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time for a rest

Time for a Rest

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In a few days, many people will be taking some time off from work for their annual vacation. That is of course if they are fortunate enough to have a job.

So, when I was thinking about this blog, several thoughts came to mind:

  • Firstly, let’s do something different; hence the podcast;
  • Then, I thought about a fascinating book that I have been reading by Matthew Walker titled “Why we Sleep”;
  • I also thought about what am I going to do over this period.

There are always mixed feelings over this period for me. Firstly, there’s the mad rush to make sure that I complete all the tasks and goals that I had set out for myself before I go on vacation with my family. Then, there’s this angst about all that is happening out there: How will the stand-off between the United States and China play out? What is Vladimir Putin planning now? Will anything come out of the State Capture Judicial Commission? How will the elections in South Africa pan out in 2019? The list can go on and on …. All of these can have some bearing on how the markets perform and ultimately on the performance of the portfolio too.

Coming back to the Walker’s book on Why We Sleep. This latest research and conclusions on the importance of sleep for mental and physical health are profound. Very aptly, you should try to get 8 hours of sleep daily. This is good for your physical and mental health, for your creativity, memory retention and emotional well-being.

On reading the book, I could not help thinking about the importance of taking some time off regularly to clear one’s mind, to spend some quality time with good friends and family, re-connect with nature, get some exercise and some rest, switch off from all the noise in the media, and use the time to read a few good books. I have a few books that I want to read: 21 Lessons for the 21st Century by Yuval Noah Hariri and the Lean Start Up by Eric Ries. I’d like to also get through a novel or two.

The time off will also be good preparation for the year ahead. Whilst, we have done quite a lot of analysis on our investment strategy for 2019 and started implementing them, I’m sure after a good rest, there would be some more thoughts and ideas that we could test and implement.

From a personal financial point of view, this is also a good time to check if my financial plans are still intact. Should I do something different?

  • Spend less and invest more perhaps after the dire markets of the last few years?
  • Will I have sufficient funds when I retire?
  • What will I change of my investment strategy: more or less offshore, which markets, etc?
  • Is my Family Balance Sheet up-to-date?

Taking a good break will go a long way in reenergising our minds and bodies. This will be good preparation for the year ahead.

Mostly though I am looking forward to spending time with my family and good friends and having some fun times with them.

Wishing you all of the best.

Stay safe.

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Bad Markets

Good Markets, Bad Markets

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Market Overview

The market has been on a roller coaster ride over the last 3 months, showing good gains in August, but having a significant pull-back in September and October, both locally and offshore.

The markets are largely driven by high valuations in the US; rising interest rates in the USA and Europe; and low appetite for emerging markets, possibly as a consequence of trade wars and governance issues.

Whilst there are macro-economic and socio-political risks, there are pockets of value emerging in South Africa.

Portfolio Overview

The portfolio declined in October, more or less in line with the market.

During the month, we sold some of our Amazon and Nvidia shares to further reduce our Technology exposure and to increase our cash holdings. We do however think that these are great businesses.

Approximately 36% of the portfolio is offshore; 29% of the portfolio is in Cash; 15% is in the Technology sector; 22% in Financials; and 8% in Biotechnology. The high cash exposure is conservative and allows us to acquire companies we deem are cheap relative to intrinsic value.

We continually seek opportunities in our preferred investment themes to deploy our cash, but remain patient until the right opportunities present themselves.

Key Indicators

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Top 10 Holdings

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What we are thinking about: Good Markets, Bad Markets

\”The biggest mistake that most people make is to judge what will be good by what has been good lately. So, if a market has gone up a lot, they think that\’s a good market, rather than it\’s more expensive, and when the market goes down a lot, they think, \’That\’s a bad market, and I don\’t want any of it,\’ rather than realizing it may be a good time to buy certain stocks at a bargain price.” Ray Dalio, Bridgewater Associates

It is common sense that we should buy something when the price is cheaper than the value that we can derive from it. Similarly, we should be selling when we can get more than the value that we can derive from the asset that we want to sell. Strangely, people do not behave this way when they buy stocks on the stock market. When stock prices have had a good run, then most people want to buy stocks; and similarly, when there has been a major drop in the stock market, then investors want to be selling their stocks. The gyrations in the stock market can truly mess with an investor’s mind.

Ray Dalio, from Bridgewater Associates puts it in a very nice way with his quote above. The guidance that one should take from Dalio is that the market is more expensive when the stock markets have gone up, especially when it has gone up over a very long period of time. Similarly, when there is a major sell-off in the market, then the market is in fact cheaper than it was. If one looks at the US markets, it has risen significantly over the last 10 years or so. The South African market, on the other hand has been more-or-less flat over the last 3 years. One can thus argue that there are better opportunities in the South African market than there are in the USA markets.

