Financially Speaking November 2009

Remember always, that you have not only the right to be an individual; you have an obligation to be one. You cannot make any useful contribution in life unless you do this. [Eleanor Roosevelt]

Dear Client,

Three different but easy to read topics: Get coffee and read, choosing the headings of interest to you or all of them.

  1. Corporate Governance of ‘MY’ businesses:

Every so often there is something about a brokerage / financial service provider appearing to be …. suspect, for want of a better word. The first issue of Personal Finance in the Saturday newspapers this month had a couple of such articles.

The first was an article where the FSB has applied to place certain business operations, of Pretoria-based Dynamic Wealth, under curator ship. Apparently the group is running [potentially] illegal unit trust funds under the guise of investment clubs – probably for groups of financial advisors. The short end of the story is that what happens here, is that financial advisors use a basket of unit trust funds and a group such as Dynamic Wealth come along and say they’ll wrap them up in a named portfolio for this group and the real short end of the story is the group of advisors channel all their funds through the said group and – you guessed it – the advisors get a greater rebate / kickback / asset management fee passed through to them and the company, such as Dynamic Wealth, might benefit from greater funds through their channels.

Now we, my little “Lakeside Investor’s Club”, have already been offered to have our regular choice of funds wrapped in white label structures, so that we can get a higher rebate. We said no thanks and don’t ask again. The point was never to cost our clients more or to try earn more but rather to provide peer-reviewed sound investment choices.

The second article in that issue was directly about these white label funds and how the FSB wants to clamp down on them. Company names such as Metropolitan and Sanlam are mentioned as being in line to have their white labeling businesses shut down. These funds are usually more expensive and are often made up of funds inside them only from asset managers that agree to give the rebates, hence again falsely dictating the funds offered by the advisor.

I know of financial practices where the guys won’t use certain asset managers who don’t phone to say thanks for the business, or who haven’t had the technological ability to pay a 1% trail to the advisor, even if the funds were better for the client.

And the shortest story here;

  1. No matter how large and prominent the financial services company appears to be, it doesn’t necessarily mean ethical business practices or fund management advice occurs inside its doors.
  2. I will never make use of white label funds and will never create my own. I am considering applying for a licence level that will enable me to do fund switches on your behalf, but that’s as far as it goes and you’d have to give me a mandate to do it and it would never create an extra rebate. It’s just going to cost me R9500 to get it!! Yip, that’s what the FSB wants to give it to me. That’s a rip-off too.
  3. I just have to watch for future business operations that might result in the business management going under, like Ovation, and avoid those. Right now I am being approached by another privately owned fund structure wanting my business.

Moving on from that. Hope you didn’t mind that topic, debated with myself whether it was relevant to talk to you about it.

  1. Investments – Fund Manager’s comments listened to this month:

Over the past month I have attended presentations here in Pietermaritzburg by analysts and fund managers from Foord, Coronation and Marriott and then had my own personal meeting with the representative from Sarasin Thematic Fund Managers, out from London. I have written down some one-liners of interesting comments from all of them. However, my one (or two) main questions that I looked for an opinion across the board, was about which asset class is the cheapest now and their opinions on the direction of stock markets in terms of price.

On this first question they were unanimous that equities, in other words shares on stock markets, were the best value as opposed to cash – definitely a no no, bonds – watching for when to buy, or even property – still looking for better value and yields. I needed this answer for clients who have money to invest and we are deciding what assets to go in to and whether or not to phase in.

Phasing in was answered by the second question; not really expecting another dramatic drop in market prices and expecting things to go along pretty much sideways for a while with (maybe) moderate growth.

Some one-liners:

  • Short term performance is incontrovertibly random.
  • If we don’t manage money correctly, we don’t have a business. All funds are on 24hours notice. No tied agents, no forced LISPS. Pure asset managers. [Coronation]
  • Your entry point is almost insignificant if your time-line is longer than 10 years.
  • The risk of not taking enough risk.
  • Money Market funds; they have a negative REAL return.
  • Most investors don’t have enough money ‘offshore’.
  • We buy quality businesses with great dividends.
  • Expect inflation in SA to be at least 7%.
  • The USA has brands and multi-national companies, which operate all over the world.
  • SA is 1.7% of global market capitalization. It’s small, vulnerable and 50% owned offshore anyway.
  • The expected exchange rate for the Rand to US Dollar is 9.90 to the dollar.
  • Total write off by Banks over this recession: 1.6 Trillion US$. {Don’t understand that number – Ed!!!}
  1. Monthly financial advice:

It’s the time of the year when you should review your benefit level on your medical aid. 1st January is when you can go onto a different benefit level if you wish to or if it would be better for you. In order to know this, you need to have a conversation with your medical aid broker or directly with your medical aid – if someone there can help you with this – to talk through your current claims history, your potential family requirements and whether a different level would give you greater insured benefits. Insured benefits being something more than just hospital cover and excluding the savings account.

Until next time

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