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Find and invest in “high-yielding growth-sensitive assets” is an investment slogan that’s now replacing those old outdated ideas – such as hedging against inflation, spread and asset classes – throughout the world. High time, too. The investment environment is changing just as drastically as the earlier realisation that the earth wasn’t a flat mass resting on four pillars. The incredible events of our time that present an entirely new challenge to the investment manager are listed on the left.
However, the catchword for investment remains “high-yielding growth-sensitive assets”. And that’s not from a piece of bare land on a golf estate somewhere in Limpopo or a United States government bond that promises to pay investors dollars in two years’ time but meanwhile offers a current cash return of only 0,15%/year.
Luckily, there are plenty of high-yielding growth-sensitive assets available to SA investors on the JSE. (See my reply on p20 to Bernard Jansen and the nine shares with which you can beat the Top 40.)
The timing of how and when to get the best out of this strange new economy and investment environment isn’t something the current generation of investment advisers knows much about. And the old idea of buying and holding on to something good, as perfected by Warren Buffett, also doesn’t always work any more. But don’t feel bad: read this precious comment in The Wall Street Journal:
“There’s absolutely no way anyone knows what’s going to happen.”
That was the reply by Mark Rylance, a financial adviser in California, in the authoritative newspaper to a question on whether the current month-old bull market in share prices was going to stumble soon or whether share prices were going to rise further.
“Excellent article,” was the comment of a reader, “but why did you bumble along for a further two pages, falling this way and that?” The remark that there’s no way anyone can know what’s going to happen tells it all.
The graph of the US dollar/euro exchange rate for the past two years shows clearly that nobody knows. In fact, the graph tells three stories – and all three say nobody was right. Early last year everyone realised the US was bankrupt. Federal Reserve president Ben Bernanke started printing dollars in what’s now known as QE1, the abbreviation for quantitative easing. Of course, you must flee from the currency of a country where interest rates are forced down to zero and where the central bank prints money as fast as it can to force-feed the economy – more or less what the French do to geese to enlarge their livers.
Oil-exporting countries are threatening to insist on payment in euro instead of US dollars in future. And even China is wondering whether it shouldn’t convert part of its US dollar reserves into some other currency. The value of the euro rose from US$1,25 in February to around $1,50 currently.
Just when everyone was happy with the story, piggy rumours began doing the rounds in Europe. A new word – “PIIGS” – was created. It stands for Portugal, Ireland, Italy, Greece and Spain – countries whose sovereign debt is so high they’re even failing the financial tests set up for banks.
Even worse, the euro – barely 10 years old – began stumbling. End of the first fairytale. The second started – and the euro weakened from $1,50 to $1,20, while efforts were made to save the Greeks from their incompetent, debt-ridden government.
Interestingly enough, the Greek private sector has very little debt and Greeks even held small protests saying they’d be happy to see the government go bankrupt rather than have their taxes increased. Very reluctantly, German Chancellor Angela Merkel (who is becoming the new Iron Lady) decided to save Greece, and a special fund was created for that purpose.
That was the start of the third story. Meanwhile, the US’s Ben Bernanke started suggesting QE1 wasn’t big enough and began planning QE2 (still quantitative easing, not ship building). The US dollar would decline even more, analysts predicted.
There was a rush by investors to other kinds of assets. The price of gold – plus actually everything on the agricultural market, from maize to soya, of which there’s an oversupply – went up. That was a hedge against the weak US dollar. And shares too. So stock markets worldwide enjoyed one of the best October months in many decades.
But now it’s time for the fourth chapter of the story. Just when, thanks to QE2, advisers wanted to write a serial about an ongoing weak US dollar and a constant rise in the price, Ireland began sinking to its knees. Now no. 2 of the PIIGS must be saved. The same old story of the euro that will not be able to continue existing – especially if Portugal also collapses – and the illness spreads to neighbouring Spain. The analysts are talking about Spain and its economy in clichés: “It’s too big to fail” or even “It’s too big to save”.
And snuggled tightly up against Spain is France, with a President who’d like to be re-elected but clearly remembers how angry the French were just weeks ago when he increased their retirement age from 60 to 62.
There’s an impending currency war. The outcome of that war could be much worse than protectionism, the protection of your own, which was the general economic policy during the Depression of the Thirties.
