Weekly Thoughts

Financially Speaking May 2008

Life’s admin: Do we create this for ourselves? I’ll just hang this out there…

Dear Client,

Now that we’ve all supported the generator industry and allowed the importers and distributors to have made their money on the ‘jennies’, subsequently ‘fueled’ the increased requirements of diesel through this, Eskom says we can stop this shedding issue and we can all carry on as normal. (Just when I’ve bought LED headlights for all in the household and two of those come-on-when-the-power-goes-off lights) Whatever normal is in a country that says there is nothing wrong up North. Well, at least there’s stuff to talk about!! What would a Swiss person talk about around the braai? Probably don’t even braai….

Investment issues

A couple of days ago I attended Allan Gray’s bi-annual presentation to us guys in Durban. As I’ve said before, these guys that talk have half the alphabet behind their names and are very good at analysing balance sheets, income statements, a company’s dividend flow accompanied by the predicted dividend growth, the potential directional movement of the market that a company they have invested in might take etc. But, they are often extremely boring public speakers. They need coaching in this area; from where to stand, to how to speak clearly, to how to manage the microphone, to body language. They need a corporate client of mine to go fix this.

However, and this however means everything a however can mean, they are very clever and very good at what they do. So I listened to the administrative performance of Allan Gray Investment services, like how quickly the call centre is answering the phones when we phone them. Then I listened to the local Chief Investment Officer followed by the Orbis (Allan Gray Offshore) Investment Officer. They are proud of what they have achieved over the past 4 years in South Africa and abroad, but understand that the next four will be different here on SA markets. My meeting on the morning of the same day before this talk also went around some of this hesitant market future.

This earlier meeting was where I enjoyed an hour and a half of exclusive time having tea with Simon Pearce, the CEO of Marriott Income Specialists. He spoke about the value of offshore shares at the moment and then alluded to the changes he expects in the property arena. “Hey, this property thing is over”, he said, when I raised an example of a stagnated development in Hilton. I then spoke about property syndications – investment structures that I have avoiding promoting. He said that due to the current reduction and squeezing of consumer spending, a result of the new credit act, higher rates, inflation, petrol price and etc, the smaller, boutique type or specialist retailers in shopping centres will be the first to lose income. They will then not be able to afford the rent, might close, then the centre owners will not want to have an empty shop so they give a 6 month rental holiday to a new tenant with a much lower rent thereafter. So now you have the retail property market having lower earnings which comes through in negative ways to the property syndications. Those of you in listed property structures like Marriott’s funds do not have the same concerns as they are utilizing the income stream from thousands of tenants in many retail complexes and are able to re-structure those income streams due to the listing of the property funds. In a syndication, the individual owner needs to find another buyer if he or she wished to move out. This is going to become problematic.

Monthly financial advice:

What I do to my bond: Every week I make those electronic monthly payment – domestic workers, spending money to my wife etc. While I’m on the banking site, I usually also pay an extra R50 to my bond. R50 is coffee money, sweets in the café money. We don’t miss it and sometimes doesn’t feel like it was there. But over time, it will do me good in that account.

Until next time
Regards,
Kevin

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.

Financially Speaking March 2008

“You know, philosophers talk about accepting the ‘what is’ in your life and that this acceptance is the first step to succeeding and to peace……… And so it’s this ability to accept the reality of life and live within those certain rules.” – Eric Weihenmeyer. (The first blind man to summit Mt Everest)

Dear Client,

So, all us homeowners have had to consider the issue around our ‘new’ property values set by our esteemed municipalities who paid good sums of money when out-sourcing this task to well (?) qualified people who attempted to gain access to your property. The consequence of all this has actually nothing really to do with re-sale values of course. I was actually wondering if our good municipality would give me a refund of some of my rates if I sold my house one day for LESS than they had me listed at! Rhetorical question of course.