The bigger lesson though is that investors should be buying more when markets have come down significantly, and similarly being more cautious when markets have gone up a lot. Psychologically, this is very difficult to do. We are wired to feel more pain when we take losses in our portfolio than the commensurate joy when we have profited in the portfolio.

Avoid the mistakes that Ray Dalio warns against. Don’t panic when the markets have come down a lot. This is probably the wrong time to be selling if you are a long-term investor. Similarly, when the markets have risen a lot, don’t be tempted to make a quick buck. Successful investors have a long-term strategy of investing. They allocate an amount to invest every month (debit orders are a great and efficient way to do this). They ignore day-to-day gyrations in the market. They review their asset allocations (i.e. which funds, asset classes, geographies, industries they want to invest in) once or twice a year. They give their investments time to grow.

Don’t let emotions drive your investing behaviour. Buy low, sell high. Not the other way around.

Transact Online

Clients invested in the Lunar BCI Worldwide Fund can obtain statements, tax certificates or transact online at: https://www.bci-transact.co.za/Webclient/Login

Investors considering an investment in the Lunar BCI Worldwide Flexible Fund can obtain more information at www.lunarcapital.co.za and obtain application forms at https://lunarcapital.co.za/forms/.

Disclaimer

Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002 and is a full member of ASISA. Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. BCI does not guarantee the capital or the return of a portfolio. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request. BCI reserves the right to close the portfolio to new investors and reopen certain portfolios from time to time in order to manage them more efficiently. Additional information, including application forms, annual or quarterly reports can be obtained from BCI, free of charge. Performance fees are calculated and accrued on a daily basis based upon the daily outperformance, in excess of the benchmark, multiplied by the share rate and paid over to the manager monthly. Performance figures quoted for the portfolio are from Morningstar, as at the date of this minimum disclosure document for a lump sum investment, using NAV-NAV with income reinvested and do not take any upfront manager’s charge into account. Income distributions are declared on the ex-dividend date. Actual investment performance will differ based on the initial fees charge applicable, the actual investment date, the date of reinvestment and dividend withholding tax. BCI retains full legal responsibility for the third party named portfolio. Although reasonable steps have been taken to ensure the validity and accuracy of the information in this document, BCI does not accept any responsibility for any claim, damages, loss or expense, however it arises, out of or in connection with the information in this document, whether by a client, investor or intermediary. This document should not be seen as an offer to purchase any specific product and is not to be construed as advice or guidance in any form whatsoever. Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of BCI\’s products.

This research report (“report”) is confidential, issued for the information of clients of Lunar Capital (Pty) Ltd (“Lunar”) and may not be issued to members of the, nor published in, public. The information, research and opinions contained herein have been formulated in good faith and where applicable have been derived from published sources generally reliable and believed to be fair, however the information, research and opinions, as the case may be, are not warranted to be complete or accurate. Lunar does not assume liability or responsibility for their form, sufficiency or accuracy. Any person making use of this report does so entirely at his or her own risk. Lunar does not assume liability for any losses arising from any errors or omissions in this report, irrespective of whether there has been any negligence, including gross negligence, by Lunar, its affiliates, officers or employees, and whether such losses are direct, indirect or consequential. This report is neither an offer nor a solicitation to buy or sell, and is not intended to call attention to, or to market, or promote the services of Lunar. Lunar does not have a proprietary interest, other than a possible casual or arbitrage interest, in any of the listed companies referred to herein and no director of Lunar, unless otherwise stated in this report, is a director of the companies referred to herein. Lunar Capital (Pty) Ltd, FSP 46567, Reg No. K2015013022. Collective Investment Schemes in securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. Commissions and incentives may be paid and if so, would be included in the overall costs. The Unit Trust portfolios are licensed under the Boutique Collective Investments Scheme. Boutique Collective Investments is a full member of the Association for Savings & Investments SA.

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active vs passive investing lunar capital

Active vs Passive

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Market Overview

A struggling local economy, flight of capital from emerging markets to developed markets, a volatile Rand and generally low or negative growth in company earnings have been the main drivers of the poor performance in the South African equity market.

The Rand has weakened significantly against the major currencies (-12.8% YTD against the USD) benefiting South African investors invested in developed offshore markets. The Nasdaq market has shown sharp increases year-to-date (+16.6%), with the JSE All Share Index down by -6.4% year-to-date.

 

Portfolio Overview

The portfolio gave back most of the gains from August in September, largely as a result of a sharp drop in Aspen’s share price, a slight strengthening of the Rand and weak local markets.

During the month, we sold our holdings in Aspen (unconvincing results) and Facebook (reduce Tech exposure and too many data breaches), we acquired Berkshire Hathaway (to increase diversification and defensiveness in the portfolio) and increased our holdings in PSG (large discount to NAV and very good results from Capitec).

Approximately 38% of the portfolio is offshore; 22% of the portfolio is in Cash; 22% is in the Technology sector; 22% in Financials; and 9% in Biotechnology.

