professional investors with a tremendous amount of experience get it
wrong. It would be unfair to critique either of these icons because everything is easy in hindsight.
Ivan Clarke. One of the most formidable investors who made his presence felt for the most part of the new millennium is Ivan Clarke.
A local icon who came from humble beginnings and worked his way to the top of Grindrod remains one of South Africa’s renowned
investors. Having joined Grindrod in 1977, he rose through the ranks to become CEO, a position he held from 1999 to 2006.
During his time at the helm and along with the help of a strong board, Ivan steered the group from a reported loss of approximately
R66m in 1999 to the number one shipping company in South Africa and one of the top listed shipping companies in the world. Quite
simply, he turned a company with a market cap of just under R100m into a global business worth just over R8 billion with operations
in over 38 countries. His name is synonymous with the success of this shipping giant, but he too has had his fair share of investment
blunders.
In 2011, Clark joined Chemspec, a small paints and coatings group in dire need of a turnaround strategy. Ivan’s investment of roughly
R80m withered away before his eyes as the group failed to turn a profit, despite numerous efforts to restructure the business. Over four
years, Chemspec tapped the market for new capital three times and collectively raised R528m, a figure that dwarfed the market cap of
R100m, before the company applied for business rescue earlier this year.
05/2015
2
Even professional investors blunder continued
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Nick Pawley, Wealth Manager
Whilst the outcome of rescue plan is yet to be finalised, it goes without saying that Chemspec has burnt a massive hole in Clark’s pocket
and is an investment which he won’t forget in a hurry.
His loss seems unimaginable, even relative to his net worth which is estimated at R260m. A loss of R70-R80m equates to a drawdown
of 30%, something most retirees can’t handle. Recent comments in the media suggest that Clark is still optimistic that some value will
be extracted from Chemspec, but he admits, he may not be around to see it.
Warren Buffett. Warren Buffett is the world’s most respected business magnet, investor and philanthropist. The Oracle of Omaha,
who has amassed a personal multi-billion dollar fortune during his lifetime, is well known for his investing principles which focus on
discipline, patience and value.
Some of his best stock picks as measured by average annual compound return are as follows:
Buffet’s firm Berkshire Hathaway first started buying
Tesco in 2006. In 2012 he increased his stake to over 5%
despite a shock profit warning. But from 2013 through
2014 he slowly started trimming his position as cracks in
the business started to appear. In his own words, “In the
world of business, bad news often surfaces serially: you see
a cockroach in your kitchen; as the days go by you meet his
relatives.”
ANNUAL AVERAGE
COMPOUND RETURN
Petro China
BYD
Freddie Mac
Berkshire Hathaway
Wells Fargo
52 %
41 %
24 %
22 %
21 %
Tesco share price performance over ten years
TOTAL
RETURN
YEARS
HELD
720 %
671 %
1525 %
1745300 %
9417 %
5
6
13
49
24
TSCO LN EQUITY 05/20/2015
500
350
Berkshire’s after-tax loss from the Tesco investment was
$444m, which is roughly only one-fifth of 1% of Berkshire’s
net worth. Although hardly a blemish on an astounding
track record, Buffett himself agrees that “thumb-sucking”
cost him a fortune.
In his 50th letter to shareholders of Berkshire Hathaway,
the 84 year old veteran investor embarrassingly admitted
to selling Tesco shares far too late. “I made a huge mistake
with this investment by dawdling,” he said.
400
400
300
250
220.85
200
150
200M
100M
6039M
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
05/2015
3
Avoid large unpaid accounts when you are hospitalised
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Debbie Peckover, Wealth Manager
According to research done by the Council for Medical Schemes, an overwhelming majority of people indicated that they
join a medical scheme to protect themselves from financial ruin brought on by unpaid provider bills after being hospitalised.
Accidents happen and they can, and too often put the entire livelihoods of families at risk. We have all heard of people
being forced to use their life savings to cover costly hospital bills.
To be member of a medical scheme often does not offer sufficient cover. Service providers can charge more than the tariff
the medical scheme pays. Medical scheme members should invest in a gap cover policy to pay the shortfalls for services
rendered by healthcare providers in hospital, or for co-payments or deductibles applicable on some procedures performed
in and out of hospital. Having a good, professional accredited medical scheme broker to advise you on the detail of your
benefits, as well as the shortfalls and pitfalls of your medical scheme option, can therefore help you get the most out of the
medical scheme service you are paying for and can prevent the shock of unpaid bills.