There is a little calculation (which I have) for working out what your rates will be, once you have got your value from the valuation role. We all get a rebate and then there is a ‘rate randage’ figure that is applied. Currently for my town it is 0.90% of the valuation figure once the rebate has been taken off. Many of you might realize that you might be in for a 100% or more increase in rates. However, there is a strong and fairly qualified opinion that they will not increase the rates they charge us by the same percentage that they increase the valuation of our properties. This would just be too inflationary. So then what they do, is simply reduce the ‘rate randage’ figure they use on the calculation. So this means that they might reduce it to, say, 0.60%. We all just wait and see.

Investment issues:

Always nice to see that one of the funds I have chosen does well; supports the reasons we chose it in the first place. Sarasin, one of the offshore fund managers we use, won awards for both their Global Balanced Fund and Global Equity Fund earlier this year at the annual Raging Bull unit trust awards. The means best performing fund over a particular time line. Sarasin themselves are also very happy with their Global Balanced Fund as it turned 20 years old at the beginning of this year and has produced an average dollar return of 9.6% per annum over this time. This has been better than the average of global equities (8.4% pa USD), lending support to our emerging opinion that over long time periods, balanced funds seem to return better, while being safer, than most equity funds. The fund has also always been in the top quartile of all international unit trust funds.

This is one of the three balanced funds we use for clients with foreign money to invest.

Monthly financial advice: TIPS ON FILLING UP YOUR CAR WITH PETROL

(From someone who has worked in the industry for 31 years).

  1. Fill up early in the morning when petrol is cold. The petrol in then denser. When it gets warmer it expands and your litre is not exactly a litre. Service stations do not have temperature compensation at the pumps.
  2. Do not let the petrol get pumped in too fast. (if you have control over this) This minimizes the vapours created while pumping and thus the loss of petrol.
  3. Try keeping your tank at least half full all the time, so fill up when your tank is at half. The more space in your tank the more air, the more air the more your petrol evaporates. Petrol storage tanks have internal floating roofs to compensate for this.

I suppose we all panic a bit every time there is a dramatic rise in fuel costs and then we get used to it and life carries on as before. The same probably happened when (if) petrol went from 50c to 60c. A 20% increase!! (Would have been somewhere around 1983 I think)

Until next time
Regards,
Kevin

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.

Financially Speaking January 2008

“… to the multisensory human [more evolved], a reverent businessman or woman is a person who infuses a new energy into the archetype of entrepreneur, shifting it from a dynamic that is motivated by profits that are generated by serving others to a dynamic of serving others that is made possible by profits…”

Gary Zukav, The Seat of the Soul

Dear Client,

Just before Christmas I went to one of those funerals you just shouldn’t have to go to; a 2 year-old girl. She passed away from Leukemia before a bone marrow donor could be found and the transplant done. Five months before this, the parents had been enjoying their little girl unaware of the trauma that was about to unfold in their lives.

Then last year in September I went to paddle overseas as part of a South African Canoeing Team. One of our

incredibly healthy and fit team mates (a fantastic guy, role model, husband and father) just suddenly collapsed and died while we were watching one of the races. The cause was an aneurism, a condition none of us would probably be aware of if we were in the same situation.

These two events shocked me as they were too close to home. The issue is that we can never know when these life events will be upon us. Financially, we can cater for the latter event through insurance. But the first one scared me from a financial point of view. This little girl was one of two small children who died within weeks of each other here in Pietermaritzburg from the same thing. Both families had had to try raising money for medical costs not covered by medical aid for the transplant, possibly flying international donors out, the Cape Town transplant visit etc. They were needing anywhere from half to one million Rand, possibly more. Can you and I find that sort of cash tomorrow?

Just thoughts….

