Thursday, May 31, 2007

Asset managers you can rely on to deliver

We are in the process of conducting a unit trust survey. Based on the results of our survey and our up-to-date knowledge of the asset management industry, we will publish a list of recommended asset managers and unit trusts around the middle of June. This will be very useful for our client and the general investing public. So watch the space!

Stanlib's Sher tops SA funds

I like portfolio managers who do the real diligent work to assess investment targets. Anthony Sher of Stanlib is one such portfolio manager, and he has results to prove his hard work.

Anthony Sher was one of only three fund managers to buy when Esor first sold shares last year. The stock of the engineering company, which he visited after seeing the name on signs at building sites in Johannesburg, has jumped sixfold since then.

Observation is one of the skills that has made Sher South Africa's top fund manager and helped his R820m Stanlib Small-Cap Fund beat his benchmark and rivals this year and in the last three years.

"We don't ignore anyone, as you never know what they may become," Sher, 37, said. "Opportunities are opening up down the size scale rather than up the size scale."

Sher says he plans to maintain the 45% of his fund now invested in industrial stocks, as they are domestically focused and will be boosted by faster economic growth in South Africa. In the last two quarters he has added to his stakes in mining and steel companies, which make up 12% of his holdings. He expects the rand to weaken and lift the value of their dollar-based sales.

Sher draws on his past as a bank and insurance analyst at Standard Bank's asset-management unit, where he worked for two years, to pick small companies not covered by brokers and usually bought by individual investors. He also asks rivals, customers and suppliers about a business he is following, and sometimes holds stocks for more than five years.

To read the full story, click

Inflation breaches target range

More evidence of inflation creeping up and out of control:

"South Africa's targeted CPIX inflation pierced the upper end of the central bank's band in April, rising 6.3 percent year-on-year, official data showed, and hardening the case for higher interest rates.

Figures from Statistics South Africa showed that key measure jumped from 5.5 percent in March on higher food and fuel costs, while the all-items consumer price index increased by an annual rate of 7.0 percent, from 6.1 percent previously.

A Reuters poll had predicted that CPIX would rise by 5.9 percent while CPI would grow by 6.5 percent."

To read the full story, click

The retail and financial sectors of the market are likely to be under pressure over the next week. Should the Reserve Bank decide to raise the interest rate, the market may fall even further.

Inflation trumps housing in US Fed Minds

This story appears in Yahoo! Finance, see

Fed Minutes: Central Bank Saw Inflation As Bigger Threat Than Slumping Housing Market.

To quote from the story, "Concerns about inflation trumped worries about the slumping housing market last month in the minds of Federal Reserve officials who voted to hold interest rates steady.

While Fed officials said the downturn in housing was turning out to be more severe than expected, worries about inflation continued to dominate the May 9 discussions among Fed Chairman Ben Bernanke and his colleagues, according to minutes of the closed-door discussions released Wednesday.

"Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation," the minutes said.

The Fed on May 9 left the federal funds rate unchanged at 5.25 percent. It marked the 7th straight Fed meeting -- nearly a year -- in which the central bank has held the funds rate steady.

Many economists said the minutes strongly suggest the central bank may be content to keep rates unchanged for the rest of this year."

As per our earlier article on inflation outlook, I think inflation is likely to surprise central bankers around the world on the upside. This means they will either keep the rates steady or raise them. Increasing interest rates are generally negative for the stock markets.

Wednesday, May 30, 2007

JD Group - buying opportunity is coming

Yesterday JD Group and Steinhoff announced their merger talk is now off, due to insufficient JD Group shareholders' support.

JD Group is also recently in the news about it charging its customers much higher interest rates on furniture loans. This, together with its relatively poor profit outlook, has weighed on its share price.

Judging from the price chart, it has broken the shoulder line of a head and shoulder pattern, which is negative. It is likely to test the R77 - R79 level.

However, should it reach the R77 level, it will be a good time for investors to buy the stock. It will be at a lower PE. In addition, JD Group offers high dividend yield.

