Monday, February 2, 2009

List of Recommended Unit Trusts Updated

We aim to identify asset managers that will provide consistently superior long-term returns for investors. Our recommendations are as follows:

Domestic Equities: Allan Gray; Tim Allsop of Polaris, which manages Nedgroup Investments Rainmaker Fund; John Biccard, who manages Investec Value Fund; Prudential (both Equity and Dividend Maximiser); RMB Mid/Small-Cap Fund

Domestic Bonds / Income Funds: Nedgroup Investments Gilt Fund; Metropolitan Gilt Fund; Henk Viljoen of Stanlib Bond Fund; Nedgroup Flexible Income Fund; RMB Income Plus Fund

Money Market Funds: Cadiz, Allan Gray

Domestic Prudential Funds: Allan Gray Balanced, Allan Gray Stable, Coronation Balanced Plus, Investec

Flexible Asset Allocation Funds: Investec Opportunity Fund

Property Funds: Stanlib and Investec

Global Equities: Allan Gray-Orbis Global Equity Feeder Fund; Coronation World Equity; Investec Strategic Value Fund; Investec Worldwide Equity Feeder Fund; Investec Global Equity FoF; Oasis; RMB International Equity Fund of Funds; Berkshire Hathaway

Global Asset Allocation: Allan Gray, Flagship

Happy investing!

Sunday, February 1, 2009

Our yearly model portfolio for 2009

We would like to remind investors of our rigorous investment process:

1. We conduct an analysis of the global politics and economy.
2. We analyse the South African politics and its economic prospects.
3. We evaluate the prospects of major industries in South Africa.
4. We decide on the industries we should consider to be included in our portfolio.
5. Shortlist companies we should consider. These companies generally have low PE ratios and good prospects.
6. Conduct a fundamental analysis on each company in the shortlist.
7. Place a value on the company using our proprietary valuation model.
8. Conduct a technical analysis on each company in the shortlist.
9. Decide on the individual stocks to be included in the portfolio and their weightings.

Like 2008, there are 12 shares in our 2009 portfolio (in brackets are the closing prices of 31/12/2008). Keen followers of our yearly model portfolios will discover that many of the companies in our 2008 portfolio are again included in this year's selection, as these companies still have good long-term prospects, excellent management teams, and above-average long-term operating excellence. In addition, their share prices have been depressed to a level that offers attractive returns over the medium to long term.

1. DAWN (R7.75) - Distribution and Warehouse Network is a manufacturer and distributor of building supplies. It has grown quickly over the last few years, with presence in many African countries. Its management is confident it will be able to grow its earnings this year. The falling fuel costs will help it contain its operating costs.

2. Grindrod (R15.30) - Grindrod is a shipping company with businesses expanding to related logistics services and financial services. Although the global economic slowdown has severely affected international trade, which has resulted in much lower shipping rates, the majority of Grindrod's contracts are fixed over longer term, which will help it cushion the impact of current unfavourable shipping rates.

3. Steinhoff (R12.55) - Steinhoff is an international manufacturer and distributor of quality furniture. It produces furniture in lower-cost markets such as Eastern Europe, then sells them mainly to developed countries, although now also expanding into the Asian markets. There is room for them to grow over the next few years. The global economic recession and credit crunch will cause declining furniture sales, so it will be difficult to maintain its earnings in its current financial year. However the group is cash generative, which will help it take advantage of consolidation opportunities in its sector.

4. Arcelor Mittal (R88.45) - Arcelor Mittal SA was previously Iscor. It was a public enterprise, in the 1990's it was partly privitised and listed on the JSE. A few years ago Mittal Steel (now Arcelor Mittal) became the largest shareholder, it then changed its name to Arcelor Mittal South Africa. The largest steel producer in SA, its share price once reached R265 in 2008, then fell by two thirds after the global financial crisis in the second half of 2008. The steel production volume will be down compared to last year, but the rand weakness will help prop up the steel prices, which will help mitigate the likely reduction in earnings this year.

5. Datacentrix (R2.80) - Its historical dividend yield is an attractice 10%. Datacentrix is an IT solutions company, which has been growing steadily over the last few years. Its share price has fallen sharply last year, like many other small caps.It will not escape the effect of the current economic slowdown, but its management is confident of maintaining its profitability.

6. Digicore (R4.40) - Digicore develops and provides vechile tracking technology and services. It started in SA, now it has developed its presence in Europe and Asia. New car sales in SA and around the world have fallen "off the cliff", which is sure to impact its business this year. However, its share price is now close to its NAV, and its long-term prospects are still reasonably good.

7. Famous Brands (R15) - Famous Brands manages and develops well-known fast food brands such as Wimpy, Steers, Debonairs, Fish Aways and Brazilian Coffees. Famous Brands should continue to grow on the back of increased market demand for its products. However, economic slowdown and lower consumer spending power will mean lower revenue growth for the group. Expected lower food prices and fuel costs should help it contain operating costs.

8. Iliad (R6.70) - Last year the share price of this mid-sized wholesaler and distributor of building materials has fallen by more than 50%, now with PE less than 5, presenting attractive value. Falling residential demand will affect its business, however this is to some extent mitigated as it should continue to benefit from the infrastructural spend by the public sector.

9. Pinnalce (R1.82) - In its 2008 financial year its revenue and profits grew substantially. Its increased product offering and consumers' demand for technology products such as GPS and lower cost notebooks should help it weather the current storm.

10. WBHO (R107.51) - This is our long-favoured company in the construction sector. In the second half of last year the share price of construction companies have fallen substantially, as investors expect lower future profits due to economic slowdown and reduced order book. However the order book of all construction companies is still healthy for the next 2 to 3 years, so the market may have over-reacted. WBHO's operating and profit history has been more consistent relative to other construction companies, so it will be more defensive in a downturn.

11. Investec (R41.99) - Investec is an investment bank, with businesses in SA, UK, USA, and Asia. As a result of the global financial tsunami and its mortgage business in the UK, its share price has fallen from the high of R106 in May 2007 to the current R42, a 60% fall. Its share price should be close to the bottom, which should rebound after a period of consolidation. The reason we have selected Investec instead of ABSA or Standard Bank, which are in last year's portfolio, is we believe Investec now offers a better relative value.

12. Northern Platinum (R20.60) - Due to the Eskom electricity supply crisis in the first half of 2008, the supply of platinum was threatened, causing the platinum price to race to USD2,200 an ounce at one stage, with the outlook for the platinum industry pretty rosy. But in the second half of 2008, with the rapid deterioration of the global economy, car sales took a nose dive, demand for platinum shrank, and the platinum price fell all the way to the current USD950. The merger deal with Implats was called off in January 2009, cuasing its share price to fall by over 20%. Its current PE ratio is 3.1, with a dividend yield of 16.8%, higher than the money market yield.

Happy Investing!