Investment issues –

Finally the rampant Bull Run has passed and the JSE has lost 15% of its value in a matter of months. Remember; this is a loss on paper until you need to sell out of your funds without re-investing immediately, because then you’re out and in during the same conditions. I want to comment on a couple of positive concepts here:

  • This immediately creates better times of value to buy into the markets as suddenly shares and units are now cheaper and you buy more for the same Rand.
  • Any re-investments inside your unit trust funds (dividends, interest and property rental income being re-invested) would therefore also buy more units
  • Retired or income dependent investors who sell units of capital for income will, over the pass couple of months, have had to begin selling more and more units of capital each month in order to get the same level of income. However, for my Marriott clients, they don’t have this worry as they know that units of their capital are not sold in order to receive income. Even though some of their capital value will have dropped, their unit balance will have remained the same. And their excess income now buys more units each month, for income for the future. [They haven’t paid me to say this, we just all know that this is why you’ve chosen to live on the income created by the capital!]

Monthly lifestyle advice:

A useful thing: put 082911 on your cell phone for Netcare 911. Having this number available like this, helped me call an ambulance for a school pupil motorbike rider who was knocked down by a taxi in my neighbourhood two weeks ago. But last year I first had to look for it when my neighbour fell down her stairs and had to go to hospital.

Until next time
Regards,
Kevin

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.

Financially Speaking June 2007

Yesterday is history. Tomorrow is a mystery. And today? Today is a gift. That’s why we call it the present.

Dear Client,

Our town; so quiet this week what with the strikes. I mean, compared to Johannesburg it’s always empty. But still. I understand their motives, if not all methods. I think that there would be enough money for greater state employee increases if we just had a few less large black Range Rover Sports driving around at illegal speeds. And then, as Evita Bezuidenhoud commented recently; “I am impressed with KZN. They have all that stuff about HIV, the homeless, crime etc sorted out so well that they can spend their time and energy and money on street name changes.” Puts it in perspective I suppose. Budgeting and prioritising should happen at all levels. And in my opinion, decent salaries come before street name changes. Anyway, there we have it. My thoughts.

Investment issues

Last week I attended a Marriott Asset Management presentation given by their CEO, Simon Pearce. Very good; both Simon and the presentation. (In discussions with him afterwards, he said to me that he would do a personal presentation to groups of my clients and so I will try this both locally and in Johannesburg.) To his presentation:

His view on local economic indicators:

  • We are in a rising interest rate cycle in South Africa.
  • The average SA household is spending 73% of disposable income on servicing debt.
  • We are at a record high current a/c deficit and if we cannot fund this, the currency will be negatively affected.
  • The record capital inflows into SA in 2006 of R140 billion, can go away in a flash which will put pressure on our currency.
  • SA stocks are overvalued.

That brought him to the main theme of his presentation. Speaking about Marriott’s International Income Growth Fund, which most Marriott investors participate in, in one way or another, and the global economy – with a slant on encouraging us to get clients to invest internationally.

He says that too many investors worry about price growth and not earnings and earnings growth. You’d never invest your capital in a business that did not pay you an income. Capital growth (price growth) will come from income and income growth. So capital growth is a function of earnings growth. Capital can be wiped out, even capital invested in property he says. He went on to give an example of why invest locally in Standard Bank shares that are yielding 2.5% when you could buy Barclays Bank at 9% which also happens to be a much larger bank operating in economies with lower inflation.

He spoke of how Marriott’s International fund is a low risk balanced portfolio with a flexible mandate that does not invest in emerging markets. He told us in depth of the team they work with in the Isle of Mann – an impressive group. He finished by showing us that this fund had done 42% Rand terms to date end March 2007 and was the top performing fund of all local asset swapped foreign funds. Some of you are in this fund via asset swapping and some of you directly via foreign allowances.

Their strategy remain solid: they will not always outperform others, but when price catches up with income; they will probably always be at or near the top. Warren Buffet invests this way. It is a fund that holds ‘Old World’ blue chip stocks and low risk bonds.

Great fund. Great Asset Management Company. OK, OK, so they are taking me to the rugby in Durban next weekend!

Until next time
Regards,
Kevin

P.S. For those of you who receive this by snail-mail and wonder if you missed May’s copy or if that month was cancelled due to lack of interest, no, I missed a publication!