We continually seek opportunities in our preferred investment themes to deploy our cash, but remain patient until the right opportunities present themselves.

 

Key Indicators

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* Lunar BCI Worldwide Flexible Fund

 

Top 10 Holdings

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What we are thinking about: Active vs Passive Investments

“Is it a good idea to invest with absolutely no regard for company fundamentals, security prices or portfolio weightings? Certainly not. But passive investing dispenses with this concern by counting on active investors to perform those functions.” Howard Marks.

Passive investing (i.e. index based investing like Satrix 40, Ashburton Mid-Cap, Sygnia Itrix MSCI US) have been all the rave in the past few years. The main arguments for passive investing been lower management fees and that many active managers do not outperform their benchmark indices. Active managers, on the other hand seek out good investments by analysing fundamentals of those businesses and the markets that they operate in and trying to establish whether those businesses are trading below intrinsic value. So, active managers’ decisions on whether to buy or sell certain shares, in fact derive the price for those shares. These prices then set the weightings and the prices on those respective indices.

Passive managers would thus adjust their portfolios to be in line with the revised weightings on the indices. This is effectively like riding on the back of active managers.

There is another inherent danger in passive investing, as index-based (i.e. passive) investing becomes more popular. An investor in a passive fund effectively perpetuates the weightings on the index. By buying more of higher weighted shares, they make those shares more expensive as there is no regard for valuation, only the weighting on the index. Marks argues that this could lead to significant dislocations in the markets when there is a large sell off.

It is understandable that investors want to reduce costs and grow their investments. Passive investing has certainly put costs in the spotlight and many active investment managers have adjusted their costs. Passive investing, by definition should also perform in line with the market less costs. Passive investing, however cannot exist without active investors.

The challenge for investors is to seek out active managers that will outperform over time and combine that with a selection of low-cost, passive funds. Which active managers should one choose? Which passive funds should one select? These are no easy questions to answer.

The long-term costs of staying out of the equity markets however are much more severe than not getting your fund selection absolutely right. Investors must seek to obtain real growth in their savings and investments. This requires at least some equity investments.

 

Transact Online

Clients invested in the Lunar BCI Worldwide Fund can obtain statements, tax certificates or transact online at: https://www.bci-transact.co.za/Webclient/Login

Investors considering an investment in the Lunar BCI Worldwide Flexible Fund can obtain more information at www.lunarcapital.co.za and obtain application forms at https://lunarcapital.co.za/forms/.

 

Disclaimer

Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002 and is a full member of ASISA. Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. BCI does not guarantee the capital or the return of a portfolio. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request. BCI reserves the right to close the portfolio to new investors and reopen certain portfolios from time to time in order to manage them more efficiently. Additional information, including application forms, annual or quarterly reports can be obtained from BCI, free of charge. Performance fees are calculated and accrued on a daily basis based upon the daily outperformance, in excess of the benchmark, multiplied by the share rate and paid over to the manager monthly. Performance figures quoted for the portfolio are from Morningstar, as at the date of this minimum disclosure document for a lump sum investment, using NAV-NAV with income reinvested and do not take any upfront manager’s charge into account. Income distributions are declared on the ex-dividend date. Actual investment performance will differ based on the initial fees charge applicable, the actual investment date, the date of reinvestment and dividend withholding tax. BCI retains full legal responsibility for the third party named portfolio. Although reasonable steps have been taken to ensure the validity and accuracy of the information in this document, BCI does not accept any responsibility for any claim, damages, loss or expense, however it arises, out of or in connection with the information in this document, whether by a client, investor or intermediary. This document should not be seen as an offer to purchase any specific product and is not to be construed as advice or guidance in any form whatsoever. Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of BCI\’s products.

This research report (“report”) is confidential, issued for the information of clients of Lunar Capital (Pty) Ltd (“Lunar”) and may not be issued to members of the, nor published in, public. The information, research and opinions contained herein have been formulated in good faith and where applicable have been derived from published sources generally reliable and believed to be fair, however the information, research and opinions, as the case may be, are not warranted to be complete or accurate. Lunar does not assume liability or responsibility for their form, sufficiency or accuracy. Any person making use of this report does so entirely at his or her own risk. Lunar does not assume liability for any losses arising from any errors or omissions in this report, irrespective of whether there has been any negligence, including gross negligence, by Lunar, its affiliates, officers or employees, and whether such losses are direct, indirect or consequential. This report is neither an offer nor a solicitation to buy or sell, and is not intended to call attention to, or to market, or promote the services of Lunar. Lunar does not have a proprietary interest, other than a possible casual or arbitrage interest, in any of the listed companies referred to herein and no director of Lunar, unless otherwise stated in this report, is a director of the companies referred to herein. Lunar Capital (Pty) Ltd, FSP 46567, Reg No. K2015013022. Collective Investment Schemes in securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. Commissions and incentives may be paid and if so, would be included in the overall costs. The Unit Trust portfolios are licensed under the Boutique Collective Investments Scheme. Boutique Collective Investments is a full member of the Association for Savings & Investments SA.

