Dear client

 

1.    We have obtained our fund management licence and setup our Balanced Wrap fund during 1995, which we changed to Kanaan Balanced FoF during 2005, because a FoF is a registered unit trust fund, with newspaper exposure, like all other unit trust funds, but more important, one can switch the underlying funds of a fund of fund within a few days, whereas in the case of wrap funds like Kanaan Active Wrap funds, which we setup during 2018, the notice period is between a week and 2 weeks, but there are much less regulations in the case of Wrap funds. In the case of our Kanaan Active wrap funds we are allowed to have a 100% exposure to locally registered offshore funds, whereas in the case of your investment in our Kanaan Balanced FoF we are limited to a maximum of 30%, which regulations had decreased a few months ago to only 11%!

2. The other problem with FoF’s in South Africa is that because of the cost structure you cannot manage a FoF under R50 million and lately there is more and more a need to rather have various smaller wrap funds (which may be as small as R10 million per fund) so as to meet the various risk profiles of our clients. Dries Van Tonder from our offices has found that he may be able to do the necessary programming to link our client administration system with BCI, hopefully within the next few weeks or months, after which we will be able to overcome the obstacle with the slow switching process in the case of wrap funds, after which we will be able to switch as fast as in the case of Fund of funds and even faster. Once that programming has been done we will start the process to move the investments of our clients in Kanaan BCI Balanced FoF (see your investments in the Balanced FoF below) in bulk to our much more effective and cost efficient Active Wrap funds.

3. Below you will see how much better our Wrap funds did compared to our two South African Fund of funds.

3.1.    Kanaan Active 1 since 1 January 2019 has grown with 1.08% for the first week of August and 13.01% YTD!

3.2.  Kanaan Active 2 since 1 January 2019 has grown with 0.58% for the first week of August and 10.04% YTD!

3.3.  Kanaan Active 3 since 1 January 2019 has grown with 0.88% for the first week of August and 12.8% YTD!

3.4.  Kanaan Active 4 since 1 January 2019 has grown with 0.77 for the first week of August and 11.3% YTD!

3.5.  Kanaan Passive 1 since 1 January 2019 has grown with -0.1% for the first week of August and 5.78% YTD, this fund intends to compete with a savings account or the money market and as you can see if it carries on like this it may end the 12 month period with more than 10% almost twice as good as a savings account.

3.6.  Kanaan Active 5 since 1 January 2019 has grown with -0.1% for the first week of August and 26.13% YTD in USD! Kanaan Active 5 differs from the other Active Wrap funds, as the fund is not limited to the handful locally registered offshore funds, but has access to any offshore fund worldwide via our administrator in Mauritius, International Assurance Ltd, because of which the growth is almost twice as good as the other Active Wrap funds, even better than our offshore Moriah Global FoF, but much more volatile and not advisable for pensioners.

4. Below you will see that our two South African Fund of Funds have not grown as well as our Wrap funds above:

4.1 Above you will notice that under the fund name column, your investment in Kanaan Balanced FoF has grown -0.15% for August and YTD 5.78%, which if it carries on like this could go to +-10% for the 12 month period, which is almost twice as good as a savings account or a money market account, but a far cry from the above Kanaan Active Wrap funds, where we have more freedom to choose.

4.2 Above you will notice that under the fund name column, your investment in Kanaan Hedge FoF has grown -0.43% for August and YTD 4.23%, which if it carries on like this we will go to +-8% for the 12 month period, which will not be much better than a money market account and a far cry from the above Kanaan Active Wrap funds where we have more freedom to choose, specifically to invest in locally registered offshore funds.

To answer the question whether one should take profit now:

5.  One should ask the question whether one should take profit now, as the recent depreciation of the ZAR caused your unit trust investments to grow rapidly in ZAR, which has caused your investment in our Kanaan Fund of Funds, as well as Wrap funds to go well. The locally registered offshore funds, which has grown as follows - In the case of Sanlam India, just for the first week of August 1.73% (4.89% YTD), Mi Plan Global 1.52% (16.37% YTD) and Old Mutual Global 0.99% (15.22% YTD). See below their performances since January. 

 

6. Offshore funds are performing far better than the locally registered offshore funds:

     Below you will notice comparable unit trust growth funds namely (underlying funds of our Moriah Global FoF, managed via our administrator, International Assurance Ltd, in Mauritius) BnP Paribas and JP Morgan that have done very well for the year, with BNP Paribas 18.05% YTD and JP Morgan 37.65% and that in USD! However you will notice that in USD BNP Paribas and JP Morgan did very bad for the first week of August, which is an indication of the American market that is busy taking a breather because of the fact that it is relatively expensive and also because of the continued trade war. That means that the ZAR growth that you have seen in the case of the offshore, locally registered funds above, namely Old Mutual Global and others have grown for the first week of August only because of Rand depreciation, not because of the underlying shares. We have therefore already decided to sell BnP Paribas and JP Morgan and to keep it in USD Income funds, namely Old Mutual USD Income Fund that is giving an above average return of +-3% per annum and in South Africa we have already given notice to sell Old Mutual Global, Mi-Plan and Sanlam India and are switching it to locally registered Standard Bank USD Income fund, as the Old Mutual USD income fund is not locally registered.

7.  We have locked-in the profits of the past 6 months:

     We have therefore already given notice to switch  out of these excellent locally registered offshore growth funds in the case of your investment above so as to take profit, not because we believe that the Rand will make a comeback (the ZAR is too difficult to time and we therefore are staying in USD income funds). We want to get out of the offshore growth markets for the time being, because of the trade war and uncertainty of Brexit, but we want to stay in USD as we believe that the Rand may depreciate to 20 ZAR/USD in the next 12 months, even though there are signs that the USA wants to depreciate the USD. We believe the ZAR will depreciate even more.

8.  In South Africa, in the case of our Kanaan Hedge FoF, we are not allowed to switch to offshore hedge funds, but there is a way to switch into these hedge funds, hopefully within the next three months, but in the meantime we have already given notice to switch to Standard  Bank USD income funds, so as to protect the fund against expected bad Rand depreciation for the next 12 months.

9.  In the case of Moriah Global FoF we have left more than 70% of the fund in these excellent offshore hedge funds, as the managers of these funds have proven themselves over the long term to know what to do during market corrections and global market corrections, since 1998. See below, for instance, our Hadiar Jupiter Hedge fund in USD compared with the performance of the FTSE JSE ALL Share Index, also calculated in USD.

 

     Above you will notice that when the JSE crashed with -2.13% during the IT Bubble crash of 2000, Hadiar grew 45.98% and the JSE crashed with -25% during the Credit Crunch Crash of 2008, Hadiar went down only with -6.03%, because of which Hadiar’s CAR (Cummalative Average Rate of Return Since Inception) is 18.24% per annum, compared to the CAR of 9.67% of the JSE (all in USD).

     It is unbelievable how the three underlying hedge funds of Moriah Global FoF are performing to which we have more than 70% exposure. For July, KG Investment fund has grown 1.88% and is now 22.88% YTD, Global Sigma 0.93% and is 5.36% YTD and we do not yet have the figures for Haidiar, but YTD up to the end of June it is 32.56% in USD and therefore immune to a depreciating Rand!

 

We will keep you posted.

Friendly greetings

Andre