Medical aids have a tariff at which they will reimburse providers, i.e. 100%, 200% or 300% of the scheme rate. For example
your medical aid may specify that they will reimburse a surgeon R30 000 (100%) for a procedure, however he charges
R120 000 (300%), leaving you responsible for the balance. This is where your gap cover will step in as it will reimburse you
for the difference up to five (500%) or six times (600%) the scheme rates dependent on your medical scheme option.
DURING THE LAST FEW MONTHS GAP COVER HAS MADE THE FOLLOWING PAYMENT
TO CLIENTS WHERE THEIR MEDICAL SCHEMES HAVE NOT SETTLED IN FULL:
Product
Procedure
Claimed
Scheme
Gap paid
GapCoMri
Spinal stenosis
R102 521.52
R51 952.49
R50 569.03
Combo
Knee
R36 179.80
R15 333.90
R21 845.90
GapCoMri
MVA
R168 495.28
R81 803.05
R77 426.48
GapCo
Reflux
R12 500.00
R0.00
R12 500.00
GapCoSub
Knee
R30 747.06
R11 056.14
R19 690.92
GapCoMri
Cancer
R21 022.56
R9 394.40
R11 628.16
Investing in a gap cover policy has extensive benefits for
medical scheme members. Policies are available from
only R135 per family per month.
If you would like to find out more about gap cover,
please talk to your wealth manager or medical aid
broker.
05/2015
4
The root of the retirement problem: retirement age
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Chris Pretorius, Wealth Manager
It is a well-publicised statistic that only 6.5% of South Africans are able to retire. But why is this the case? Do we lack the necessary
education to make simple mathematical calculations? Have we lost the ability to plan? Has consumerism become so important that
saving no longer has any value and we simply hope that a combination of our children and the state will provide for us in our old age?
The problem of people being unable to afford retirement is however not isolated to South Africans. Only 55% of Americans are able
to retire and 52% of Brits. Given that South Africa’s unemployment rate is 35% and the US and UK unemployment rates are only 5.4%
and 5.5%, it is clear that is not just a South African problem but a global one. This raises the question as to whether there is a more
fundamental problem with the notion of retirement. In attempting to answer this question, I investigated the history of retirement to
see if it provides any answers.
The first country to adopt a formal pension system was Germany in 1889. Chancellor Otto von Bismarck initiated a plan that the state
would provide for non-working Germans over the age of 70. Bismarck’s rationale for adopting the pension system was not social
consciousness but in an attempt to stifle the growth of Marxism that was growing in popularity. It was not until 1916 that that they
lowered the retirement age to 65. This means that the retirement age has not changed for the last 100 years, yet medicine has
advanced and we are living a lot longer. To put this into perspective, the table illustrates the life expectancy of white males in the US
over the last century.
Year
1890
1910
1930
1950
1970
1990
2015
Life expectancy
42
50
59
68
70
75
79
If we apply Bismarck logic to today, he would have made the retirement age 107! Life expectancy
roughly increases by 5 years every 20 years. This means the amount of savings required also increases.
So a 20 year old cannot apply the same formula as their parents to plan for their retirement. I
remember when I was growing up and my mom said she required 15 times her annual salary to
provide for retirement. Today the figure is closer to 25 times. The bottom line is that we need to
either work past our retirement age or save considerably more than our parents to adequately
provide for our retirement.
In the next issue of Alpha Angle, Chris will take look at some of the traditional retirement savings
vehicles and whether they actually work.
05/2015
5
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FOREIGN WILLS - HOW DO THEY WORK & WHEN DO YOU NEED ONE?
Judy Snyman, Trust & Fiduciary Specialist
Since the relaxation of exchange control, an increasing number of South Africans have been
investing offshore with important consequences for their estate planning. If you have invested
offshore, consider whether you need a foreign will to deal with your foreign assets on your
death. The general principles to consider are:
01
02
The main reason for creating a foreign will is to avoid delays in winding up your estate. If a South
African resident only has a South African will, the executor of his estate may have to apply for foreign
court orders to recognise his right to deal with the foreign property. This could result in delays, problems
with foreign language and additional administration costs. Having a foreign executor appointed by a
foreign will means that your local estate can be finalised without delays caused by obtaining recognition
in a foreign jurisdiction.