 

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patience - lunar capital

Patience

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Market Overview

The current market is characterised by political uncertainty and multiple global economic issues. The main issues affecting the South African market are Rand volatility, emerging market woes and political and policy uncertainty.

The Rand has weakened significantly against the major currencies (-19.4% YTD against the USD) benefiting South African investors invested in developed offshore markets. The Nasdaq market has shown sharp increases year-to-date (+17.5%), with the JSE All Share Index marginally down year-to-date (-1.4%).

Key Indicators

     31 Aug ‘18 31 Jul ‘18 31 Dec ‘17
JSE ALSI 58 669 57 433 59 505
Nasdaq 8 110 7 672 6 903
USD/ZAR 14.75 13.14 12.35
LBWFA* 119.66 109.37 108.54

Portfolio Overview

The portfolio performed well in August, benefitting from the good results from FirstRand and Discovery locally and from Amazon and Nvidia offshore. Rand weakness also had a positive impact on the portfolio. Aspen also had a good run in August (but sharply down in September after unimpressive results).

Approximately 38% of the portfolio is offshore. 16% of the portfolio is in Cash; 30.6% is in the Technology sector; 18.7% in Financials; and 17.1% in Biotechnology.

We continually seek opportunities in our preferred investment themes to deploy our cash, but remain patient until the right opportunities present themselves.

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Thought for the Day: Patience

“The stock market is a device for transferring money from the impatient to the patient” Warren Buffett.

The South African stock market is certainly testing the patience of investors in the local market. A strategy of regular (monthly) investments in good quality investments generally pays off well over the long-term.  There is a lot of noise on a daily basis that can really mess with an investor’s mind. Typically, when sentiments are low, stocks are cheap and vice versa. Unfortunately, stock prices can remain high or low for extended periods of time truly testing the patience of investors. Investors are tested further, when a correction does occur, as these can be quite sharp rises or falls in the stock market.

The patient investor who has a regular investment in good quality businesses, who ignores daily gyrations in the markets will generally do well over the long-term.

Transact Online

Clients invested in the Lunar BCI Worldwide Fund can obtain statements, tax certificates or transact online at: https://www.bci-transact.co.za/Webclient/Login

Investors considering an investment in the Lunar BCI Worldwide Flexible Fund can obtain more information at www.lunarcapital.co.za and obtain application forms at https://lunarcapital.co.za/forms/

Disclaimer

DISCLAIMER: This research report (“report”) is confidential, issued for the information of clients of Lunar Capital (Pty) Ltd (“Lunar”) and may not be issued to members of the, nor published in, public. The information, research and opinions contained herein have been formulated in good faith and where applicable have been derived from published sources generally reliable and believed to be fair, however the information, research and opinions, as the case may be, are not warranted to be complete or accurate. Lunar does not assume liability or responsibility for their form, sufficiency or accuracy. Any person making use of this report does so entirely at his or her own risk. Lunar does not assume liability for any losses arising from any errors or omissions in this report, irrespective of whether there has been any negligence, including gross negligence, by Lunar, its affiliates, officers or employees, and whether such losses are direct, indirect or consequential. This report is neither an offer nor a solicitation to buy or sell, and is not intended to call attention to, or to market, or promote the services of Lunar. Lunar does not have a proprietary interest, other than a possible casual or arbitrage interest, in any of the listed companies referred to herein and no director of Lunar, unless otherwise stated in this report, is a director of the companies referred to herein. Lunar Capital (Pty) Ltd, FSP 46567, Reg No. K2015013022. Collective Investment Schemes in securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. Commissions and incentives may be paid and if so, would be included in the overall costs. The Unit Trust portfolios are licensed under the Boutique Collective Investments Scheme. Boutique Collective Investments is a full member of the Association for Savings & Investments SA.

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What to do about the rand?

What to do about the Rand?

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Introduction

This blog discusses the reasons for the volatility in the Rand and what the ordinary person can do to protect herself from the impact of a weakening Rand.

Why has the Rand been so volatile?

The South African Rand has experienced much volatility over the last few years. There are many reasons for this.

Local political events like Nenegate and other cabinet reshuffles, the ANC NEC elections, pronouncements on policy changes like the Mining Charter or Land Expropriation Without Compensation; can impact how local and international investors view the risks or benefits of investing in the country. This could lead to additional investments flowing into or out of the country, resulting in either Rand strength or weakness.

Economic conditions can also influence whether the Rand strengthens or weakness. As South Africa is a net importing country and has a higher rate of inflation than most of the developed economies, the Rand should weaken over the long-term. This is what has been experienced. Low economic growth in the country; unemployment; the state of country, state-owned enterprises, and/or company finances can also impact the strength or weakness of the Rand.