Write this chapter yourself. What’s the worst immediate danger? QE2 or the sovereign debt of Ireland and then Portugal and even Spain? Action after that should be simple. Strong US dollar, keep away from gold, other commodities and even listed shares. Weak US dollar – and therefore a Europe saving itself – buy gold again, even soya beans, and of course shares.
“There’s absolutely no way anybody knows what’s going to happen.” As The Wall Street Journal’s reader recommended, we’ll start and end with that paragraph.
RETIREMENT
The save-and-retire formula
PSG KONSULT INVESTMENT economist Dawie Klopper recently wrote that a prospective pensioner can now only draw about R4 000 per R1m of his retirement money every month if he wants to make an adjustment for inflation in his withdrawal every year and also wants to protect his capital. These are probably the two outdated ideas that have now lowered the safe withdrawal rate to R4 000/month/R1m invested. The debate about why that happened is being conducted elsewhere. Here it’s only necessary to look at the implications of the R4 000/month/R1m capital. For many years the following simple formula served as a guide to see whether you were saving enough to retire.
Current annual income X age ÷ 10
= Net assets
Test yourself. If your gross annual income before tax is R500 000 and you’re aged 60 your net assets must be R3m. This includes the value of your pension fund. If Klopper is right you can safely draw R4 000/R1m, or in the case of R3m, R12 000/month or R144 000/year to live on. That’s quite a bit less than the pre-retirement income of R500 000/year.
Clearly, the formula needs to be amended. Perhaps, in the new world, it should read: Annual income (R500 000) times age (60) divided by five, not 10, for a retirement value of R6m. Of course, that needs a lot more saving. According to Klopper’s guideline of R4 000/month/R1m it would hopefully double your tax-free income from R12 000 to R24 000/month if you could indeed save R6m.
But with respect to Klopper and all the other advisers, it’s easy to calculate the pensioner will only be able to withdraw R4 000/month for each R1m of assets now. Interest rates have halved over the past two years and the inflation rate – which, incidentally, kept interest rates high in the past – is gone.
Rather than hedging against inflation – which, according to the wisdom of the past, is going to erode both your income and your capital – the opposite has happened and financial advisers should rather have protected us against falling inflation and the accompanying fall in interest rates or the return on your retirement money.
Klopper’s guideline of R4 000/month/ R1m of capital has fallen over the past five years: first from R8 000/month to R6 000 and now to R4 000. Dawie Klopper is right: you can’t do anything about that unfortunate kind of drop in interest in your old age, especially now that the Sharemax bubble and its promise of 12%/year has burst. The safe and probably only solution would be, as he suggests, to change your lifestyle.
The adjustment in the retirement formula above – age times annual income divided by 10, which should now rather be divided by five – needs two miracles. If you’re 55 now you must save like never before so your assets can double. If you’re already 60 or 65, start praying – and make serious adjustments to your lifestyle.
The other alternative – and most likely the only one – is the new consoling word in investment management: look for, hunt for high-yielding growth-sensitive investments.
It’s probably not out of place to give a word of caution here: the assets and other investment miracles of the past can let you down badly, just when it’s too late to start earning new money.
MARKETS
Emerging, developed, submerged...
Blanket references are no longer relevant
OVER the last few years investors have heard little other than the fabulous potential offered by the BRICS (Brazil, Russia, India and China) and the MAVINS (Mexico, Australia, Vietnam, Indonesia, Nigeria and South Africa) while ignoring the likes of the US and Europe, which have been plunged into a debt crisis coupled with “low” growth prospects.
But maybe investors are missing a trick here.
“Coca-Cola for instance is not an American company anymore,” says Dr Adrian Saville of the Gordon Institute of Business Science (Gibs) and asset management firm Cannon Asset Managers, pointing out that the company makes more than half its money outside of the country.
As the attached table shows, forecast growth rates and price to earnings multiples tell an interesting story.
In other words you are paying the same “price” for a South African company as you are for a US company. Similarly investors are prepared to pay 20 times earnings for a company in China but ignore the fact that many European companies offer exposure to the region at a far lower multiple.