A foreign will dealing with offshore assets will address specific requirements of the relevant jurisdiction(s)
and legal system(s) and simplify the administration of the offshore estate.
03
It is important to specify in the local will that it deals only with local assets, and in the foreign will that
it deals only with the relevant foreign assets.
04
Having separate wills for local and foreign assets will not affect a South African resident’s liability for
estate duty. If resident in South Africa, estate duty is payable in South Africa on all assets, wherever
situated. There may also be estate duty payable in the jurisdiction where the assets are situated and in
such a case, the estate will receive a credit which can be set off against duties payable in South Africa.
05
If the assets consist of foreign investments administered by a South African institution, there is no
need to prepare a separate foreign will.
06
There are jurisdictions, like Switzerland, where it is not necessary to have a foreign will in place for
assets held in that jurisdiction. This is because a South African executor will be recognised by financial
institutions without the need for expensive court applications.
07
08
Joint accounts: in certain jurisdictions two or more people may hold accounts jointly. The effect of this
is that on the death of one of them, the account simply continues in the name of the survivor(s) and a
foreign will is not needed to deal with assets held in such an account.
It is always advisable to have a will where the foreign property is immovable property. This is because
different countries have different laws that deal with the transfer of property and these wills have to be
drawn up by a specialist attorney in that country.
05/2015
6
Master Drilling Group: an amazing business
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Keith McLachlan, Small Caps Fund Manager
We recently went on a site visit of Master Drilling ’s Fochville Head Office where they unveiled their latest, largest
drill, the RD8, which is the landmark 100 th rig in their globally-dominant fleet.
It is not often that a South African business is globally dominant in anything. It is even less often that this business is actually a small
cap company (outside of the Top 40). And it is even less often (verging on almost never) that this business has a head office in the
sleepy, mining town, Fochville.
Master Drilling Group Ltd (share code: MDI) is exactly that: operating out of the Group’s head office in Fochville, it services major mining
houses around the world with its global (customised) raise boring fleet that is about three times larger than its nearest global competitor.
Raise boring is used in underground mining to create a circular hole between two levels utilising an initial drilling process that is then
aggressively widened with a reaming head to make it the exact size required. Traditionally these shafts are used for ventilation, but the
technology is improving rapidly (pioneered by Master Drilling, of course) and it is not unimaginable to see these shafts eventually being
used for people and plant (i.e. becoming “access shafts”).
All technicalities aside, raise boring eliminates the need for explosives and is often cheaper, faster, more accurate and safer for
underground mines than other alternatives. These metrics ultimately sell themselves in the dangerous, messy and cost-sensitive world
of mining. Founded by the current CEO and majority shareholder, Danie Pretorius in 1986, Master Drilling has built itself from a single
drilling rig into a global force in raise boring. The group even designs its own drills and rigs in-house, sources and manufactures the
components (mostly out of its Chinese subsidiary) and assembles the finished rigs. This allows it to constantly (and cost effectively)
grow and improve its fleet without competitors having access to these highly-guarded engineering secrets, another key competitive
advantage in the market place.
We were invited to a site visit at their Fochville head office where they unveiled the RD8, which is both their 100th rig in their fleet
and amongst the largest drills in the world. An incredible feat in engineering, the RD8 will be used in a multi-year contract on the
Palabora mine. Even if the contract expires without it being renewed, the RD8 (as with basically all of Master Drilling’s fleet), can be
disassembled and moved to another contract anywhere in the world. It should have a useful life of more than 20 years.
05/2015
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Master Drilling Group: an amazing business continued
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Keith McLachlan, Small Caps Fund Manager
Used drill bits that are sent
back to Master Drilling’s
Fochville operations for
reprocessing. These drill
bits are a large expense
and the ability to reprocess
and reuse them a major
advantageous cost-saving.
Master Drilling’s 100th
drill in its fleet, the
RD8, is among the
largest drills in the
world and will be used
on the Palabora mine in
South Africa.
The recently consolidated
spare part warehouse
in
Fochville.
Similar
warehouses are established
in various geographies
around the world and even
on major contracts, as
they provide operational
continuity while returns to
scale make them efficient.