Governance can also influence the strength or weakness of a currency. High levels of corruption, the rule of law, the efficacy of the judicial system, the strength of institutions such as the central bank and the tax collection agency; can all influence how the currency behaves. This is especially so when there is a marked deterioration or improvement in governance. In a highly mobile international investment environment, money can leave or enter a country very quickly, which can have a profound influence on exchange rates.

Sentiment can also play a role. We witnessed this after the election of Cyril Ramaphosa as ANC President and then the subsequent disillusionment of his ability to bring about quick changes. Similarly, sentiment can be influenced by international events. A recent example is the Turkish Lira crisis, where all emerging country currencies were impacted, and the Rand especially so.

These are just a few reasons why the currency can strengthen or weaken. Sadly, these are not in the control of individual or professional investors.

Why should you care?

Should you even care if the Rand weakens, given that you live in South Africa and that your expenses are largely in Rands?

Unfortunately for South Africans, most of the goods that we use are imported and are thus impacted by exchange rates. As the Rand weakens, imported goods become more expensive in Rands. South Africa also imports oil which is priced in US Dollars. So, a weakening of the Rand has an impact on fuel costs. This impacts not only your travelling costs, but also the cost of transporting goods. So, even locally produced goods that need to be transported get more expensive.

Clothing, motor vehicles, medicines, TV’s, cellphones, Social media platforms, some food items, fuel, fridges, toasters, stoves, computer hardware and software are all mostly imported. The prices of these goods and services become more expensive as the Rand weakens.

You should care if the Rand weakens because your cost of living will increase. You should also act to reduce the impact of this increase in your cost of living.

What can you do?

If you’re not in control of how the Rand behaves, what can you do? Do you idly watch the Rand weaken over time, albeit in a very torturous route?

There are a variety of ways that one can invest offshore. Exchange Control allows an individual upto R1m per annum to invest offshore and more if you are up-to-date with your taxes at SARS, subject to SARS approval. One can also invest in a local unit trust that has offshore exposure. Many funds, such as the Lunar BCI Worldwide Flexible Fund have some offshore exposure. You can invest in these funds without impacting your foreign exchange allowance.

Regular contributions (for example through a debit order) into these funds can provide a good way to be invested offshore, thus limiting the impact of a weakening Rand. If you contribute to a retirement fund, you could select the option that has upto 30% invested in offshore markets.

* * * * *

Investing on offshore markets is thus not out of reach for the ordinary people. If you invest an amount on a regular basis (say, a monthly debit order), you benefit if the Rand is strong by getting more foreign assets, and as the Rand weakens, you benefit on the growth in Rand terms of the amount you have already invested.

By investing offshore, you provide a hedge (protection) against the Rand weakening and ultimately providing some protection against your cost of living increasing.

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Trade wars.

Trade Wars

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What is a Trade War?

“A trade war is a side effect of protectionism that occurs when one country (Country A) raises tariffs on another country’s (Country B) imports in retaliation for Country B raising tariffs on Country A\’s imports. A tariff is a tax imposed on imported goods and services.” This is the definition of a Trade War as per Investopedia.

For example, if the USA imports TV’s from China and China imports maize from the USA; then a trade war between the two countries could involve the USA raising tariffs (customs duties) on TV’s imported from China; and China could raise tariffs on maize from the USA. This results in the landed cost of TV’s into the USA increasing and similarly for maize imported by China from the USA.

 

What are the implications of a Trade War?

We can immediately ascertain that trade wars result in higher costs for consumers in both countries. In the example above, Americans will have to pay more for TV’s and similarly the Chinese would pay more for maize. Typically, in a trade war, multiple goods and services are impacted, so the price of many items of goods and services will increase.

The effects of this are:

  • People buy less of those goods because they have become more expensive;
  • People try to find cheaper substitutes;
  • People can’t do without those goods (e.g. staple food) so they spend less on other goods;
  • Local industries could benefit, however. So, for example the TV manufacturing industry could be revived because the higher costs of Chinese built TV’s are now more expensive than locally (USA) built TV’s. This could lead to job creation locally.
  • Illicit trading could take place, e.g. smuggling (think about the tobacco industry in South Africa).
  • Also, countries and industries that are not directly involved in the Trade War could also be negatively. The world’s supply chains are highly interconnected and integrated. The impact of a global economic slowdown would affect almost every market.
  • If the Trade War involves more countries, alliances can be developed between countries to create more bargaining power and/or to create trading blocs.The dynamics could play out in several and complex ways.

Why would anyone want to start a Trade War?

Again, according to Investopedia, “Trade wars can commence if one country perceives another country\’s trading practices to be unfair or when domestic lobby groups (e.g. trade unions; industry bodies) pressure politicians to make imported goods less attractive to consumers.”

