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Jan 2019

Dear client



  1. Of the Three funds under our management namely, Kanaan Hedge FoF through Sanne, Kanaan Balanced FoF through BCI and Moriah Global FoF through International Assurance Ltd PCC, I believe Kanaan Hedge FoF will outperform over the next 12 months. They are the most undervalued and we have had the opportunity over the past 3 years to fine tune the portfolio, in other words to get rid of the losers and to get an excellent trader in Sanlam Alternative Gamma on board. Hopefully Sanlam Gamma will maintain their performance, after which we will increase our exposure to them.


  1. You may recall the success we had with the very successful Badger trading fund years ago, but unfortunately Henk Grobler had decided to close his fund to the public and we just couldn’t find another similar reliable trading fund in South Africa, until the Sanlam Gamma Fund.


  1. With our Offshore Moriah Global Fund, via International Assurance Ltd Pcc, it has also not been so easy to pick reliable trader funds, but we have been following a similar process there as we have been following here in South Africa with Kanaan Hedge FoF, after a difficult three years. In the case of Moriah Global you may recall that after the 2008 Credit Crunch crash we had noticed that certain hedge funds had not crashed, namely Haidar Jupiter and Global Sigma, which we have kept to this day and where we have increased our exposure to 34% in the case of Global Sigma and 27% in the case of Haidar, as we have gained confidence in them.


  1. Global Sigma did 14.78% in USD for 2018 and Haidar Jupiter 8.87%!


  1. I know what your answer is going to be, namely – “Why didn’t you put the whole lot in the two of them”? 😊


  1. I will quickly lose my licence as a financial advisor if I do something like that with other peoples’ money, but even if an over-concentration of other peoples’ money, in only two funds, would not put me on the red carpet with the financial services board, I would not do it in case. Even the famous Warren Buffet with his Berkshire fund, took a knock of more than 50% during the Far East Pacific crash of 1998 and it took him more than 2 years to make a comeback. He has been catching up through the years with a CAR of more than 17% per annum and all his very rich investors who didn’t need to extract their income from their investments with him during the crash, are worshipping him like an idol.


  1. Many things can go wrong with a good fund. The fund manager, the actual guy who is calling the shots, can be head-hunted by another fund and we may not be able to pick that up right away, or the fund manager can retire - not all fund managers carry on until they are 90, like Warren Buffett. We have also found that where a traded fund becomes too popular, their AUM (assets Under Management) tend to become too big and they become clumsy and eventually underperform, etc…


  1. As mentioned before, we in fact, switched our clients out of unit trust to cash before the October 1987 crash, two weeks before the Far East Pacific crash of 1998, before the IT Bubble crash of 2000, but we always knew that we may not get it right the next time, because of which Gert and I did our studies for the CAT IIa license in order to manage hedge fund of funds during 2005.


  1. Hedge funds do not follow a strategy of buy and hold like unit trust funds, most of them have the specific mandate to time the markets by short selling their shares when necessary, but as we all know today, when you do get a crash like that of 2008, the demand for short options world-wide, will suddenly become so big that these options will become too expensive if you do not buy them timeously. So what we have learned from clever people, over the past 30 years, is true – “There is no such thing, as a safe asset class, a manager or a strategy. They are safe until they are not safe anymore.” Therefore, the wise thing to do is to diversify amongst the various asset classes and strategies and to rebalance and fine tune it from time to time, according to market conditions.


  1. A portfolio with an exposure of at least 30%  up to 60% and more in our Moriah Global FoF, is well diversified, offshore, as well as in South Africa, with the very best funds that we are aware of.


  1. If we want to strategize successfully, we will also have to look at the market holistically. Economists have consensus that, “It wasn’t a good year for investors in equities last year. In Fact, it was the worst year for the JSE since the big crash in 2008”. Last year started of so well with all the optimism around our new president. I won’t go into the reasons for the malaise, which differ according to the analysts you speak to, but lets look more closely at the figures, which make for enlightening, although somewhat depressing, reading.


  1. The JSE dropped off 11.49% for 2018. That is low compared to the 27.5% drop in 2008, which eventually dropped to -56% during May the following year, but here’s the rub that hasn’t been a crash, just lots of volatility, with most of it occurring in the last quarter.