This mobility allows Master Drilling to move where the demand is, profiting out of the commodity market without any real commodity
spot price risk. The fact that the world’s natural resources are becoming deeper and deeper underground creates tailwinds that help
fuel the long-term demand for the group’s services, but in the short-term, the fact that the majority of their revenues come from
operational drilling helps create a stable revenue base (ventilation shafts are steadily drilled as an operating mine’s shafts progress).
It is not just the geographic mobility that is impressive, but the entrepreneurial drive in the business. Master Drilling identified that
their core competency lies in drilling holes in the ground, so they began to look for other applications for these services. The applications
for raise boring are numerous, from construction sector “piling” to hydro-electric projects. In fact, the latter is what the group picked
up in terms of a large contract for drilling for a major hydro-electric project in Columbia.
And the future?
Master Drilling’s recent fleet expansion and upgrading (they have been steadily automating) is almost complete, its move into parallel
industries is progressing with the hydro-electric win as an example, and they are progressively opening a new territory or two each
year across the world. All these initiatives are scaling the group, improving its profitability and de-risking its business model, while the
lower forward capex requirements means that the group will soon be able to pay dividends. Master Drilling is doing all of this when the
mining and commodity markets are arguably experiencing the toughest times in recent memory. I believe Master Drilling is an amazing
business earning hard currencies in a globally-dominant position that comes with high barriers to entry, deep competitive advantages
and a clear, achievable growth strategy.
I would say that an investment into Master Drilling comes with a “free option” on the commodity and mining sector, but the stock is
trading on an 11.4x price earnings! I believe that you aren’t even paying full price for the business at this point, let alone getting any
extra free option on mining recovery in the future.
It is simple: Master Drilling is an amazing business and their shares are cheap. Hence, we hold it in the AlphaWealth Small Cap Fund.
05/2015
8
Impact investing offers good returns as well as social change
ANGLE
Marc Hosiosky, Chief Financial Officer
Your investments can generate both financial returns and measurable social and/or environmental impact. That’s the premise
behind impact investing, an area that’s quickly gaining traction among socially aware investors. Studies conducted over the last three
years indicated that investors are increasingly satisfied with impact investing and plan to invest more money in the future. If you or your
family are keen to generate not only income but social change, please talk to your wealth manager or Marc Hosiosky, chief financial
officer of AlphaWealth who has a great deal of experience in this sector for families as well as individuals. They can tell you more about
new tax incentives and structures that are useful for this type of investment
This month, Marc talks to Filipe Santos, visiting professor of Social Entrepreneurship at INSEAD about social entrepreneurship and
impact investing and how families can best engage in this growing investment sector.
?
WHAT IS SOCIAL ENTREPRENEURSHIP?
Social entrepreneurs throughout the world match clever solutions to neglected societal problems to achieve a strong impact.
Social entrepreneurship, a nascent field since the early 80s, became a mainstream area in 2006 when the Nobel Peace Prize was
awarded to Muhammad Yunus and his pioneering bank for the poor people in Bangladesh – Grameen which had by then spun a global
micro-finance industry with 150 million clients and $25 billion in loans.
?
But beyond the well-known example of microcredit as a business innovation to alleviate poverty, thousands of social entrepreneurs
are developing innovative solutions to some of the world’s most intractable problems, including long-term unemployment, youth
citizenship, access to basic services for disadvantaged populations, affordable housing, and knowledge access and sharing.
WHAT ARE A FEW EXAMPLES?
Among the social entrepreneurs whom I have met over the last few years to explore their business innovations, there are those using
the powerful sense of smell of rats to locate war mines in Africa and thus save countless lives www.apopo.org, disseminating physical
education to elderly people in France thus increasing well-being and lowering health costs www.sielbleu.org, fitting river boats as
hospitals in Bangladesh to provide health care to under-served populations www.friendship-bd.org, using technology to engage and
empower close to a million youngsters from favelas in Brazil www.cdi.org.br, and using theatre projects to empower long-term young
unemployed people in Germany and placing 60% of them back into a professional career www.projektfabrik.org .
05/2015
9
Impact investing offers good returns as well as social change continued
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Marc Hosiosky, Chief Financial Officer
?
?
IS SOCIAL ENTREPRENEURSHIP BUSINESS OR CHARITY?