A Trade War could be started for political purposes; e.g. to force regime change or even to force concessions such as lower tariffs or forcing local skills beneficiation.

Common forms of unfair trading practices are:

  • Local subsidies for certain industries to protect jobs or develop local know-how,or even to establish certain levels of security for food, energy, etc. The European union subsidises their farmers quite significantly, for example.
  • Dumping, i.e. the practice of selling goods at very low costs (maybe even below cost price) into a market to make local companies uncompetitive and unprofitable. This eventually forces the local companies to go out of businessto benefit the exporting country’s industry.
  • Creating logistical barriers, e.g. complex and bureaucratic processes to approveand release goods that are imported.
  • Making it difficult for foreign companies to establish businesses in-country.

Trade wars, whilst largely considered to be detrimental for all, can provide some relief for local industries (and by implication local jobs). In an ideal world, everyone would be able to trade freely with each other. And as trade grows, so does productivity, which ideally benefits everyone by giving consumers better products and services at cheaper prices.

Sadly, we don’t live a fair world and different interest groups will always play a role in how we deal with each other. Free trade is thus a utopia, but in my opinion something that every country and industry should strive towards.

 

What should we do?

The World Trade Organisation (WTO) was established in 1995 to moderate trade disputes and to create a forum for multi-lateral trade negotiations. South Africa is a signatory of this and this would be the right place to deal with disputes.

But at a strategic level as a country, we should be looking to be very competitive in a few industries (e.g. tourism, agriculture, mining, information technology services, financial services; etc.). We should be doing this to create more jobs, especially those that are relevant and least at risk of being disrupted in the near future. In other words, we should create more resilience in our economy, so that we are in a stronger position to negotiate when there are disputes.

As investors, we should be concerned by the current trade war that is being initiated by the USA. A full-on trade war can have significant impact on global growth. We should be cautious of those industries that could directly be impacted by these trade wars (mining?). We have not heard of what actions South Africa would take – these could also be both negative or positive for local companies, even if just temporarily.

We continue to monitor how this Trade War may pan out, if it becomes an all-out war or if it is just merely quibbles to gain certain concessions. In the meanwhile, we will also assess what this may mean to our current investments and what decisions we would need to take to mitigate risks or to take advantage of opportunities that present themselves.

Whilst an all-out Trade War could impact global growth, good investing opportunities may also become available.

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Share focus: NVIDIA

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Nvidia manufactures high-end Graphical Processing Units (GPU’s) , i.e. computer processing chips. They work closely with software vendors that develop solutions on the Nvidia processors to build solutions for end-customers. Many AI (Artificial Intelligence), AV (Automated Vehicles); Cloud Computing Datacentres, and Gaming Applications utilise Nvidia processors. These are significant growth markets and the company has performed incredibly well over the past few years. It has strong relationships with software vendors. It recently built the fastest supercomputer in partnership with IBM.

View our Summary 

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Lunar BCI Worldwide Flexible Fund Two-Year Review

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Two Years On

On 1 June 2018, we celebrated two years since the launch of the Lunar BCI Worldwide Flexible Fund.

We are proud of our performance of 8.27% (after costs and fees and including distributions) for the two years to 31 May 2018. This performance ranks the Lunar BCI Worldwide Flexible fund as 6th out of 55 Worldwide Flexible Funds in the South African market over the two-year period and well ahead of the average fund performance of 0.04%.

The main drivers of our performance were:

  • We held a number of quality businesses through most of the period (Discovery, FirstRand, Amazom, FaceBook, Nvidia, Aspen, Amgen, PSG, Shoprite) and these have done well over the period, with a few exceptions;
  • We held higher levels of cash through most of the period (approximately 20% of the portfolio) awaiting better entry levels in the market;
  • Negatively, we were impacted by the poor performance of Small cap shares and the contagion from Steinhoff (we held no Steinhoff shares, but PSG was impacted). Rand volatility also impacted the portfolio negatively during the period.
  • Our best performers since inception are:
    • South Africa in ZAR: FirstRand (51.15%), Shoprite (34.79%); Discovery (29.55%), Equites (12.96%).
    • Offshore in USD: Amazon (103.82%), NVDIA (90.29%), Facebook (48.79%)

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We would have liked to have performed better than we did but are satisfied that most of our major investments have performed well. Our positioning was somewhat risk averse during the period. Where an investment did not pan out the way we envisaged, we analysed the reason/s for it and used that to improve our investment process. We are confident of our Investment Process.

“The stock market is a device of transferring money from the impatient to the patient.”          Warren Buffett.

We have been patient and will be until we think it is time to be more aggressive.

Our Portfolio

Our portfolio composition is as follows:

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We recently reduced our stake in Discovery as our view was that it was trading at elevated values. We do however believe that it is a quality business and it is still part of our Top 10 holdings. We also sold our holdings in AliBaba at a good profit. We were concerned about the high number of acquisitions that AliBaba was undertaking.

