Companies included in the JSE’s Top 40 index earn roughly two-thirds of their annual profits outside South Africa. It’s worth mentioning that astounding statistic since our “big cats” caused quite a stir over recent weeks with various corporate manoeuvrings (real and rumoured), events that raised the profile of those counters on international markets. BHP Billiton quite unexpectedly made a cash offer of close on US$40bn for Potash Corp. In terms of market cap, it’s the world’s largest producer of raw materials for the fertiliser industry. Old Mutual is sitting around the negotiation table with HSBC, apparently the world’s largest bank, which wants to take over Nedbank for $7bn.
From Australia we’re hearing rumours that SABMiller is the favourite to take over that country’s struggling Foster’s brewery. A price of £7bn – almost $10bn (more than R70bn) – is being mentioned.
The commentators on CNN Money were actually quite excited about the significant revival in corporate activity – mergers and takeovers – about a week ago, because that’s usually good for share prices. And all three names they mentioned are conveniently available here on the JSE for local investors. That’s more proof it’s unnecessary to go wandering far afield to enjoy the benefits of international exposure for your portfolio.
The billions now being bandied about by SA’s big guns – $40bn, $10bn and $7bn – still sound high to local investors. After all, that’s even more than our (little) country’s gross domestic product was a few years ago. Once again, these large numbers simply demonstrate that in the Top 40 – therefore also in the listed Satrix 40 index – there are quite a number of players holding their own in markets worldwide. There are also a few very nice emerging players.
Drikus Combrink, portfolio manager at PSG Konsult in Pretoria East, scratched around a bit in the Top 40 and came to the conclusion this select group already earns more than two-thirds, that’s 67%, of its annual profit overseas. The very biggest guns – and for the sake of convenience, we include British American Tobacco (BAT) – earn around 80% of their wealth in the outside world. Their names are usually among the top five: for example, BHP Billiton, which is already the biggest miner in the world; SABMiller, which is on its way to becoming the biggest brewer while already the biggest bottler of Coca-Cola; MTN is the communications leader in Africa and the Middle East; and Naspers (parent company of Finweek), with its unique portfolio of assets, is also quietly making a place for itself among the world leaders.
These companies are big, really big, in terms we in SA were used to, especially in the days of economic isolation. With between 50% and 100% of their total income coming from activities offshore, these companies are also far above the incessant yapping of puppies about nationalisation and Government’s predilection for fumbling around the key issues effecting business.
Threats of nationalisation – of course, only of local assets – become irrelevant. Especially BAT’s and Richemont’s shareholders don’t have to pay much attention to that.
However, it’s not only local investors who should look at the successes. Berkshire and its guru investment head, Warren Buffett, get more favourable publicity every week than our shortlist of BHP Billiton, BAT, SABMiller and Naspers, to mention only a few.
Nevertheless the table, compiled with the help of Google, shows the share prices of all those new world leaders fared significantly better over the past five years than Berkshire Hathaway’s. The selective and disinterested American investor – if he exists – may perhaps fare much better over the next decade with a portfolio of Naspers, SABMiller and BHP Billiton than with Buffett’s older US line, especially if the global economy continues tilting in favour of the emerging world, of which even Africa could perhaps be a part. The shares of these three companies can easily be bought by Americans on their own markets, far from the malleable misdirected musings of ANC Youth League president Julius Malema.
It’s also nice to read through the names of some of the select group’s leaders. The boy from Brits – the very popular Meyer Kahn – is still SABMiller chairman, while the group’s CEO, Graham McKay, is equally well known in SA. Marius Kloppers, the active young man at the head of BHP Billiton, was also born in SA. It’s just a pity that Jan du Plessis decided to change the chairman’s seat at BAT for that of Rio Tinto after 10 years. The latter, just like BHP Billiton and also Foster’s – which is now the target of SABMiller – is “apparently” an Australian company.
Of course, the international successes of our top cats create wonderful opportunities for SA investors, large and small, who want to spread their wings slightly. Smart, very smart, company managers do it for you. Avoid the trap of playing on the international markets by yourself with the permitted R4m you may take out of the country. The world’s best asset managers can’t even beat the global or regional share indices regularly. The so-called fund of fund of international funds – sometimes there are up to five levels – in which you can invest your money are seldom sustainably better than the averages, the indices, themselves.
Make life easy. Look at these tables. Check how much your favourite earns overseas. Look especially at newcomers, such as Shoprite, not to mention the world’s best, like BHP Billiton and SABMiller. All these shares are at your fingertips. You receive the dividends on your doorstep and one day your executor will wind up your estate easily.
INVESTMENT | Dream portfolio Taking the worries out of retirement“WE SOLD THE FARM for R10m. Apart from the money, we’ve got nothing – only the paid-off house at Hermanus and two cars, one of which is a 4x4, of course. Please look after us,” my good friend Hannes wrote from Vaalwater. He and Lettie are both just over 65 and in the best of health.
Just as I was going to send the enquiry to one of my better qualified friends with the necessary certificates, I suddenly realised nobody is allowed to give advice about anything – though my golfing friends, not one of them a qualified instructor, often give me unsolicited advice for the entire 18 holes we play every week.
Of course, the usual advice to Hannes would be: diversify. That means 30% overseas, make sure inflation doesn’t erode your money and keep at least one year’s running expenses in cash on the money market. It’s nice to be able to look back at the past over your shoulder, but all three of those standard moves would have made you poorer over the past decade.
