Financially Speaking October 2009

“There’s a lot to be said for getting up in the morning and putting one foot in front of the other”. – Warren Buffet

Dear Client,

Investment issues:

Last week Wednesday I attended Allan Gray’s second ‘Road Show’ of the year in Durban. At these presentations they usually do three things:

  1. Give us a business processes updaterelating to admin issues, processing issues, turn-around times and all these sort of things, presented by one of the directors or management team.
  2. Bring along an international fund managerfor as look at international markets and their offshore funds run by Orbis and lastly
  3. Bring along a local fund managerfor an overview of the SA markets and the local funds.

This they did and here is some of the feedback.

International Perspective:

The first guy from London began by saying that over the past 80 years the three worst years on the markets were 1931, 1937 and 2008. There were no places to hide in 2008 he said. By this they mean that if you are running an equity fund (holding shares of companies), which the Orbis Global Equity Fund is, then you have to remain in equities no matter what the markets do. It is not a balanced fund where you can opt to sell some shares and buy more cash for a while. So in this case, having no-where to hide means that there were no companies and therefore no shares that were unaffected by the global economic issues of last year and so whatever shares they held in the Orbis Fund, they would experience the downturn in market value. However, the fund went down 35.9% when the market average went down 40.9%. This doesn’t help your thoughts, I know, but a decent fund manager might have been in companies that weathered issues better than others.

Right now however, they are up 38.6% to end September from the lows of last year, while the market is up 28.6%. The one guy admitted it might be a decent job in terms of recovery but they’re not yet back to the predrop values. [This is because, mathematically, 38% up on a reduced level is not the same actual amount as the 36% drop was. Get it? – Ed]

The next guy spoke around some client behavioral issues. He asked why the average fund manager doesn’t outperform over the longer term. The average stock, he said, was bought and sold in one year. In 1940 it was a 10 year duration and in 1950 it was 8 years. Orbis takes a 3 to 5 year minimum time line on holding stock.

The local fund manager, a frightfully bright Delphine Govender, spoke of how the recovery was largely driven by unprecedented amounts of government money having been pumped into economies, and thus markets. The thing which got us into troubles was, she said, over indebtedness. Now, governments must watch that they are not borrowing too much again.

52 Billion Rand has flowed into equities (shares) alone in the SA markets over the last 6 months. This is excluding money market inflows. Emerging markets have outperformed developed markets this year but the money could just as quickly leave again. Allan Gray are now worried about the loss of value if share prices pull back. [This thought goes together with what I wrote recently about market corrections typically following recoveries. -Ed]

She finished with a comic strip:

“Yesterday in this space I predicted the world would come to an end. It did not. I regret any inconvenience this may have caused.”

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.