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Who are you going to vote for?

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Elections Everywhere

Nigeria, Namibia, Indonesia, India, Spain, South Africa, …. Elections Everywhere. It seems like 2019 is the year of elections.

As citizens, we are all interested and invested (in the broadest sense of the word) in the outcome of the election in South Africa, and maybe even in some other countries’ elections too. We hope that the party that we support will be significantly stronger in this election than in the previous one. We are nervous of the parties that we believe to have policies that may affect our interests and aspirations. We hope that they do not get into power.

 

Whose interest?

Ultimately though, we want to protect our interests; which includes our financial interests, the education of our children, our safety, our rights, our jobs, how our taxes are used and our ability to access quality basic services. Whilst some of these interests may be selfish, it also likely includes broader societal interests. We vote hoping that the party that comes into power, will protect our interests and be beneficial to the broader society too. Arguably though, most of us may be looking at the wrong place if we are hoping that politicians will advance our interests – the state of politics and the quality of politicians in our country, magnified by the social media voice, is dire. Politics seems to attract those that have a high degree of self-interest. That, however, does not mean that we shouldn’t vote.

 

Choices

Whilst we have a duty to think carefully about who we will vote for and then to cast our vote; we can do a lot more individually to improve our lot and to improve the lot of our fellow citizens.

We worry about the risks that we cannot control, like how politicians will behave once they have been elected. Yet, we have many decisions that we can control and we can mitigate some of the risks of poor political appointments.

We can take active decisions about which schools we send our kids to; which causes we advocate and the organisations that we join; how we spend our money; how much we save and where we invest; how we manage or insure against risks; whether we forego an item of luxury today for a bit more security when we retire.

 

Decisions

What decisions have you made between investing for the future versus living the life today? Which option have you chosen for your retirement fund? How much risk are you willing to take on your investments? What portion of your investments should be invested in offshore assets?

You should think about this carefully, taking into account the environment that we find ourselves in.

 

Recent decisions we have taken at Lunar Capital

We are cognisant of the impact that the elections can have on our investments. However, this is not the only factor that we consider when making investment decisions. We consider the economic environment, individual companies and their respective valuations, demographic trends, risks, and the overall construction of our portfolio; when we make decisions on what, where and how much we will invest.

The graphs below show our portfolio construction at the moment:

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Approximately 36% of our portfolio is in offshore assets, 9% in cash and the portfolio is reasonably diversified across industries and geographies.

These represent our views that there is value in the local market, but there are risks and it is, therefore, important to have a meaningful offshore exposure. We are always on the lookout for opportunities for new investments as well as risks in our existing investments.

Just as we have choices and make decisions at Lunar Capital, you too have certain choices and you too can make decisions. Understand the choices that you have and make the decisions to advance your and your family’s long-term well-being.

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Share Focus: Microsoft (MSFT.NAS)

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“Our strong commercial cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare,” said Satya Nadella, CEO of Microsoft. \”We are delivering differentiated value across the cloud and edge as we work to earn customer trust every day.”

Microsoft’s mission is to empower every person and organisation to achieve more. This is quite a lofty mission, but arguably their mission from the 1990’s to have a PC on every desk has largely been achieved. Since Satya Nadella has taken over as CEO, Microsoft has been transforming itself from largely a software (Windows, Office, Outlook) business to a services business – cloud (Azure, Office 365), commercial social media (LinkedIn) and gaming (Xbox).

Our view is that this is a good strategy as Outlook and Office is ubiquitous in the computing world. Migrating clients to a cloud-based model creates a stickier client base, with fewer sales and support requirements to serve those clients. Microsoft is also succeeding in monetising their social media platform, LinkedIn which is becoming a key platform for recruiting in most businesses.

The company trades at elevated price levels, after a good run from in 2017 and 2018. But, with a focus on transforming the business into a cloud and services business, there is potential to grow revenues and margins. Microsoft does face stiff competition from Amazon, Google and others in the cloud computing arena. An added risk is that it could face selling pressure if there is a broad tech sell-off.

View our Summary 

Listen to the podcast

 

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time for a rest

Time for a Rest

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Listen to the podcast

 

Transcript

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.

Time for a Rest Read More »

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.

Patience Read More »

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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What to do about the Rand? Read More »

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.

Trade Wars Read More »

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 

Share focus: NVIDIA Read More »

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.

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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]

Lunar BCI Worldwide Flexible Fund Two-Year Review Read More »

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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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