Value Group - more downside expected

The company announced yesterday its full-year HEPS is likely to fall between 60% to 80% compared to the previous year. This is worse than its earlier update, which indicates its HEPS is likely to fall between 40% and 60%.

We therefore expect the share price to fall further. Traders may short at R2.60 - R2.70 and take profit at R2.30.

Steinhoff - buyable at R23

After rising from R5 in early 2003 to R24 in May 2006, the share has been in a consolidation phase, trading between R23 and R26 most of the time since August 2006. R23 has been an important support level.

As Steinhoff is an excellent global furniture manufacture and distribution company with solid growth potential, its fundamentals are sound. Investors can look to buy when the share price falls to around R23.

Goldfields - another buying opportunity

Since hitting a high of R152.50 on 11 April on takeover rumours, Goldfields' share price has been retreating to the important support level of around R120. It now presents a buying opportunity. Take profit at the R130 - R132 level.

Tuesday, May 29, 2007

Currency futures are almost here!

Last night I attended a JSE presentation on Rand futures, which are to be listed on Yield-X. JSE together with its partners have been working on this over the last couple of years. In his Budget Speech on 21 February 2007, Minister of Finance Trevor Manual stated, " ... further developing South Africa's financial markets and increasing liquidity in the currency market by permitting the JSE to establish a Rand futures market."

I consider this to be an exciting development, for hedgers and traders alike. A currency future contract is a contract that allows market participants to trade the underlying exchange rate for a period of time in the future. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the South African Rand. Dollar/Rand contracts will be the first to be traded, with many more currency futures contracts expected to follow thereafter.

The initial margin is 6.45% on the near contract. This translates into 15.5 times gearing.

So who can trade currency futures?
  • Individuals and foreigners
  • Pension Funds and Long-term insurance companies using 15% offshore allocation;
  • Asset managers using 25% foreign allocation.

Corporates wishing to trade currency futures need to obtain exchange control approval from the SARB.

The currency futures are expected to start trading from the middle of June.

Monday, May 21, 2007

Benjamin Graham's core principles for investing

Benjamin Graham, arguably the Father of Value Investing, was professor and teacher to Warren Buffett, the greatest investor of our time. I recently came across an article by Alphen Fund Management, which stated Graham's core principles for investing as described in the book Intelligent Investor were as follows:

1. A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business.

2. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

3. The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.

4. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what is called the 'margin of safety' - that is by never overpaying, no matter how exciting an investment seems to be, can you minimize your odds of error.

5. The secret to your financial success is inside yourself. If you become a critical thinker that takes no Wall Street 'fact' on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people's mood swings govern your financial destiny. In the end, how investments behave is much less important than how you behave.

These are pearls of wisdom for investors who are serious about long-term wealth creation.

China tries to control stock market balloon

China has taken its first decisive step to deflate a dangerous bubble building in its stock market.

The central bank announced late on Friday that it was raising benchmark lending and deposit rates, lifting bank reserve ratios and widening the yuan’s trading band, its strongest package of steps since it began tightening policy a year ago.

Equities may fall sharply early next week, but fund managers and analysts expect a correction rather than a crash.

“You will see a correction in the market, possibly a sharp one,” said Zhu Ping, chief investment officer at GF Fund Management, which manages over 3.9-billion.

“Banks will be among the biggest losers on Monday. Their business relies too much on lending. Investors have been worried about that for a long time,” he said.

A fevered bull run has taken Shanghai’s composite index up 51% this year, after 130% last year, while daily turnover has ballooned to as much as 10 times year-earlier levels.

In our view, the Chinese stock market is very overvalued, and there is significant downside risk in that market.

Thursday, May 17, 2007

Worrying inflation outlook

Despite what economists are saying and what investors are hoping for, signs are price inflation is increasing and it will have a significant impact on the markets over the next 6 to 12 months.

Exhibit 1: Metals commodity prices are near or at all time highs. These will filter through to the cost price and eventually retail price of goods.

Exhibit 2: The interim results announced by Astral and the annual results announced by Sovereign Foods show there is a sharp increase in maize prices compared to last year, due to crop shortage caused by a severe draught. This sharp rise in maize prices has already caused food and meat prices to rise sharply.

