Rob Dower
Quarterly Commentary

2016 Q3 Comments from the Chief Operating Officer

It is so easy to get caught up in the latest bad news (and there has been a lot of it in the week I’m writing this) that we can miss the underlying positive march of human progress. This is partly because our attention is drawn to the big events, to politics, war, power and governments, but most real progress is made in small ways by ordinary people. Everywhere you look there are examples of this: just think of the hundreds of small things that the internet and mobile phones have enabled that improve peoples’ lives, often for free, driven by small start-ups all over the world. Globally we have massively improved food security, medical care, nutrition and literacy. There are fewer oil spills on our beaches (99% less oil is spilled in the oceans than in 1970).

Of course you can make statistics support just about any narrative, but a recently published book “Progress” by Swedish economic historian Johan Norberg is very convincing: we are now better off than ever in history on almost every dimension you care to name – less war, less murder and violence, better health, more tolerance, much less poverty and less global inequality, better environmental care, more and better education. Maybe our progress matters less than the weight of problems we still have to solve, and dissatisfaction, high emotions and righteous anger are useful drivers of social change. The energy that we need to right the many remaining wrongs in South Africa (indeed, in the world) cannot come only from rational analysis. Sometimes optimism (even when it’s based on real progress) can even be self-defeating.

But unlike social change, successful investing is an exercise in logic, not emotion. At times when fear and pessimism prevail, there are often opportunities to buy assets for less than what they are worth on a rational assessment of value and risk. This is because the most important factor of success in long-term investing is the relationship between the actual (not popularly perceived) prospects and risk of an investment, and its current price. Ben Preston and Maurits Ovaa from Orbis make this point in their article when discussing the Orbis Global Equity Fund’s investment in Sberbank, a large Russian bank.

Shaheed Mohamed looks at some other common behavioural biases and errors of judgement in his article this quarter, and how these lead to irrational investment decisions. When presented with information, we interpret it according to our own biases, and then we tend to react to the information. Understanding the traps you are prone to falling into, and avoiding them, and knowing what information to pay attention to, all contribute to your investment success. 

Most of us are prone to drawing overly-strong inferences from previous, and especially recent, events or trends. Africa sovereign bonds denominated in US dollars are among the best-performing assets globally this year, returning about 17%. Naturally these returns have attracted the attention of many investors. Nick Ndiritu explains that simply investing based on these recent returns may be short-sighted. He says that the case for investing in Africa’s debt markets shouldn’t be based on today’s positive sentiment; rather investors need to hunt for, and understand, the long-term risks and opportunities.

Preservation fund withdrawals

If you are close to or above the age of 55 and you have not yet taken a once-off withdrawal from your preservation fund, it is important to carefully consider the tax implications of each option before you make any decisions. Carla Rossouw and Carrie Furman help you get to grips with your choices in their article. They stress that SARS does not allow formal tax directives to be cancelled, so it is imperative to understand your situation before you submit any instructions to us.

When to use a money market unit trust

In Shaheed’s piece he uses unit trusts and market returns to illustrate the impact of investor behaviour. At face value these examples could lead you to believe that your money is safest in a money market unit trust. While it is certainly true that you lose less in a money market fund if the market crashes, you also lose out on buying power over time as the returns of a money market unit trust often do not keep up with inflation over the long term.

In this quarter’s investing tutorial, Beki Mafulela explains the best use for money market unit trusts and how they fit in to your broader portfolio. He notes that they are a good tool to use for money in transition or for a short-term savings or emergency plan. They are an effective parking place for your money.

Cheers to SABMiller

September 30 saw the end of an era, with brewer SABMiller (SAB) delisted from the JSE after 119 years of trading, as the merger with Belgian brewer Anheuser-Busch InBev moved into its final stages. The company has been a top holding in our portfolios over the years and is a neat illustration of our long-term, contrarian approach to investing.

In 2008 our overweight position in SAB accounted for the single biggest point of difference between our portfolios and the average portfolio of our South African peers. We invested for clients in the company because it had high barriers to entry in its sector, a strong position in markets where it operated, almost no technological obsolescence, no working capital requirements and a strong performance culture within the business. In many of its countries of operation, SAB was one of the biggest and most efficient contributors to the fiscus; national governments thus had an interest in its ongoing success. Despite the sceptical market view in 2008, SAB has outperformed the FTSE/JSE All Share Index (ALSI) by more than 125% cumulatively over the last five years and contributed substantially to our clients’ equity returns.

Sifting the wheat from the chaff

Describing the investment case for a huge multinational like SAB in one paragraph doesn’t do justice to the importance of proper stock analysis. In his piece this quarter, Leonard Krüger discusses why one should thoroughly interrogate the numbers that companies present. He notes that it is not unusual for a company to report six or more different earnings per share numbers when presenting results, causing much confusion. Before you make investment decisions you need to be sure you are focusing on the right information.

I hope that you have taken the same rigorous approach to picking your investment manager as we take to picking investments for your funds. We are doing our utmost to prove your choice wise – thank you for your trust.

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