“Maybe, just maybe, traders are just gradually going to have to loosen up on the hitherto rigid classification on “developed” and “emerging” and look rather to individual country merits,” comments stockbrokerage Imara SP Reid in their December newsletter to clients.
The firm raises an important issue that South African investors need to become aware of when they note:
“Just as the S&P 500 companies derive somewhere around half of their income from outside the US and hence are not entirely beholden to the whims of US politicians, so the JSE contains many companies which will continue to thrive despite government shortcomings. This includes exporters of coal, iron and manganese ore, food and, more recently, other retailers especially those with African footprints.”
Saville has been vocal on the fact that there is a strong possibility and even probability that many developed nations will default. He went so far as to say it was “Mathematically impossible for the developed world not to default”.
His advice was that investors should consider looking for quality shares that offer investors an ability to return money to shareholders in the form of dividends.
“There are many good value, rock solid shares out there that offer dividend yields in excess of yields on government bonds,” says Saville.
A good example could be a company like European pharmaceutical group Pfizer which is trading on an earnings multiple of 8 times earnings but a dividend yield of 4,3% or retailer Tesco which you can buy on a 3,5% yield and 13 times price multiple.
In comparison you would be paying a far greater price to be buying into South African stories such as Aspen (20 times earnings and 0,74% dividend) and MassMart (25 and 2,7%).
With the relaxing of exchange controls South Africans can be far more tactical about where and how they invest their funds to generate long-term returns. Investors no longer need to just buy pre-packaged “emerging market” baskets or funds but can put their money in quality stocks so the next time your local broker comes peddling the emerging market story to you, be aware you have options.
Dear Vic, I remember a cover article in Finweek around 18 months to two years ago where you made the argument that “...we may never see the JSE at 32 000 again...” I’ve been looking for that report but, short of visiting my local library, I have been unable to.
However, I’m interested in your thoughts now that the market is hovering around 31 500 again. Obviously, that’s a massive improvement against the lows of a few months ago.
Understand me well: I’m a big fan of your writing (when are you bringing out a book?), so don’t see this as criticism. But I do feel your grim view about the stock market has been proven wrong (in theory?) less than two years later. For me that’s quite remarkable.
BERNARD JANSEN
via email
GRIM VIEW QUESTIONED
Vic’s almost red face
I REALISED quite a few months ago that my cover story of 12 March 2009 – in which we made the funeral arrangements for the Satrix Top 40 index – could backfire badly on me. The cover had two messages: “Nine shares to beat Satrix 40” and “Portfolio picks to get you out of the doldrums”.
The motivation for the latter claim was twofold. At that stage, the prospects for commodity shares – which bore so much weight in the Satrix 40 index – looked pretty bad, and Anglo American had just skipped its dividend for the first time. It was also just after the listing of British American Tobacco and the shock that share – at that stage by far the biggest on the JSE – wasn’t included in the Satrix 40 index. That’s because of BAT’s inward listing and the various rules on what South Africa’s institutional investors may invest in. It’s partly a continuation of those hateful old exchange control regulations. We were frightened that more shares – such as SABMiller and especially Richemont – could perhaps be excluded from the tradeable index.
The listed Satrix 40 at that stage was trading at 1750c and the latest price is 2850c, an increase of 62%. That’s still a few points away from the underlying prediction it wouldn’t soon increase again (if ever, I said) to the underlying 32 000. (The listed Satrix 40’s price is 1/10 of the index.)
Instead of Satrix 40, we recommended nine shares that had no exposure to the resources sector. That was a mistake, especially if you look at the latest gold rush and the increase in BHP Billiton’s share price.
The nine shares we recommended – and which are all still good investments, especially since they answer well to the new target of high-yielding growth-sensitive assets – all performed excellently, with the exception of BAT. Or they fared better than the Satrix 40, or at least not much worse (see table).
But where to now?
The nine shares in the table are still excellent. It might now be a good idea to exclude the two financial shares of Sanlam and Standard Bank and replace them with BHP Billiton. In my proposal of 12 March, I gave BAT a weighting of 40%. In terms of capital growth that was completely misplaced loyalty over the past 18 months. It might also be a good alternative to buy far less BAT and invest the difference in BHP Billiton.