Interestingly, social entrepreneurship is closer to business than to charity. Social entrepreneurs mobilise resources and develop
sustainable solutions to important societal problems, often perfecting their solutions at a local level before replicating and disseminating
them nationally or even globally. Instead of focusing on profits (which is a measure of how much value they are able to capture), social
entrepreneurs care about and focus directly on value creation for society. Thus they are motivated to operate in areas that do not seem
profitable at first and are therefore ignored by commercial entrepreneurs (usually due to low ability to pay by clients or to a high level
of value spillovers).
WHY IS INTEREST IN SOCIAL ENTREPRENEURSHIP RISING?
Many of the areas which social entrepreneurs focus upon serve localised segments of the populations and are outside the reach
of governments, even if well-endowed and well-intentioned. Furthermore, problems in our society are increasingly complex and
interconnected and we need the innovative potential of thousands of social entrepreneurs trying to solve them, not a central government
dictating solutions which are not always effective.
Thus, social entrepreneurship is critical for the proper functioning of the capitalist system. It is driven by mankind’s interest for others
as opposed to self-interest. The rise of social entrepreneurship comes at the right time, since the capitalist system is increasingly being
challenged due to the inequalities that it generates and the gaps that it exhibits.
Alongside the mainstreaming of social entrepreneurs, we are now seeing the rise of an investment market to support them. The field
of impact investing aims to identify entrepreneurs and organizations that can achieve substantial impact while offering a return on
investment. A related field, called venture philanthropy, is less concerned by financial return, but rather maximizes the societal impact
of the investments.
?
HOW CAN FAMILY BUSINESSES FUND SOCIAL ENTREPRENEURS?
New funds focusing on impact investing or venture philanthropy are appearing in every country, many of them inspired and funded
by family foundations. There are two main reasons why family offices should care about social entrepreneurship and impact investing.
First, these areas are fully aligned with the long term view and societal concerns of family businesses. Family business leaders invest for
the next generation, not the next quarter, and their success depends on thriving and engaged communities, both at a local and national
05/2015
10
Impact investing offers good returns as well as social change continued
ANGLE
Marc Hosiosky, Chief Financial Officer
level. Social entrepreneurs act as catalysts to engage with and improve communities, be it in the favelas of Rio, the suburbs of Paris, or
the villages of India. Their solutions are more sustainable than charities and international aid, and usually focus on the underlying causes
of societal problems, not merely their symptoms. Second, these areas make excellent business domains to engage the next generation
of the family. Either as social entrepreneurs or as investors in social businesses, engaging with the field of social entrepreneurship will
teach the next generation of the family about clever and innovative businesses, at the same time as they build character and values
that can become a foundation of the next generation’s involvement with the family business. Strategic philanthropy around social
entrepreneurship can also become a rallying point for family union and the reinforcement of family values.
?
WHAT ARE SOME OF THE BEST PRACTICES TO ENGAGE IN SOCIAL ENTREPRENEURSHIP?
First, instead of a scattered approach, it is best to focus on a particular domain of action, ideally connected to the core business of
the family, or to an area strongly aligned with its values, or to a particular geography tied to the family identity. If your business is civil
construction, affordable housing provides a very interesting growth area. If it is in retail, then ethical and sustainable supply chains
provides a fertile field for engagement. Or maybe your family has a particular set of values around the importance of education or the
fight against long-term unemployment. These are thriving areas of action for social entrepreneurs. Or maybe the goal is to promote
sustainable development in impoverished regions where the family business was founded.
In summary, a focused approach, particularly in areas of strong capabilities or identity of the family, will allow leveraging and
strengthening the family core values and skills, providing more value to society beyond the financial resources mobilized.
Second, involvement in social entrepreneurship should be seen as more than a stand-alone project. Instead, it may demand the building
of a portfolio of activities through a fund, or a network of support with different partner organisations. It should involve the engagement
and collaboration of different generations of the family, or even be used as a platform to collaborate with other business families that
operate in the same region or have similar values and societal concerns. This will strengthen the family business networks and the sense
of union in large families particularly beyond the second generation.
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Anti-Benchmark ETFs the answer to underperformance
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Jacques du Plessis, Chief Investment Officer
?
When we started the process of researching the building blocks for our new offshore equity fund, Iconic Aggressive, there were
a number of factors to consider give the prevailing market environment. A key focus within the group has always been to select
active managers that consistently produce above market returns and to maximise the diversification benefits by using a small group of
managers with different approaches. However we also need to take into account the growing strength of the exchange-traded funds
(ETF) market and the attractive proposition of fees and predictable return outcome. So we scoured the world, considering all options
available to meet our mandate requirements.