  1. We are grateful that your investment in our Kanaan Hedge FoF went down only -4.6% and your investment in our Kanaan Balanced FoF -4.82%. Your investment in our Moriah Global went down for the year with only -0.60%, but luckily in Rand it went up 15.3% The average South African general unit trust fund, was down 8.9%, according to profile data. Of the 163 funds in the sub-category only two did not end in the red, after costs: Kagiso Islamic Equity fund (up 1.7%) and the RECM Equity fund (up 0.47%). The worst performing funds were down more than 20%!


  1. Cash and short term bonds were the best performing local asset classes, delivering northwards of 7%. We have been lucky that we had picked Fairtree Income Plus, to which you have an 25% exposure, via BCI in our Kanaan Balanced FoF fund, with 10.73%, after the fees of the underlying managers, but before our fees and the fees of BCI, of +/-1.6%, which still gives you 8.77% 😊. There are a few of these cash and bond managers that are doing very well and the question remains whether we should not just call it a day and switch to a combination of these type of funds taking into account that most economists say that there are only two years left of the global bull market?


  1. This is a very problematic question to answer. The worst question that I have faced since I have started to manage fund of funds about 30 years ago. The problem is that the intervention of the so call free market governments, namely the USA, Japan, Europe and the UK, had decided against their own free market principles (normally in opposition to the socialist intellectuals of socialism and communistic countries like Venezuela and Cuba), to intervene during the 2008 Credit Crunch Crash. The simple principle of the free market is that the government is there to maintain law and order and to leave the market to sort it self out in terms of the forces of supply and demand. That world-wide intervention disturbed the normal rhythm of the free market, which is making it extremely difficult for managers like myself and the clever hedge fund managers to time the market (one of the reasons why we are continually looking out for good traders, who do not have to time the markets, as they are trading on a daily basis).


  1. There is a danger going into cash and bonds when most economists say that they are expecting at least another two years of growth.


  1. I am a witness to it that once you are in cash related funds, before the end of a bull market, it becomes very difficult to get back to growth again (they call that the cash-trap). If you went out of growth because you didn’t know where the top will be, how would you be able to determine the bottom, when it is time to get back into the market? You should know of course, that cash related investments are much less volatile, but not necessarily more safe, especially not in emerging markets like South Africa where inflation can easily go much higher than the returns on cash and bonds, not to speak of tax, but inflation is the bigger problem of the two.

    So is the equity party over?

  2. Most economists expect equities to rebound over the course of 2019, with upside potential on offer to investors, although in a more volatile environment. A tougher year is more likely to materialise in 2020 when the US will have to negotiate high interest rates and growth disappointments in an election year. A recession could even be a possibility then. We agree with economists who say that a slower interest rate hiking cycle in the US and a possible breather by the Dollar would alongside support in China, also be good for emerging market economies and currencies.

  3. South Africa has a scope to improve, but will it? We have a new political administration, which is slowly making headway in changing the economy around. Much will, however, be on hold until the main election. Attention will be focussed on issues such as land expropriation without compensation, delivery and capture. We are unlikely to see any meaningful progress toward economic policy reform until the ANC and notably president Cyril Ramaphosa, receive a solid mandate from voters to enable the government to concentrate on the business of governing. If things do not fall into place, as envisaged, 2019 will prove another tough year for South Africa.

  4. On a positive note, history is on our side in 2019 – since the 1950’s, every year the S&P500 d-rated by more than one times, the average return the following year was 16%. In addition, on only two occasions was the return negative the following year. Global Markets are around 30% cheaper than they were a year ago and many of the current headwinds can be addressed by political leaders. We believe it would be in their interest to act in a manner that would be positive for reasonable economic growth. We agree with the majority of economists that markets are acting with extreme risk eversion and are discounting an outcome worse than what will materialise. The annual compound return from the S& P500 over the last 4 years is 4.4% - less than half of the long term average. This dispel the myth that we are at the end of a rampant Bull run; there has been very little euphoria, with the market becoming progressively cheaper over the past few years. The prospects for a positive 2019 has improved, given the sell-off in the last quarter of 2018. Emerging markets like South Africa could outperform in this scenario and this will be positive for South Africa.

  5. Current conditions are conductive to volatility but we believe that investors who keep cool heads and stay invested through 2019 will be rewarded with meaningful returns.



Kind regards


Andre Delport

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