Somewhere in the portfolio there may also be a place for the fat dividend Lewis pays every year. If you can manage with less of a dividend, Richemont always offers good value. For the rest, they still look excellent exposures to high-yielding growth-sensitive assets.
Marc Ashton
However, the catchword for investment remains “high-yielding growth-sensitive assets”. And that’s not from a piece of bare land on a golf estate somewhere in Limpopo or a United States government bond that promises to pay investors dollars in two years’ time but meanwhile offers a current cash return of only 0,15%/year.
Luckily, there are plenty of high-yielding growth-sensitive assets available to SA investors on the JSE. (See my reply on p20 to Bernard Jansen and the nine shares with which you can beat the Top 40.)
The timing of how and when to get the best out of this strange new economy and investment environment isn’t something the current generation of investment advisers knows much about. And the old idea of buying and holding on to something good, as perfected by Warren Buffett, also doesn’t always work any more. But don’t feel bad: read this precious comment in The Wall Street Journal:
“There’s absolutely no way anyone knows what’s going to happen.”
That was the reply by Mark Rylance, a financial adviser in California, in the authoritative newspaper to a question on whether the current month-old bull market in share prices was going to stumble soon or whether share prices were going to rise further.
“Excellent article,” was the comment of a reader, “but why did you bumble along for a further two pages, falling this way and that?” The remark that there’s no way anyone can know what’s going to happen tells it all.
The graph of the US dollar/euro exchange rate for the past two years shows clearly that nobody knows. In fact, the graph tells three stories – and all three say nobody was right. Early last year everyone realised the US was bankrupt. Federal Reserve president Ben Bernanke started printing dollars in what’s now known as QE1, the abbreviation for quantitative easing. Of course, you must flee from the currency of a country where interest rates are forced down to zero and where the central bank prints money as fast as it can to force-feed the economy – more or less what the French do to geese to enlarge their livers.
Oil-exporting countries are threatening to insist on payment in euro instead of US dollars in future. And even China is wondering whether it shouldn’t convert part of its US dollar reserves into some other currency. The value of the euro rose from US$1,25 in February to around $1,50 currently.
Just when everyone was happy with the story, piggy rumours began doing the rounds in Europe. A new word – “PIIGS” – was created. It stands for Portugal, Ireland, Italy, Greece and Spain – countries whose sovereign debt is so high they’re even failing the financial tests set up for banks.
Even worse, the euro – barely 10 years old – began stumbling. End of the first fairytale. The second started – and the euro weakened from $1,50 to $1,20, while efforts were made to save the Greeks from their incompetent, debt-ridden government.
Interestingly enough, the Greek private sector has very little debt and Greeks even held small protests saying they’d be happy to see the government go bankrupt rather than have their taxes increased. Very reluctantly, German Chancellor Angela Merkel (who is becoming the new Iron Lady) decided to save Greece, and a special fund was created for that purpose.
That was the start of the third story. Meanwhile, the US’s Ben Bernanke started suggesting QE1 wasn’t big enough and began planning QE2 (still quantitative easing, not ship building). The US dollar would decline even more, analysts predicted.
There was a rush by investors to other kinds of assets. The price of gold – plus actually everything on the agricultural market, from maize to soya, of which there’s an oversupply – went up. That was a hedge against the weak US dollar. And shares too. So stock markets worldwide enjoyed one of the best October months in many decades.
But now it’s time for the fourth chapter of the story. Just when, thanks to QE2, advisers wanted to write a serial about an ongoing weak US dollar and a constant rise in the price, Ireland began sinking to its knees. Now no. 2 of the PIIGS must be saved. The same old story of the euro that will not be able to continue existing – especially if Portugal also collapses – and the illness spreads to neighbouring Spain. The analysts are talking about Spain and its economy in clichés: “It’s too big to fail” or even “It’s too big to save”.
And snuggled tightly up against Spain is France, with a President who’d like to be re-elected but clearly remembers how angry the French were just weeks ago when he increased their retirement age from 60 to 62.
There’s an impending currency war. The outcome of that war could be much worse than protectionism, the protection of your own, which was the general economic policy during the Depression of the Thirties.