The growth of US-based exchange-traded funds (ETFs) has significantly exceeded every other asset management category. By the end
of 2014, the total number of index-based and actively managed ETFs had grown to 1,411, and total net assets were $1,974 billion. Of
these, 111 were actively managed ETFs with $16.5 billion in total net assets. In more than 20 years since the product’s inception, ETFs
have been used by most managers as a purely passive tool, designed to provide broad market exposure.
ETFs continue to garner significant flows for this use and continuous product innovation and a
steady progression toward value-added strategies have also helped fuel the recent expansion.
One of our major concerns about a traditional ETF that tracks an equity index is reflected in the
graph to the right. With most of the traditional indices following a capital-weighted approach,
we were concerned about the risks of this approach. In a capital-weighted index allocation
investments are made based on the size of the company. Therefore as the share price of a stock
appreciates, the greater their weighting in the index and conversely so when the prices declines.
This graph shows the relative weighting of the different sectors in the S&P 500 over time. What
is very noticeable is the dramatic changes. This means that an index is not actually a passive
investment strategy but a dynamic strategy that evolves over time. What concerned us most
is that this dynamic approach would mean that we would be allocating more to the expensive
stocks/sectors that performed best in the recent past and less to the stocks/sectors that offered
the most value. This would result in our risk increasing whilst weightings are determined,
lowering our return expectations.
S&P 500: Large Cap Equity Sector Weights
S&P 500: Large Cap Equity Sector Weights
Energy
Raw Materials
Industrials
Consumer Cyclicals
Consumer Staples
Financials
Technology
Telecom
40%
30%
20%
10%
0%
Jan-67N
Jan 67
ov-72S
Nov
72
ep-78J
Sept
78
ul-84M
July
84
Investor rationale for investing in ETFs rather than active funds, is that it removes the risk of under-performance since so few funds
outperform their benchmark indices after fees. However, investing via an ETF also removes any chance of outperforming the index.
Furthermore, buying the index only makes sense if the large constituents of the index are under-valued. Unfortunately, after six years
of rising stock markets, that may no longer be the case.
ay-90M
May
90
ar-96J
Mar
96
Janan-02
02
Nov
07
Nov-07
Source : Factset, Russell, Standard & Poors; CRSP January 1967 - November 2007
05/2015
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Anti-Benchmark ETFs the answer to underperformance continued
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Jacques du Plessis, Chief Investment Officer
These concerns led us to investigate the growing universe of active ETFs that offer many of the benefits of a conventional ETF, like low
costs, transparency of process and predictable outcome but with the benefit of active management process.
TOBAM’s Anti-Benchmark stood out as a clear leader in
the space. They were established in 2005 and have over $4bn
in assets under management. Their approach is designed to
maximise the degree of diversification when selecting the
weighting of assets in the portfolio allocation process. The
Anti-Benchmark equity portfolios generated by this approach
have been shown to provide greater returns than market cap
weighted benchmarks over a market cycle. These portfolios
typically also have significantly lower volatility than the market
cap weighted benchmark. Our research indicates that the
systematic returns available from equity markets is higher than
previously estimated using market cap weighted benchmarks,
and are also far more stable through time.
PERFORMANCE SINCE INCEPTION
MDP AB WORLD SHARE CLASS A
MSCI DAILY TR NET WORLD USD
LIVE DATA
The overall benefit of TOBAM alternative beta
strategy is even more apparent when we blend it
with the portfolio of active alpha seeking equity
managers in the Iconic Aggressive Fund. Within one
defined asset class like global equities, it is extremely
difficult to get meaningful diversification and it is
diversification that enables us to offer an investment
solution with a better risk adjusted return profile than
the index.
05/2015
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Stock News
Andrew Flavell, Wealth Manager & Chris Ball, Investment Analyst
Short news snippets from some of the local and global stocks we monitor. If you’d like to discuss any in more depth, please contact your
wealth manager.