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.

Financially Speaking April 2007

Following the rules will not get the job done.

Dear Client,

In February this year, I woke up one Saturday morning and decided to go to Durban for a swim in the sea. Now although there’s a perfectly good highway from here to there, I decided to join 100-odd other silly people and went there by canoe via the Duzi Non-Stop canoe race. So off we set at 5.30am and went along the Tourde-Valley-of-1000-Hills in KZN. My partner and I arrived at in Durban at about 4pm, just in time for tea. What was the first thing I wanted to do? Hug my children.

Now here’s the thing: each and every time we say goodbye to these or other special people in our lives, know that it might be the last time. Even though my family was possibly in more danger than I was that day by driving down to Durban via the highway, I was acutely aware of the task and challenge and environment that I had put myself into. Where am I going with this?

Three clients have, over the last 10 days or so, experienced realities which we don’t want to experience. The first has had a group of friends experience a horrific vehicle accident in Mozambique. One death, one flown out by medical rescue helicopter because he had medical aid, another left at the side of the road for hours because he didn’t – the mates had to come up with the hundred’s of thousands of Rands to evacuate him, another now aware that his disability protection is virtually non-existent, but it’s now too late for that. The next client was held at gun point, tied up and left in the fields of his farm while his bakkie was stolen and the third, a client and very old and best friend of mine was also held up at gun point in his place of work in Johannesburg, while their offices were robbed and his vehicle stolen.

It is with huge relief that my clients are all OK. But it is with a bump that I realize how much of my job is about ensuring that our lives are ready. Ready for loss: loss of life, loss of ability, loss of income, loss of things. I have spent, and it has been necessary, a huge amount of time over the past year focusing on the understanding and selection of asset management techniques both locally and internationally. But maybe I need to ensure that I’ve remembered the essentials of risk and estate planning every so often and ensure that I’ve been forthright in highlighting areas of this need where I see them, and not making only token mention of them. Starting with myself and also doing the same for you. And when they’re understood and necessary, they need to be urgent.

Investment thoughts…

My thoughts here are not linked to the above in any way and neither is this supposed to be a sensationalism letter this month.

As time goes by and I watch local and global lifestyles and trends, both politically and economically, I am more and more convinced that it is only prudent, if not logical, to ensure that some of a person’s wealth is based outside of the restrictions of their country of residence. To be specific; you need to have some of your investments outside of South Africa. In the cash and unit trust type investment world, this means that you have maybe made use of your exchange allowance and invested abroad, with these funds being able to be deposited into a foreign bank account. In other words not done via what is known as asset swapping, where the money has to come back to a local bank account. I think that if you have the wealth, you need to make this a goal, so that you are more globally invested and some of your wealth is globally accessible.

Until next time
Regards,
Kevin

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.

Financially Speaking March 2007

In life we need to be defined and accepted by who we are and not by what we do or achieve. This, is selfacceptance

Dear Client,

So the budget speech has come and gone. How do you benefit?

  1. Tax brackets move again; individuals will pay less income tax.
  2. Retirement fund tax has been scrapped. The funds in your retirement annuities and pension or provident funds used to be 9% on interest and property income. This is now gone and is a very good thing. It makes all retirement fund vehicles very economical investment tools. (As long as the vehicle is efficient)
  3. The estate duty abatement has been increased – from 2.5 to 3.5 Million Rand.
  4. The amount for individuals to make tax-free donation has increased, up from R50 000 to R100 000.
  5. The amount of tax-free interest or rental income you may receive from your investments has increased yet again.
  6. Capital Gains Tax annual exclusion amounts have increased slightly.

It is the first one that you will initially feel in real terms.

Investment issues –

Thoughts and lessons about yields and capital growth:

One of Marriott’s Funds, their International Income Growth Fund, currently projects a forward yield of 4.5%. This means that if you have $100 000 in this fund, you will receive a yield, or income, of $4500 for the year. It is paid out bi-annually, so you get about $2250 paid to you, or re-invested, twice a year. Many people would say; “that is a poor performance, only 4.5% per year?”

