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Johannesburg - Be on your guard against the fashionable new term “alternative investment” asset managers are currently bandying about.
These alternative investments supposedly take the place of ordinary listed shares on the JSE, because our equity is purportedly too expensive in comparison with what’s happening in the rest of the world.
But the ideas have yet to become deeds. In short, very little information is being made available about the names of those alternative investments and where they can be obtained – because perhaps there aren’t any.
And don’t confuse investments with trading opportunities.
I’ve been investing in alternatives for years but I’ve never called them investments, as they’re simply trading opportunities to be utilised.
Buy Satrix 40 or entrust your money to a good asset manager and, yes, then you can hang a “five-to-10-years” label on it.
Any other alternatives – such as government bonds or other interest-bearing assets, direct investments in property of whatever nature, and especially the commodity market – are simply trading opportunities and never five- to 10-year investments.
You trade in the things.
For example, look at property. Every now and then people in the game like to “advise” that now’s the right time to enter the buy-to-lease market, especially for properties around the R700 000 price range, often nice two- or three-bedroom flats or duettes that can be let for R3 500 to R4 500/month.
Be very careful. Even though we do most of our buying at sheriff’s auctions at prices up to 30% lower than the supposed market price, I’ve burnt my fingers badly in the past – and I seem to be in the process of doing so again.
There are all kinds of pitfalls to watch out for. The quality of tenants is going down.
People whose incomes force them to this category of tenant are still under considerable pressure. You can calculate the thing any way you like, but if the tenant is a bad bet, you’re likely to be without an income for at least two months – perhaps a good deal longer.
Another pitfall is the levy to the homeowners’ association. Even on ridiculously small flatlets – with a value of R500 000 and a possible rental income of R3 000/month – the levies and the rates and taxes are often already up to R1 000/month.
If you still have to give an agent his share of the rental, it becomes a stupid investment.
Also be very careful of older buildings. Anything older than 20 years and you just can’t sell it. But also remember the quality of those properties that shot up like mushrooms in the building boom of 2001 are very suspect, so there are therefore maintenance costs to consider.
Keep away from vacant land, especially the fully serviced stands with all their monthly costs but where no one is interested in building.
The whole interest-bearing market in SA – but also in the United States in particular – is saturated. To the brim.
The consensus views worldwide are that interest rates won’t fall any further. In fact, almost everyone is predicting they’re going to start rising again from 2012.
Decisions about an investment in interest-bearing instruments are easy. If interest rates rise, or even no longer fall, you don’t invest in such assets.
It’s very simple. Take a government bond with a coupon rate of 7.5%/year fixed for the next 10 years.
For example, in SA that’s currently trading at a market rate of 7.4%. The price of the bond is around R101 for every R100 of nominal value.
If the market rate rises to 8.5% – remember, the coupon rate is fixed at 7.4% – the market value of that bond will fall from about R101 to R92.
It’s very simple: when interest rates increase, the market value of fixed-interest-bearing bonds falls and the longer the duration of the bond, the bigger the fall.
The prices of the listed PLS of property companies don’t rise and fall as closely in line with interest rates as do government bonds.
Things such as increases in rental income and a lower vacancy rate can help a little to halt the short-term or direct fall in the prices when interest rates rise.
But in general, the prices of listed property companies fall when interest rates rise – and they’re going to.
Of the three asset classes asset managers like to bandy about when they’re trying to sound impressive – ordinary shares, property and fixed-interest-bearing assets – only the prices of ordinary shares are perhaps safe when interest rates start rising.
So don’t be led astray by honeyed phrases such as: “Make sure you have the right exposure to the three asset classes.”
Property is currently dangerous, and fixed-interest bonds – such as government bonds or Eskom bonds – even more so if interest rates increase, as seems to be generally expected.
The prices of “softs” – that is, agricultural products that are so uniform they can be traded on the market – have exploded over the past 12 months (see table) and suddenly the prospects look even better, though SA has a large surplus of maize.
A wide range of agricultural products is being traded on Safex and that has been, and perhaps still is, an excellent alternative for the now somewhat boring bank and retail shares. But remember: you aren’t investing in maize or wheat, you’re trading in it.
Safex is also a futures market and the product you’ve bought or bought short must be received on a certain date or be delivered.