Charter Communications Inc
The company is seeking to remake the US cable television industry by acquiring larger rival Time Warner Cable Inc for $56
billion and will try to skirt the regulatory obstacles that helped sink Comcast Corp’s earlier bid for Time Warner Cable. The
combined company would control a big swath of the cable and Internet markets, marking a huge step toward industry
consolidation, long advocated by cable pioneer John Malone, Charter’s biggest shareholder. Reuters
On the back of this research, analysts have upgraded Charter Communications to a buy with analysts from Raymond
James and Wells Fargo indicating the stock will outperform the market. UBS have a target price of USD220 for the stock
indicating 20% upside in 12 months. On the back of this news, Time Warner Cable jumped 15% and now trades at a
market cap of USD51 billion, USD5 billion discount to the proposed acquisition price. AlphaWealth
Zooplus
Zooplus, which sells online in 13 European countries, including France, Germany, Italy, Spain and the United Kingdom, says
Q1 sales will be a record for the company. “The total sales of EUR 169 million in the first quarter of 2015 are well above the
target we set for ourselves and also mark a new record high. The sales growth of 36% is again greater than the growth rate
of 33% for the full year 2014,” said Cornelius Patt, CEO of Zooplus. “Particularly remarkable is the acceleration of growth
in the German-speaking region. A major driver of the positive sales performance was once again the high rate of customer
retention, which was again over 90% in the first quarter of 2015. Furthermore, new customer business is growing across all
regions.” Internet Retailer
On the back of a roadshow hosted by AlphaWealth for Astellon, a prominent and unique money manager, that form part
of our offshore hedge fund strategy, it became clear that their favourite pick Zooplus offers significant upside. The online
pet food retailer is one of a select few online retail stores that has a positive free cash flow yield and continues to justify
the earnings multiple by providing shareholders with significant growth. AlphaWealth
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Stock News continued
Andrew Flavell, Wealth Manager & Chris Ball, Investment Analyst
Tiffany & Co
Better than expected sales and profits over the quarter ended 30 April 2015 caused luxury jeweller Tiffany & Co’s share
price to jump 11.5% to its highest point since January. International Business Times
This is a significant turnaround after the company posted disappointing Christmas trading results. The company attributed
the “earnings beat” to new products that were launched during the period and price increases. The CT60 Watch and the
T jewellery line have been able to successfully boost margins and sales growth. While not cheap (trading in line with peer
multiples) the growth and cash generated from operation was impressive to see in the results. AlphaWealth
Michael Kors
Michael Kors’ brand of luxury populism may be hitting some limits. The accessories brand, which grew rapidly by offering
luxury to the masses, said sales at existing stores fell 5.8% in the three months ended March 28, driven by a 6.7% decline in
North America and a 5.6% drop in Europe. The drop was partly due to a slowdown in spending by tourists because of the
strong dollar and weak euro, but also reflected a sharp falloff in the company’s watch business. Wall Street Journal
The company fell 21% on the back of the news to USD47 per share. Analysts and investors were alarmed by the negative
company outlook for sales growth as well as the decline in the two major trading regions. This is the biggest intraday
decline since the company’s IPO in 2011. AlphaWealth
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Disclaimer
This document is intended to provide general information regarding AlphaWealth, its affiliates and Group companies (“AW”) and its
solutions; products and services. The opinions expressed in this article do not constitute investment, tax or other advice and you should
consult your professional advisor before you make any decision, or take any action which might affect your personal finances or business.
Please be advised that this is not a full disclosure of the risks involved in making an investment in any financial solution, product, stock
or fund referred to in this report. The value of currencies, securities or investments and the price of shares which might be mentioned
in this newsletter could fall as well as rise. Investment performance is not guaranteed in any way and past performance is not a
guarantee of future returns or indicative of future performance. Returns are dependent on the values of underlying investments, which
are subject to fluctuation and may be volatile. An investor may not get back the full amount invested. Any performance information
included in this report is unaudited. The returns shown are calculated net of fund management costs only. Other costs and taxes may be
applicable. Certain strategies employed may include unregulated investments. All information as set out in this document is provided
for information purposes only and no responsibility or liability of any kind or nature, howsoever arising (including in negligence), will
be accepted by AW, its officers, employees and agents for any errors contained in, or for any loss arising from use of, or reliance on this
document. All rights, including copyright, in this document shall vest in AW. No part of this document may be reproduced or amended
without the prior written consent of AlphaWealth (Pty) Ltd. Alpha Wealth Proprietary Limited and its group companies are licensed
financial services providers in terms of the Financial Advisory and Intermediary Services Act, 2002. FSP no, 13808 and 534.
05/2015
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