Write this chapter yourself. What’s the worst immediate danger? QE2 or the sovereign debt of Ireland and then Portugal and even Spain? Action after that should be simple. Strong US dollar, keep away from gold, other commodities and even listed shares. Weak US dollar – and therefore a Europe saving itself – buy gold again, even soya beans, and of course shares.
“There’s absolutely no way anybody knows what’s going to happen.” As The Wall Street Journal’s reader recommended, we’ll start and end with that paragraph.
RETIREMENT
The save-and-retire formula
PSG KONSULT INVESTMENT economist Dawie Klopper recently wrote that a prospective pensioner can now only draw about R4 000 per R1m of his retirement money every month if he wants to make an adjustment for inflation in his withdrawal every year and also wants to protect his capital. These are probably the two outdated ideas that have now lowered the safe withdrawal rate to R4 000/month/R1m invested. The debate about why that happened is being conducted elsewhere. Here it’s only necessary to look at the implications of the R4 000/month/R1m capital. For many years the following simple formula served as a guide to see whether you were saving enough to retire.
Current annual income X age ÷ 10
= Net assets
Test yourself. If your gross annual income before tax is R500 000 and you’re aged 60 your net assets must be R3m. This includes the value of your pension fund. If Klopper is right you can safely draw R4 000/R1m, or in the case of R3m, R12 000/month or R144 000/year to live on. That’s quite a bit less than the pre-retirement income of R500 000/year.
Clearly, the formula needs to be amended. Perhaps, in the new world, it should read: Annual income (R500 000) times age (60) divided by five, not 10, for a retirement value of R6m. Of course, that needs a lot more saving. According to Klopper’s guideline of R4 000/month/R1m it would hopefully double your tax-free income from R12 000 to R24 000/month if you could indeed save R6m.
But with respect to Klopper and all the other advisers, it’s easy to calculate the pensioner will only be able to withdraw R4 000/month for each R1m of assets now. Interest rates have halved over the past two years and the inflation rate – which, incidentally, kept interest rates high in the past – is gone.
Rather than hedging against inflation – which, according to the wisdom of the past, is going to erode both your income and your capital – the opposite has happened and financial advisers should rather have protected us against falling inflation and the accompanying fall in interest rates or the return on your retirement money.
Klopper’s guideline of R4 000/month/ R1m of capital has fallen over the past five years: first from R8 000/month to R6 000 and now to R4 000. Dawie Klopper is right: you can’t do anything about that unfortunate kind of drop in interest in your old age, especially now that the Sharemax bubble and its promise of 12%/year has burst. The safe and probably only solution would be, as he suggests, to change your lifestyle.
The adjustment in the retirement formula above – age times annual income divided by 10, which should now rather be divided by five – needs two miracles. If you’re 55 now you must save like never before so your assets can double. If you’re already 60 or 65, start praying – and make serious adjustments to your lifestyle.
The other alternative – and most likely the only one – is the new consoling word in investment management: look for, hunt for high-yielding growth-sensitive investments.
It’s probably not out of place to give a word of caution here: the assets and other investment miracles of the past can let you down badly, just when it’s too late to start earning new money.
MARKETS
Emerging, developed, submerged...
Blanket references are no longer relevant
OVER the last few years investors have heard little other than the fabulous potential offered by the BRICS (Brazil, Russia, India and China) and the MAVINS (Mexico, Australia, Vietnam, Indonesia, Nigeria and South Africa) while ignoring the likes of the US and Europe, which have been plunged into a debt crisis coupled with “low” growth prospects.
But maybe investors are missing a trick here.
“Coca-Cola for instance is not an American company anymore,” says Dr Adrian Saville of the Gordon Institute of Business Science (Gibs) and asset management firm Cannon Asset Managers, pointing out that the company makes more than half its money outside of the country.
As the attached table shows, forecast growth rates and price to earnings multiples tell an interesting story.
In other words you are paying the same “price” for a South African company as you are for a US company. Similarly investors are prepared to pay 20 times earnings for a company in China but ignore the fact that many European companies offer exposure to the region at a far lower multiple.
“Maybe, just maybe, traders are just gradually going to have to loosen up on the hitherto rigid classification on “developed” and “emerging” and look rather to individual country merits,” comments stockbrokerage Imara SP Reid in their December newsletter to clients.
