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Back to News Covid-19 Strategy and Portfolio Update
Apr 2020
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Dear Client,

 

  1. Just to give you an update on your portfolio and our present strategy.

 

  1. The great damage being done to global financial markets by the corona virus caught most financial advisers and economists off guard, including ourselves.  Clients like yourself who have voluntary money so as to be able to diversify in Hedge Funds offshore who are hedging properly, have not been badly hurt, as far as their total portfolios are concerned, with not all their eggs in one basket, in your case, in our Passive 1, Passive 2, Active 1, Active 2 Active 3, Active 4 and Active 5  and our Kanaan Balanced Fund of Fund in South Africa, and our Moriah Global offshore.

 

  1. We are thankful that on the morning of 10 October 1987 when we only had a handful of clients in growth funds during the start of that worldwide crash, we switched to cash, as well as more than 10 years later, a week before the Far East Pacific Crash of 1998, the morning of the IT Bubble Crash of 2000 and during the 2008 Credit Crunch Crash. However, we have never insinuated that we will always be able to switch our clients from growth funds to cash before worldwide market crashes in the future.
  2. The action the biggest and the most successful first world countries with free market principles (in other words, not communistic or socialistic) took to protect their economies, was largely contrary to free market principles, which have been contributing to them prospering and to be successful and ironically had tendencies toward government intervention in the free market, typical of socialism and communism. Although the mentioned governments are still to a large extent underwriting capitalism and the free market, their actions to save many of their banks and big companies from bankruptcy during 2008, have disturbed the normal rhythm of the free market worldwide and it has been complicating the market to such an extent that we came to the realization that it will be more and more difficult for us to time big worldwide market crashes in the future, because of which we started to give more attention to it, to advise clients to diversify their investment portfolios amongst various asset classes that do not normally correlate with each other, in terms of their various risk profiles and circumstances.
  3. Because it is not practical and cost efficient for us to manage hundreds of client’s portfolios in terms of their risk profiles and circumstances, we have systematically started to group our clients accordingly into various fund of funds and wrap funds of which the strategy we explain in more detail in paragraph 2 below.
  1. A good time now to switch back into growth funds?
  1. Some of the best growth funds worldwide like the Berkshire fund of the famous Warren Buffet in which our Moriah Global Fund was invested as well as some of the excellent growth funds in South Africa like for example the PSG Flexible Fund, have had drawdowns of more than 30% since the outbreak of the coronavirus and some of the South African fund managers, for example PSG, are now encouraging clients to switch their money back from USD and to invest in their South African growth funds. They argue that the markets over reacted because of the coronavirus and the value of their underlying shares went far below realistic market values, not to mention that the Rand depreciated also with more than 30%, far below its market value and that it would be a bargain to buy ZAR and to invest in their funds. In other words, once the coronavirus is something of the past and markets come back to normal, you may have had a growth of 30% on your appreciating Rands over a short period and the further 30% on your appreciating South African growth funds, which equals 60% over a short period of time.
  2. We acknowledge the fact that it is theoretically possible, but we should take into consideration that these fund managers have had enormous amounts of withdrawals from their fund, and they cannot tell us when the coronavirus will be something of the past. Since the 1987 market crash, we became properly aware of the fear that one can lose a lot if you do not switch back to growth funds quickly after a crash. However it is generally known amongst fund managers that it is far more difficult to time the bottom of a share market crash than to time the top, but the danger is much bigger that the market can take many years before it grows back to its previous high, than the danger that you may lose some of the growth if you don’t switch back quickly enough into growth fund.
  3. To us as financial advisors the various opinions concerning which is the best abovementioned strategy, is a relative concept. To us, it depends on the applicable client’s risk profile in terms of his specific circumstances. Younger clients for example, with the right risk profile, who may not need their capital or a portion of their capital for income like pensioners over the short term, can be invested much more aggressively and there is consensus amongst fund managers with proven statistics that such a strategy outperforms the conservative strategy over the long term with great margins.

