Financially Speaking May 2009

Be kinder than necessary, for everyone you meet is fighting some kind of battle.

Dear Client,

Investment issues:

This week I attended Allan Gray’s investment ‘roadshow’ in Durban. They go around the country and do this for us twice a year. For this one they had brought out an Orbis fund manager, Craig Bodenstein, from Bermuda, where Allan Gray himself lives and co-manages the Orbis Funds while continuing to have a role in the South African branch of things. Craig presented to us together with Ian Liddle, an equity fund manager from Cape Town. As I’ve said before; always good to listen to these guys, you glean info through the personal sessions and Q&A times that one cannot get off just the published reports. So off I went, even though I am getting more and more grumpy with the drives to Durban. And for good reason; on the way I had to evade someone who had stopped in the fast lane due to a puncture and was busy walking around his/her (?) car!!! I ask you……

Here are some random comments that make for good reading. These are in no particular order and came either from the fund manager’s own presentation content or from the Q&A seasons.

Craig began by speaking about the ‘Investor Behaviour Penalty’ syndrome:

  • We are very short term focused as a society and we want quick fixes which results in spending and borrowing that are high.
  • When research looked at Investor behaviour vs. the index internationally, they found that the S&P 500 tracking fund returned 8.4% pa over the measured period whereas the average investor returned 1.9%. This was where the investor had ‘interfered’ with the fund manager’s goal by selecting to come out of a fund and go into a fund at the incorrect times based on going in when things were already high and coming out when dropping.
  • The investor wants to buy something that has already done well.
  • 55% of inflows were found to go into funds that were the previous year’s top 20% performing funds.
  • Investors need to understand that they have to stay the course. The reality that investors look at their portfolios weekly or daily is laughable.

Other comments:

Returns are an outcome, a result of diligent patience. Cannot predict when it will happen.

If someone had placed some money with Allan Gray when he started in 1974 in the Allan Gray Equity Fund, today it would be 20 times more than the all share index (the average of the stock market).

The ‘bottom’ of a market cycle is generally always before the bottom of earnings. So waiting for earnings to go up first means you’ve probably missed the bottom in price.

Q: Are there too few businesses to invest in, in SA? A: Because SA is so small, it has some of the most profitable businesses as there are fewer companies and fewer competitors due to the smaller market.

In SA there are fewer companies to screen through than the guys have who manage the global fund.

Allan Gray was meeting Vodacom management tomorrow as part of their screening process. [A good reason why a unit trust fund works well for the average investor as, unless you or I have the time, the means, the opportunity, the resources and access to corporate management, these guys will do a better job than you or I in trying to guess our own direct stock portfolio. The AG management team (likewise Marriott, Coronation, Foord etc) carry enough weight to get a management audience. Ed]

Fund managers learn from their mistakes and when having chosen a company that goes under, which now becomes a permanent loss of capital, (not just a loss on paper) ‘we’ learn more for the next time.

One of our analysts will analyze a share, or company, for months. Then they bring it before the portfolio management meeting, which will then agree to add it or not to our buy list, from which the fund manager can buy if he or she so chooses to.

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.