Exhibit 3: Locally, the energy cost will continue to rise, due to Eskom hiking the electricity prices and the ever rising petrol and diesel prices.

The more I think about the possible consequences on consumer spending, Reserve Bank's interest rate decisions and corporate profits, the more I am nervous about the markets at current levels.

Trade cautiously.

Wednesday, May 16, 2007

Interesting AltX companies

On 22 March my colleague and I had the opportunity to attend the AltX T-Sec Investor Forum, during which a number of AltX companies presented their investment case.

The companies that presented were Dialogue Holdings, IFCA, Myriad Medical Holdings, Workforce, SAB&T Ubuntu, Acc-Ross, African Dawn and OneLogix. The presentations are available on

The companies that I have found to offer superior growth potential are as follows:

  • Dialogue Group: Their main business is outsourcing, in particular call centres and business processes. Call centres are a rapidly growing global industry. South Africa has the advantages of being in the same time zone as Europe, has neutral English accent, and call centres being a growth industry targeted by the government. In addition, telecommunication costs, although still very high, are falling.

Dialoue Group currently employs 1,800 people in CT, JHB and DBN. It handled 48 million calls in 2006 and has a list of blue chip companies as its clients. It listed on the JSE at R1. The 2007 HEPS forecast is 9.1 cents.

Given the growth potential of Dialogue Group, I would buy their shares at R1.50 or less.

  • Myriad: Their business is the sourcing and distribution of medical devices, a segment of the health care industry that offers a lot of consolidation opportunities. It wants to grow its business through organice growth, product range expansion and regional expansion.

One thing that is particurly attractive about its business is medical devices and consumables have steady, increasing usage, as more and more people visit doctors and hospitals. The half-year HEPS to 30 November 2006 is 4.9 cents. Let's wait for the company's next set of annul results, which should be published in August.

  • Acc-Ross: When they listed last year, I stayed away from this counter, as I didn't like the valuation and the way they spending millions in advertising the fact that they were listed on the AltX. I was right. The company went through quite a lot of problems, and the CEO resigned. But now under the new CEO, Wilfred Robinson, the company is on the right track: It now has a much better strategic focus, is more intelligent in how to employ its capital. It is certainly on the road to recovery. It listed at R1, then fell all the way to 13 cents. It has since recovered to 50 cents. Acc-Ross is in our 2007 model portfolio, and its share price has risen sharply from 32 cents at the beginning of the year to 50 cents.

  • African Dawn: It is a provider of finance and financial services. It has the following distinct divisions: short-term secured finance (bridge finance), home improvedment finance, cellphone banking solutions, financial literacy solutions and property sales. It has a strong marketing force. Its share price has risen 1,400% from 4 cents at inception to R2.30 at time of the presentation. Its profits are growing strongly. It is a gem, a buy at R2.50 or lower.

  • OneLogix: A niche player in logistics, it focuses on logistics that have high barrier to entry and high margin. It is in our 2007 model portfolio. Buy at R1.10 or less.

Monday, May 14, 2007

SA's first hedge fund blow-up

Since late last week a lot has been written about the demise of a hedge fund, The Evervrest Aggresive Fund, and surely more will be written about it.

To read the full story, click

So how did the fund manager, Marc van Veen, managed to lose 66% of the fund value in the space of 1 month, especially when the stock market continued to boom?

This is because a typical hedge fund uses financial instruments such as futures and CFD's (contracts for differences) to obtain gearing / leverage, in order to try to increase returns. In addition, a fund manager can short the stock, meaning to borrow shares in a company he does not own, selling them in the market, with the hope of making a profit by buying them back at a lower price.

This is what Marc van Veen did. He anticipated Sanlam's share price to fall. He took a large short position on Sanlam and expected to make a handsome profit on this position.

Alas, Sanlam's share price continued to rise, by as much as 17% in April. And the expected handsome profit turned out to be severe losses.

It seems to me this fund manager did not use the correct money management techniques, including stop loss and diversification. If he had employed these techniques, the losses would not have been as large.

The following links take you to related articles.

Hedge Funds: how not to burn your fingers