Recent acquisitions include Glencore and Naspers. We like the mix of commodities mining and commodities trading in Glencore. It is also well placed to take advantage of the demand for cobalt and copper which are core components required for electric car and cell phone battery technologies. As for Naspers, it is trading at a deep discount to net asset value and its holdings in Tencent is an entry into the growing Chinese technology sector. The recent drop in Naspers share price provided us with an opportunity to invest.

Our portfolio is geared to taking advantage of demographic trends such as:

  • The growing middle class in emerging markets;
  • Ageing populations, especially in developed markets;
  • Technological changes creating opportunities for disruption and innovation;
  • The changing preferences of millennials;
  • Rapid urbanisation, especially in megacities; and
  • Climate change and the shift to cleaner energy sources.

We continue to assess these demographic trends, and how to position our portfolio given the opportunities that present themselves. We aim to invest only in those companies that provide growth at the right price and those that provide the potential rewards for the risk that we take. We wish to obtain above average and real returns at a portfolio level for our investors.

* * * * *

Thank you to our clients, staff, directors, and business partners for your support, guidance and friendship. Whilst there are always significant risks in the financial markets, there will also be opportunities from which to profit. It is left to us to identify these risks and opportunities through our investment philosophy and methodology. Our aim is to provide a platform for growing the wealth of our families and communities.

We look forward to our third year as a fund, continuing to provide investment insights, and managing the fund for the benefit of all our stakeholders.[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

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Hubris

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Hubris

Investors are faced with a multitude of risks in any investment decision that they take. With the recent results from Famous Brands, Mediclinic, Taste Holdings and also not so recently Woolies and Old Mutual; one can’t help wondering if executive hubris* is not one of the bigger risks that investors face.

 

Offshore Expansion

In the name of offshore expansion, too many South African companies have lost significant shareholder value:

  • Woolies was forced to write off R6.7bn after their disastrous acquisition of the David Jones business in Australia;
  • Old Mutual finally through in the towel in their London listing and foreign acquisition spree that began in the mid-1990’s. They significantly overpaid for foreign acquisitions. Just compare Old Mutual and Sanlam since they demutualised: shareholders who re-invested their dividends would have received a 553% gain if they invested in Old Mutual versus a 2,822% gain if they invested in Sanlam**. Old Mutual went on an aggressive international expansion, somewhat neglecting its home market; whereas Sanlam stayed at home built its base and cautiously expanded into niche overseas markets;
  • Famous Brands, once a darling of investors is now struggling with its acquisition of UK’s Gourmet Burger Kitchen and closing some of the brands that it acquired offshore;
  • Taste Holdings, similarly is in a dire financial position as result largely for over-paying to bring big-name franchise brands like Starbucks into South Africa.

 

It is not only South African companies venturing offshore that get it wrong:

  • Massmart has struggled since it was acquired by the giant Walmart group. So much for bringing international best practice and significant buying power to a previously well-performing business.

 

The list can go on and on. Too often expansion plans don’t pan out how management paint the picture. Some records also show that most acquisitions don’t meet the original return criteria. One has to question why management do those deals in the first place. Does management overrate their own importance, or do they want to have their names emblazoned on iconic deals, or are they driven by perverse incentive schemes? Executive hubris?

 

Beware the trophy head office

Hubris takes another form in fancy new head offices. I’m certain there is a study somewhere that shows companies beginning to underperform after they move into fancy new head offices.

In the name of productivity, attracting top human capital, or branding; substantial amounts of money is spent building or leasing new offices, but it is never clear that the required return on investment is actually achieved.

It must be a great kick and boost to self-importance to drive into the fanciest offices in town.

 

Should we paint all with the same brush?

We know however that not all acquisitions or expansions are bad and that it does make economic sense at times to upgrade to newer, more efficient business premises. We argue that investors should be sceptical of acquisitions, international forays and trophy business premises. Too often, these in fact tell you more about executive hubris than about business strategy.

A good indicator of money well invested is Return on Capital Invested (ROIC) and ultimately also Return on Equity (ROE). Businesses that are able to allocate capital efficiently significantly outperform those that follow some grand footprint or flag planting strategy over time. We gave the example of Sanlam versus Old Mutual earlier. Another great example is FirstRand versus Standard Bank.  FirstRand has been much better at capital allocation than Standard Bank and this is reflected in their comparative share price performance over the long-term.

Both Sanlam and FirstRand have also acquired businesses, expanded offshore and moved into new buildings. Arguably, they have been more selective and disciplined about the investments that they made and how much they paid for them. Their shareholders have benefitted substantially more than those invested in their  competitors, and who may have not been as selective and disciplined in their investment decisions.

 

Beware executive hubris!