There’s no such thing as a five-year investment in this market and your profit or loss is reflected daily in your bank balance.
For example, look at the current opportunity in wheat. SA usually harvests its wheat in November and December.
So the wheat now trading for delivery in July is so-called old current harvest wheat. The price is R3 224 per tonne. However, wheat for delivery in December is currently fetching only R3 060/t.
That’s new season wheat, which is only going to be planted from June.
Now that just doesn’t seem logical. Wheat for delivery in December should be more expensive than for July – because after all, the prospective buyer can save finance and storage costs by postponing his purchase.
No, the market says: farmers are going to plant a lot of wheat next year and there will be a surplus. That’s why the price for December is so low.
Nonsense! SA doesn’t meet its own wheat requirements and our farmers can’t produce a surplus, as they can with maize.
If the investor also bears in mind the wheat price is a function of the world price, plus the value of the rand, it seems a good idea to buy some December wheat.
Not only will you share in the current rush to any kind of agricultural commodity but that buy will also be a hedge against the fall in the rand’s value.
If you want to take the position one step further – and would prefer a different kind of risk– it could be a good idea to buy 1 000t of wheat (value: R3m) for delivery in December and 1 000t for delivery in July.
The margin needed for that will be around R40 000.
On that you earn interest of 5%/year. If the markets behave well, the July and December wheat prices will be the same and then there’s a profit of at least R80/t, or a return of a nice 200% on your initial margin.
Not bad for a six-month investment. Oops, not investment. It’s not an investment. It’s a profit from trading in wheat.
The speculator who only buys wheat for delivery in December perhaps has a better chance of a bigger profit, but there could also be a large loss if the current crazy bull market in commodities suddenly blows up, as has happened so often in the past with other bubbles.
Incidentally, in the US the prices of tilled land – land suitable for planting maize, wheat or soya beans – has apparently already gone up by 20% this year.
Farmers, hold on to your farmland. There’s something coming. And you speculators/investors who have the opportunity, take another look at your beach cottage – which is in any case always almost being blown away by the wind – and see if you can’t swap it for a farm.
* This article first appeared in Finweek.
* To read more Finweek articles, click here.
These alternative investments supposedly take the place of ordinary listed shares on the JSE, because our equity is purportedly too expensive in comparison with what’s happening in the rest of the world.
But the ideas have yet to become deeds. In short, very little information is being made available about the names of those alternative investments and where they can be obtained – because perhaps there aren’t any.
And don’t confuse investments with trading opportunities.
I’ve been investing in alternatives for years but I’ve never called them investments, as they’re simply trading opportunities to be utilised.
Buy Satrix 40 or entrust your money to a good asset manager and, yes, then you can hang a “five-to-10-years” label on it.
Any other alternatives – such as government bonds or other interest-bearing assets, direct investments in property of whatever nature, and especially the commodity market – are simply trading opportunities and never five- to 10-year investments.
You trade in the things.
For example, look at property. Every now and then people in the game like to “advise” that now’s the right time to enter the buy-to-lease market, especially for properties around the R700 000 price range, often nice two- or three-bedroom flats or duettes that can be let for R3 500 to R4 500/month.
Be very careful. Even though we do most of our buying at sheriff’s auctions at prices up to 30% lower than the supposed market price, I’ve burnt my fingers badly in the past – and I seem to be in the process of doing so again.
There are all kinds of pitfalls to watch out for. The quality of tenants is going down.
People whose incomes force them to this category of tenant are still under considerable pressure. You can calculate the thing any way you like, but if the tenant is a bad bet, you’re likely to be without an income for at least two months – perhaps a good deal longer.
Another pitfall is the levy to the homeowners’ association. Even on ridiculously small flatlets – with a value of R500 000 and a possible rental income of R3 000/month – the levies and the rates and taxes are often already up to R1 000/month.
If you still have to give an agent his share of the rental, it becomes a stupid investment.
Also be very careful of older buildings. Anything older than 20 years and you just can’t sell it. But also remember the quality of those properties that shot up like mushrooms in the building boom of 2001 are very suspect, so there are therefore maintenance costs to consider.
Keep away from vacant land, especially the fully serviced stands with all their monthly costs but where no one is interested in building.