First of all, I realise the drop in interest rates over the past decade have done much more harm to the portfolios – no, standard of living – of pensioners than inflation has. Nevertheless, many asset managers are still obsessed with hedging against inflation and very few hedge against lower interest rates.
Let me explain: A decade ago the chap with a safe fixed deposit of R5m in the bank earning 12%/year interest was very satisfied. In fact, the annual income of R600 000 made him well off. Now the interest rate on fixed deposits – and it’s almost only in SA that it’s still this high – is only 7%/year, and will fall further. The interest cheques have already fallen from R600 000 to R350 000/year. And it’s not the fault of inflation. Well, no: it actually is. That’s gone and fallen from 10% to less than 4% – and that’s why the interest is so much lower. Contrary to what the experts say, my advice is: Hannes, we must protect you against falling inflation and falling interest rates.
The second piece of rubbishy advice – apologies for calling it that – is about diversification and the 30% of assets that must be placed overseas. That’s outdated apartheid advice and I rub my hands in glee over those poor souls who are now bringing their money back after 10 years, tails between their legs. Of course there must be diversification – but the aim must be to earn 30% of your income outside SA.
More than 60% of the earnings of the Top 40 shares on the JSE are earned overseas. If you simply invest in the Top 40 you’ll already have more offshore exposure than the biggest – or is that the most narrow-minded? – asset managers recommend.
The third traditional absurd recommendation – that one year of current expenditure must be invested on the money market in cash – also doesn’t fit in with my planning. If you’re worried about unexpected expenses, simply keep the mortgage on your retirement home open, with a small outstanding balance of R1 000 or so, and if you suddenly need money you simply draw it from the flexibond.
End of tirade. Let’s look at practical hints and tax implications. Those above 65 should in any case not pay tax.
Interest incomeHannes and Lettie can comfortably arrange R270 000 of interest tax-free every year. The very first apportionment of the R10m is R3m in five-year retail bonds at an interest rate of 9%/year. Hannes’s portion of the investment is around R1,7m and Lettie’s R1,3m. That simply works as follows: interest up to R32 000/year is tax-free for taxpayers older than 65. In addition, the tax threshold is R84 200. If you earn less than that, you don’t pay tax. If you’re older than 65 you can also deduct all medical expenses from your taxable income. The main member of the family’s medical aid usually receives that benefit. Hannes, you can easily earn an annual interest income of R32 000, plus R84 200 and – let’s estimate medical expenses – including your medical aid contributions of, say, R30 000/year. That’s a total of R146 000/year without having to pay tax. For that you can safely invest R1,6m in retail bonds and earn R144 000/year interest.
Lettie, who was fortunately a taxpayer herself all those years, can go ahead and earn R32 000 plus R84 200 – that is R116 200 – of interest, also without having to pay any tax. The interest from retail bonds on R1,4m is R126 000/year. Lettie won’t have to pay any tax on that either.
Now we come to the remaining R7m from the sale of their farm. The table showing how I’d invest the R7m tells its own story. We focus on shares that declare a good dividend – with British American Tobacco right on top. Incidentally, nearly all BAT’s income is earned outside SA. Admittedly, the R1m in BHP Billiton doesn’t earn much in dividends but it’s the hedging, the entrance ticket to the new world of economic prosperity. Consumers worldwide are realising Charles Glass still brews excellent beer here: that’s why we risk R1m on SABMiller. Standard Bank and its Chinese friend, ICBC, are going to provide investors with a lot of satisfaction in the years to come. That wonderful dividend of Lewis heading for 8%/year is even better than tobacco farming.
Nationalisation | The mines under threatTHE MINES EARN almost all their income overseas. Anglo Platinum, South Africa’s largest platinum producer, sells only a fraction of its production at home. However, we decided to exclude the direct mines for the purposes of portfolio diversification. After all, the reserves are still in SA and there can always be some nonsense spoken about nationalisation. We call it nonsense, because it’s much easier to talk about it than in fact to nationalise the mines, to manage them and pump out the acid water, as is required at Grootvlei.
The story of nationalisation in SA goes back a long way. Paul Kruger was strongly opposed to the “uitlanders” but never really threatened to nationalise the mines. Instead, he granted one of his family members the exclusive right to import dynamite and supply it to the mines.
The young Nico Diederichs, later Minister of Finance and still later State President of SA, mentioned the possibility when he drew up the National Party’s election charter in 1947 for the election they eventually won in 1948. The Freedom Charter, accepted by the Congress of the People at Klip River in 1956 and later by the ANC, specifically recommends the nationalisation of SA’s gold mines and other monopolistic businesses. However, when the ANC came to power in 1994 the gold mines were already so depleted the matter no longer attracted much attention.
It’s nothing new for the government of a country to rant and rave about the mines. Early in the Seventies the NP government was very angry at the liberal element in this country and then Minister of Mines, Carel de Wet, threatened to nationalise Harry Oppenheimer’s Anglo American gold mines, who was at the time also financing the political ambitions of the sole Liberal, Helen Sussman. De Wet later took on the more peaceful post of ambassador in London.
Even Pik Botha, at one time the longest-serving foreign affairs minister in the world, once threatened SA would withdraw its minerals from the world market if the United Nations continued interfering in apartheid policies.
Gold – and now probably platinum – mines are also certainly a good hedge against a sudden fall in the rand’s value. Currently, that doesn’t look likely. However, gold – plain, ordinary gold bullion, with an increase of 363% or 16,5%/year – has been a very good investment over the past 10 years. If you still like gold, buy Absa’s Newgold and avoid the gold mines threatened so much by upcoming politicians still in nappies.