 

* hubris = excessive pride or self-confidence; arrogance; feeling of superiority

** Source: Business Day 18 March 2018; https://www.businesslive.co.za/bd/companies/2018-03-16-returning-old-mutual-will-find-sanlam-ahead/

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Seeking Growth Markets

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At Lunar Capital, we are continuously on the look-out for long-term investments that can benefit investors in our fund (and ourselves as we are also significantly invested in the fund that we manage).

Ideally, we would allocate a portion of our fund to a large growth market (country, industry or other) that we think offers good growth potential and is trading at reasonable levels.

One of the markets that we regularly look at is the Indian market.

 

India

India is the second most populous country in the world. At current population growth rates, it could overtake China by around 2024 as the most populous country in the world.

Here are some statistics about India:

Population = 1.34 billion                                             2nd Most Populous Country

Population Growth Rate = 1.2%pa

Gross Domestic Product = USD 2,611 Billion   6th Largest economy in the World

GDP Per Capita = USD 1,983                           Ranked 139th in the World

GDP Growth 2017 = 7.1%

India is a large economy, growing at a very fast rate, but by-and-large the majority of the population is still poor by global standards.

Most foreigners and business people who visit India are intrigued by the country. It has a highly developed service sector, and a workforce that is skilled and relatively cheap. It is ranked as one of the Top 10 foreign direct investment countries in the world.

Services make up approximately 54% of the Indian market, with Industry making up 29% and Agriculture 17%.

Indian Stock Market

The Bombay Stock Exchange (BSE) has a market capitalisation of approximately $2,120 billion and is the 11th largest stock market in the world. It has over 5,700 companies listed on the exchange. It is currently trading at a Price Earnings Ratio of approximately 23.

With the large number of companies listed on the BSE, it is very difficult for an outsider to successfully pick the right stocks to invest in. India also has its fair share of corruption. Government and corporate scandals are a regular feature of the market.

The current price earnings ratio on the BSE also appears expensive by historical and global standards.

Factors contributing to growth

There has been significant infrastructure spending in India, from new and improved airports and roads to power plants and hospitals. Government has also committed to obtaining 40% of energy requirements through renewables by 2030.

India also has a growing middle-class, that is skilled, ambitious and entrepreneurial. This will likely continue to propel consumer spending.

Indians are also obliged to register their identities through the Adhaar programme. This records all citizens digitally using biometric data. The benefits to financial institutions and other businesses and agencies who require proof of identity are enormous with the Adhaar initiative.

India has also become a tech start-up hub (3rd or 4th largest in the world) and some very successful start-ups like Flipkart, Ola and Snapdeal have been established in India.

Impediments to growth

All is not rosy however:

  • There is a huge infrastructure backlog. This issue is magnified given the size of the population and cities;
  • Pollution levels is some cities like Delhi are at dangerous levels;
  • Poverty is still a large feature of the country;
  • Corruption still exists in both the public and private sectors;
  • India has a grindingly slow judicial system;
  • There is always a risk of social and/or religious uprisings, especially given that 2019 will be an election year;
  • Too few contribute to the tax base, especially compared to the size of the economy; but this has been steadily increasing.

These are some of the hurdles that the country faces to potential prosperity.

How to get exposure to the Indian market?

The Indian market should however be on investor’s radar screens. The demographic changes in this market will likely be a tailwind behind this economy. Whilst corruption is rife, this appears to be reducing. The economy is also becoming more open. Government appears to be tackling the major issues, but success rates will vary.

Stock-picking in a market like India would be very difficult for outsiders. Arguably, a good strategy would be to invest via a low-cost index tracker option. Unfortunately, this is not available directly in South Africa. South African investors would need to use their foreign exchange allowance and invest directly through the Indian market or via one of the developed market exchanges (e.g. Nasdaq).

Another alternative would be through some local unit trusts that have direct or indirect exposure to the Indian market.

A regular (say monthly) investment subscription rather than a large lump sum investment is also probably a good strategy for the individual investor.

Lunar Capital Strategy

We know that many South Africans are keen to have exposure to the Indian stock market. Our approach is to try and minimise the risks to our investors, whether it is understanding the dynamics of a particular company or determining whether a particular investment is priced appropriately or not.

To date, Lunar Capital has not invested in the Indian stock market, but we do follow the market and, in all likelihood, would invest in this market at some time in the future, either directly in certain stocks or via a low-cost exchange traded fund.

At this stage, we continue to monitor the Indian market. If and when the correct opportunity presents itself, we will allocate an appropriate quantum of funds to the Indian market.

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Lunar Capital (Pty) Limited, registration number 2015/013022/07 is an authorised South African financial services provider (FSP 46567) established in 2015. As a licensed Financial Services Provider in terms of the FAIS Act, Lunar Capital (Pty) Limited accepts responsibility for its representatives acting within their mandates, in rendering services defined by FAIS. Our key individual and representative meet the fit and proper requirements as prescribed by FAIS.

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