 

  1. For clients who are invested in one of our South African wrap funds, namely Passive 1, Active 1, Active 2, Active 3 or Active 4: (In which one of the abovementioned you are invested is shown in your investment summary report below in paragraph 4 under ‘Fund Name’).

 

  1. The advantage of the wrap funds is that we have less regulation than in the case of fund of funds which limits us at the moment for example, namely to not invest more than 25% in locally registered offshore funds and more importantly, it limits us to the amount of risk profiles we can manage in terms of clients various circumstances, because a fund of fund of less than R50 million is not cost efficient to manage, but we can manage wrap funds as small as R5 million per fund. The disadvantage of wrap funds at the moment are that one cannot switch within 24 hours from one underlying fund to another underlying fund, like in the case of a fund of fund, only two times a month and it is critically important at the moment to be able to switch very fast because of the changing circumstances globally because of the coronavirus.

 

  1. Once we became aware of the impact of the coronavirus, we wanted to switch a portion of our wrap funds to Stanlib USD, but that switch only came through a few days ago, because of which we missed out on our opportunity to switch when the ZAR was ±16.50 USD whereas it is now already 18ZAR/USD.

 

  1. Our strategy is to move all our SA funds as well as our FoF as soon as possible to the Grid platform, where we will be able to switch much faster when needed.  It came to our attention more than a year ago that the company Grid had started to work on a more cost-efficient platform for fund managers and wrap fund managers like ourselves where they can switch within 24 hours.

 

  1. We may for instance feel that we must switch more to Stanlib’s US Dollar money market if we see that the Rand depreciates further, or very quickly vice versa, if we see the Rand is appreciating.

 

Passive 1

 

  1. As far as your investment in our Passive 1 investment on the aims platform of ABSA Bank is concerned, which is a selection of income funds similar to that of the money markets, but usually with a return of up to 8% per annum compared to the money markets return of ±6% per annum, the coronavirus caused these funds (the first time in its history of existence) to give a negative return for the month, namely -2.24% for March 2020. The investments in Passive 1 are supposed to be managed conservatively, trying to do a little bit better than the money market, but under the circumstances we have decided to switch 75% of the portfolio to the money markets so as not to have all the eggs in one basket. As we can not even trust the money markets under these circumstances, we have decided to switch 25% into Stanlib’s US Dollar Money Market so as to have not all the eggs in one basket.

 

  1. If the Rand should depreciate from 18 ZAR/USD and even worse to 20 ZAR/USD, as the majority of South African economists predict because of the latest downgrade of South Africa to junk status, we may even consider switching more to Stanlib USD.

 

  1. We hope to maintain the ±8% interest per annum with your capital, not at all expose to the ups and downs of growth funds, but we do have a responsibility to protect you against further depreciation of the Rand if there are obvious indications of it to happen.

 

  1. See below the performance of our Passive 1 fund, which shows that it has grown 8.16% under the YTD column, for 2019 Net of all fees.

 

 

Active 2

 

  1. Above you unfortunately see that the fund grew negatively -2.40% for March, the first time in its history because of the corona virus, but we have switched to more conservative funds as mentioned.

 

 

  1. You may know that we have decided more than a year ago to protect our clients in the Active 2 fund where we have mostly compulsory contribution funds like LA’s, where we are not allowed to invest in our Moriah Global Hedge FoF via Mauritius, with the administrator IAL, to protect them against the enormous problems the SA government is facing economically.  We have decided to protect the clients against the depreciation of ZAR, the majority of economists predicted to depreciate with plus minus 30% over the next 12 months, because of which we have switched more than a year ago, according to us, to the best locally registered offshore funds, namely Old Mutual Global Equity and others which have given you in fact a good growth for 2019 of 15.26% net of fees. See the spreadsheet below.

 

 

  1. However above you will notice that Active 2 had negative growth for the YTD, end of March of -12.77%, which would have been plus minus -30% by now if we have been in SA Equities.  The Dow Jones also dropped in value with more than 30% but luckily the Rand depreciation caused a soft landing for Active 2.