The whole interest-bearing market in SA – but also in the United States in particular – is saturated. To the brim.
The consensus views worldwide are that interest rates won’t fall any further. In fact, almost everyone is predicting they’re going to start rising again from 2012.
Decisions about an investment in interest-bearing instruments are easy. If interest rates rise, or even no longer fall, you don’t invest in such assets.
It’s very simple. Take a government bond with a coupon rate of 7.5%/year fixed for the next 10 years.
For example, in SA that’s currently trading at a market rate of 7.4%. The price of the bond is around R101 for every R100 of nominal value.
If the market rate rises to 8.5% – remember, the coupon rate is fixed at 7.4% – the market value of that bond will fall from about R101 to R92.
It’s very simple: when interest rates increase, the market value of fixed-interest-bearing bonds falls and the longer the duration of the bond, the bigger the fall.
The prices of the listed PLS of property companies don’t rise and fall as closely in line with interest rates as do government bonds.
Things such as increases in rental income and a lower vacancy rate can help a little to halt the short-term or direct fall in the prices when interest rates rise.
But in general, the prices of listed property companies fall when interest rates rise – and they’re going to.
Of the three asset classes asset managers like to bandy about when they’re trying to sound impressive – ordinary shares, property and fixed-interest-bearing assets – only the prices of ordinary shares are perhaps safe when interest rates start rising.
So don’t be led astray by honeyed phrases such as: “Make sure you have the right exposure to the three asset classes.”
Property is currently dangerous, and fixed-interest bonds – such as government bonds or Eskom bonds – even more so if interest rates increase, as seems to be generally expected.
The prices of “softs” – that is, agricultural products that are so uniform they can be traded on the market – have exploded over the past 12 months (see table) and suddenly the prospects look even better, though SA has a large surplus of maize.
A wide range of agricultural products is being traded on Safex and that has been, and perhaps still is, an excellent alternative for the now somewhat boring bank and retail shares. But remember: you aren’t investing in maize or wheat, you’re trading in it.
Safex is also a futures market and the product you’ve bought or bought short must be received on a certain date or be delivered.
There’s no such thing as a five-year investment in this market and your profit or loss is reflected daily in your bank balance.
For example, look at the current opportunity in wheat. SA usually harvests its wheat in November and December.
So the wheat now trading for delivery in July is so-called old current harvest wheat. The price is R3 224 per tonne. However, wheat for delivery in December is currently fetching only R3 060/t.
That’s new season wheat, which is only going to be planted from June.
Now that just doesn’t seem logical. Wheat for delivery in December should be more expensive than for July – because after all, the prospective buyer can save finance and storage costs by postponing his purchase.
No, the market says: farmers are going to plant a lot of wheat next year and there will be a surplus. That’s why the price for December is so low.
Nonsense! SA doesn’t meet its own wheat requirements and our farmers can’t produce a surplus, as they can with maize.
If the investor also bears in mind the wheat price is a function of the world price, plus the value of the rand, it seems a good idea to buy some December wheat.
Not only will you share in the current rush to any kind of agricultural commodity but that buy will also be a hedge against the fall in the rand’s value.
If you want to take the position one step further – and would prefer a different kind of risk– it could be a good idea to buy 1 000t of wheat (value: R3m) for delivery in December and 1 000t for delivery in July.
The margin needed for that will be around R40 000.
On that you earn interest of 5%/year. If the markets behave well, the July and December wheat prices will be the same and then there’s a profit of at least R80/t, or a return of a nice 200% on your initial margin.
Not bad for a six-month investment. Oops, not investment. It’s not an investment. It’s a profit from trading in wheat.
The speculator who only buys wheat for delivery in December perhaps has a better chance of a bigger profit, but there could also be a large loss if the current crazy bull market in commodities suddenly blows up, as has happened so often in the past with other bubbles.
Incidentally, in the US the prices of tilled land – land suitable for planting maize, wheat or soya beans – has apparently already gone up by 20% this year.
Farmers, hold on to your farmland. There’s something coming. And you speculators/investors who have the opportunity, take another look at your beach cottage – which is in any case always almost being blown away by the wind – and see if you can’t swap it for a farm.
* This article first appeared in Finweek.
* To read more Finweek articles, click here.