The firm raises an important issue that South African investors need to become aware of when they note:
“Just as the S&P 500 companies derive somewhere around half of their income from outside the US and hence are not entirely beholden to the whims of US politicians, so the JSE contains many companies which will continue to thrive despite government shortcomings. This includes exporters of coal, iron and manganese ore, food and, more recently, other retailers especially those with African footprints.”
Saville has been vocal on the fact that there is a strong possibility and even probability that many developed nations will default. He went so far as to say it was “Mathematically impossible for the developed world not to default”.
His advice was that investors should consider looking for quality shares that offer investors an ability to return money to shareholders in the form of dividends.
“There are many good value, rock solid shares out there that offer dividend yields in excess of yields on government bonds,” says Saville.
A good example could be a company like European pharmaceutical group Pfizer which is trading on an earnings multiple of 8 times earnings but a dividend yield of 4,3% or retailer Tesco which you can buy on a 3,5% yield and 13 times price multiple.
In comparison you would be paying a far greater price to be buying into South African stories such as Aspen (20 times earnings and 0,74% dividend) and MassMart (25 and 2,7%).
With the relaxing of exchange controls South Africans can be far more tactical about where and how they invest their funds to generate long-term returns. Investors no longer need to just buy pre-packaged “emerging market” baskets or funds but can put their money in quality stocks so the next time your local broker comes peddling the emerging market story to you, be aware you have options.
Dear Vic, I remember a cover article in Finweek around 18 months to two years ago where you made the argument that “...we may never see the JSE at 32 000 again...” I’ve been looking for that report but, short of visiting my local library, I have been unable to.
However, I’m interested in your thoughts now that the market is hovering around 31 500 again. Obviously, that’s a massive improvement against the lows of a few months ago.
Understand me well: I’m a big fan of your writing (when are you bringing out a book?), so don’t see this as criticism. But I do feel your grim view about the stock market has been proven wrong (in theory?) less than two years later. For me that’s quite remarkable.
BERNARD JANSEN
via email
GRIM VIEW QUESTIONED
Vic’s almost red face
I REALISED quite a few months ago that my cover story of 12 March 2009 – in which we made the funeral arrangements for the Satrix Top 40 index – could backfire badly on me. The cover had two messages: “Nine shares to beat Satrix 40” and “Portfolio picks to get you out of the doldrums”.
The motivation for the latter claim was twofold. At that stage, the prospects for commodity shares – which bore so much weight in the Satrix 40 index – looked pretty bad, and Anglo American had just skipped its dividend for the first time. It was also just after the listing of British American Tobacco and the shock that share – at that stage by far the biggest on the JSE – wasn’t included in the Satrix 40 index. That’s because of BAT’s inward listing and the various rules on what South Africa’s institutional investors may invest in. It’s partly a continuation of those hateful old exchange control regulations. We were frightened that more shares – such as SABMiller and especially Richemont – could perhaps be excluded from the tradeable index.
The listed Satrix 40 at that stage was trading at 1750c and the latest price is 2850c, an increase of 62%. That’s still a few points away from the underlying prediction it wouldn’t soon increase again (if ever, I said) to the underlying 32 000. (The listed Satrix 40’s price is 1/10 of the index.)
Instead of Satrix 40, we recommended nine shares that had no exposure to the resources sector. That was a mistake, especially if you look at the latest gold rush and the increase in BHP Billiton’s share price.
The nine shares we recommended – and which are all still good investments, especially since they answer well to the new target of high-yielding growth-sensitive assets – all performed excellently, with the exception of BAT. Or they fared better than the Satrix 40, or at least not much worse (see table).
But where to now?
The nine shares in the table are still excellent. It might now be a good idea to exclude the two financial shares of Sanlam and Standard Bank and replace them with BHP Billiton. In my proposal of 12 March, I gave BAT a weighting of 40%. In terms of capital growth that was completely misplaced loyalty over the past 18 months. It might also be a good alternative to buy far less BAT and invest the difference in BHP Billiton.
Somewhere in the portfolio there may also be a place for the fat dividend Lewis pays every year. If you can manage with less of a dividend, Richemont always offers good value. For the rest, they still look excellent exposures to high-yielding growth-sensitive assets.
Marc Ashton