Here’s the thing: This yield has nothing to do with capital growth. That is a separate function. The yield comes from the dividends and rental and interest incomes of the international companies held by the fund. Over a 4 month period last year from July to end October, this same fund experienced a capital growth of 15%, in US Dollars. Over just these four months! When seeing the growth I phoned the fund manager and asked him if the figures given to me were incorrect. He said no.

Warren Buffet, that ridiculously rich American investor, always said that price will follow yield.

Great funds will pay an income while experiencing capital growth.

Monthly financial advice:

Pay an extra R100, or even R50, into your bond/vehicle finance scheme each and every month. Even an extra R20 pm over another 15 years will make a difference. In order for this to work two things need to happen:

Firstly, it must be easy to do. So if you haven’t yet done it, set up your home internet banking to facilitate these transfers.

Secondly, your bond cannot be a place for withdrawals for anything but emergency expenditure. The extra payments must stay there for the rest of the bond’s life.

Until next time
Regards,
Kevin

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.

Financially Speaking January 2007

Perspectives of the past, thoughts for the future; the job of History

Dear Client,

The silly season is over again and the clear winners by a long margin are ……. The Retail Stores!! Coming in a close second are the Banks with all the increased credit used for purchasing beyond budget and third, also not far off; all the spoilt children.

Amazing how many billions of Rands the retail stores have collected. A frenzy of activity; each year we all have something to mutter about it. And next year, we’ll all do it all again. The best parts of my Christmas were, firstly, my family being alone on Christmas Eve, singing Christmas Carols together in our lounge at the tops of our voices accompanied by a CD. Our kids loved it. And then secondly, being a kid with my kids on Christmas day, playing on a ‘slippy-slide’ with them, their cousins and their uncle on a small farm in the midlands. We were all a mess and covered in dish wash soap. Then we all jumped into an outdoor Jacuzzi and made it into a bubble bath.

These times create the memories, the laughs, the joy. They consume little money and are what memories are made of. Oh to increase the balance in our lives.

Investment issues – 2007: What does it hold?

Bulls or Bears for this year’s stock markets? Will the market go up or down? Who knows? A year ago it was at 19 000. Now it’s at 24 000 odd. All I know is that it will move. If you are investing for the right reasons then there should be nothing to worry about. If you are a speculator, well then that’s the game. My Lakeside Investors group and I are confident that if we’ve put you into the correct investment strategy then the Asset Managers that we are using will competently do the rest. 2006 was for us a year of buttoning down our investment strategies, asset managers and fund selections. 2007 will be the year where we fine-tune these strategies. I personally don’t think we’ll make many changes at all. I think we have done a job that is sound enough to last a couple of years. Our job remains to ensure that our chosen asset managers remain focused and on top of their game, to watch for any political instability within these fund houses, to make changes to you, our client’s portfolios when necessary.

Last year RMB Asset Management gave us a personal audience. Our goal this year is to see if we can get the same out of Allan Gray.

Monthly financial advice:

A simple and basic thing here:

When using a tap in your kitchen or bathroom for a brief moment to quickly rinse a toothbrush, swallow a tablet or take something off your finger etc, develop the habit of ensuring that you do not use the hot water tap for these quick, little things. Even though you are not running the tap for long enough to get hot water out of it, by emptying the pipe of the head of cold water, hot water from your geyser will have replaced that space in the pipe. As you draw these little bits of water out of your geyser, it has to pull in cold water to keep full. That cold water reduces the temperature in the geyser thereby causing the thermostat to switch the element on in order to raise the temperature again. This draws electricity which, as you can see, was actually a waste. The geyser is one of the greatest uses of electricity in your house. So do this and save. (Eskom should pay me for this!!)

Until next time
Regards,
Kevin

Please note that all the views expressed in this publication are based on my opinion and no action or advice is implied or intended.