 

Active 3

 

  1. You may know that we have decided more than a year ago to protect our clients in the Active 3 fund where we mostly have clients with less than the minimum of R270 000 necessary for our Moriah Global Hedge FoF via Mauritius, with the administrator IAL, to protect them against the enormous problems the SA government is facing economically. As mentioned before,  we have nevertheless decided to protect the clients against the ZAR, the majority of economists predicted to depreciate with plus minus 30% over the next 12 months, because of which we have switched more than a year ago, according to us, to the best locally registered offshore funds, namely Old Mutual Global Equity and others which have given you in fact a good growth for 2019 of 17.24% net of fees. See the spreadsheet below.

 

 

  1. However above you will notice that Active 3 had negative growth for the YTD, end of March of -11.38%, which would have been plus minus -30% by now if we have been in SA Equities.  The Dow Jones also dropped in value with more than 30% but luckily the Rand depreciation caused a soft landing for Active 3.  We believe that it is now to late to switch to USD Money Market Funds and believe that the excellent underlying growth funds will make a comeback eventually, once the effect of the corona virus is something of the past.

 

Kanaan Balanced FoF

 

  1. In the case of our Balanced FoF as mentioned previously we are limited by regulations according to which we must have always at least 25% in conservative funds like, Income funds and or Money Market funds with a Maximum of 30% offshore. However, the one advantage of FoF’s, as mentioned above is that one can switch fast, within 24h from one fund to another fund. So as to have a maximum exposure to offshore funds we have switched during the beginning of January the maximum, allowed to regulations, to locally registered offshore funds which have given us a good growth in January Net of fees of 1.73% and for February 0.26%, however the Corona Virus caused good offshore funds to depreciate since the end of February so that the YTD growth of most first world indexes went below -30%.

 

  1. Even the Income funds as mentioned previously which seldomly have a negative month, and if it has a negative Month, very small, went on average badly negative to minus 2.4% for the month of March.

 

  1. We have therefore switched on the 18’th of March 75% of the fund to conservative Money Market funds and because one can lately not even trust Money Market funds, and to protect our clients against further anticipated ZAR depreciation, we switched 25% to Stanlib USD Money Market. 

 

  1. Below you will see the performance record of Kanaan Balanced FoF since January, Net of fees which shows -3.06% for March and YTD up to the end of March -1.13%, we are thankful that we could have prevented the -30% YTD of global equities and hope to see a moderate and safe growth of 6% p/a until the effects of the Corona virus is something of the past.

 

Moriah Global FoF

 

  1. You will notice that in the case of your investment in Moriah Global, that the fund had a drawdown of -0.34% because of the effect of coronavirus on the 3 underlying unit trust namely BNP Paribas, JP Morgan and Berkshire, which fell with more than 8% in USD, but the Haidar Hedge Fund to which we have an exposure of more than 22%, grew with 7.39% for the month of February.   Moriah Global for February grew negatively with -0.34% in USD, but +3.91% in ZAR, with a YTD in USD  growth for February now +-1,72% in USD and in ZAR 15.73%!  The estimate YTD end of March in USD is now +-4.18% and the YTD in ZAR for end of March is now +-32.97% comparing to the drawdown of the DOW Jones and most other first world markets of more than -30%!

 

 

  1. We switched out of the growth funds early in March, but unfortunately we could not get out of Sphere early which fell with -10.88% for March, but luckily again Haidar Jupiter  hedged properly with 23.9% growth for March and Global Sigma with a little bit more than 1% growth.

 

  1. We are thankful that you are one of our clients that followed our advice to move a substantial amount of your voluntary money to our Moriah Global Fof, which has an exposure to excellent underlying Hedge funds, which have proven themselves during previous market crashes and that know how to hedge, busy protecting our clients now again.

 

Friendly Greetings

Andre Delport

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