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Nov 2020
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Dear client

 

  1. We are managing investments for clients according to their various risk profiles and circumstances via different strategies which are called Passive 1 & 2, Active 1 – 8. We explain below in more detail the effect COVID-19 has had on each of these strategies.

 

  1. We are managing your investments in terms of our category I and IIA license as DFAs (Discretionary Financial Advisors) so as to differentiate us from Financial Advisors, because we have the qualification and license to buy and sell shares, however, most DFAs like ourselves do not have the necessary experience to buy and sell shares. We have acquired our license, mainly for the purpose of risk management, so as to be able to switch investments of 100s of clients to cash with immediate effect when it becomes clear that a share market crash is imminent and we are thankful, as mentioned before, to say that we have been able to do that timeously before the Oct 1987 crash, the Far East Pacific crash of 1998, the IT Bubble crash of 2000 and the Credit Crunch crash of 2008.

 

  1. We believe it is necessary to remind you again, that first world governments, (like that of the USA that represents the free market, where it was over hundreds of years unheard of that these governments would intervene in their share markets), have decided during the 2008 Credit Crunch crash to intervene so as to prevent big companies from going bankrupt and to prevent their markets from crashing any further. These interventions have distorted the normal interest rate rhythm of the market, where a market usual starts to grow rapidly after a crash for +/- 10 years, eventually with tell-tale signs of high interest rates, high inflation and high PE rates, before the next crash. Many economists say that once governments intervene with quantitative easing, etc. they will be obliged to carry on doing that. This would make it impossible for us to time the big crashes and we have therefore started to develop a plan since 2008 to create various strategies (at this stage eight different strategies), so as to be able to manage the investments of our clients in terms of their risk profiles and circumstances more effectively, but also to be able to diversify them better against risk.

 

  1. If we have not done a financial analysis or retirement capital analysis for you during the past two years, or if your circumstances have changed in the meantime, I want to encourage you to contact us to do that, so that we can get a holistic view on your portfolio so as to be in a better position to make suggestions on how to diversity your investments between the following investment strategies. If you scroll down past paragraph 11 of this newsletter, you will see your personal KYC (Know Your Client) concerning your personal information and, more specifically, your investment portfolio, also in terms of your +/- pension values, which I would be pleased if you could change it or add where necessary.

 

Strategies

Passive 1 (ZAR) for income

P1

Passive 2 (USD) for income

P2

Active 1 (Moderate)

1

Active 2 (Moderate/Aggressive)

2

Active 3 (Aggressive)

3

Active 4 (RA's) regulation 28

4

Active 5 (USD) offshore aggressive

5

Active 5 (GBP) offshore moderate

5(b)

Moriah Global FoF Active 6 (moderate aggressive)

6

Kanaan Balanced FoF regulation 28

7

Kanaan Balanced Wrap Investec regulation 28

8

 

  1. Passive 1 & Active 1

 

5.1.  The majority of our clients do have the need to have a portion of their investments in liquid funds (similar to a savings account that is easily accessible) because of various reasons, but with a better return as that of a savings account or a money market account with low interest rates of +/- 4% (see below paragraph 6.4 the return of our Old Mutual Income fund on the spreadsheet). We are selecting here some of the best income funds available in South Africa which have been averaging 7% per annum, but we protect the portfolio also against risks like that of COVID-19 and political risks, like in our neighboring country, Zimbabwe, which has been experiencing hyper-inflation which can cause even a stable interest rate of 7% per annum to become meaningless. You might find this remark strange but we do not find it strange because we do have clients that came from Zimbabwe and we have experience together with them, how a savings account with a Zimbabwean bank, with a reasonable interest rate of 5% per annum can become, overnight, meaningless when inflation increases to rates of more than 30% per annum and eventually to more than 300% per annum.

 

5.2.  As mentioned, the investments in Passive 1 have been managed cautiously, trying to beat South African money markets, with 8.16% net of fees for 2019. Active 1 has been invested more aggressively during 2019 with a 20.71% net of fees YTD December 2019, but both Passive 1 and Active 1 have been managed cautiously during 2020 because of COVID-19, at a stage with a huge exposure to the Stanlib USD money market fund so as to protect the investments against the Rand that may have depreciated with more than 30% against USD. The Rand eventually depreciated with more than 30% against the USD and it initially made sense not to invest in USD growth funds, because the Dow-Jones, the biggest stock market in the world, depreciated eventually to more than 35%, but we didn’t get the timing right with the Sanlib USD money market fund, giving only +/- 1% per annum, when the Rand made a comeback again to appreciate with more than 10% over a short period against the Dollar, when we should have switched back timeously to USD growth funds, causing our Passive 1 now to be at -0.31% YTD September 2020 and Active 1, -0.48% YTD September 2020, but at least we have prevented a total collapse of more than 20% as is the case with some of the South African growth funds, and we have to take it into account that the majority of economists predicted that the Rand would badly depreciate to even more than R20/USD.

 

5.3.  Why didn’t we stay 100% in income funds, or seemingly even safer, 100% in the money markets? That is because interest rates of income funds under circumstances of a worldwide crash, may have gone negative and although money markets, usually with lower interest rates, seldomly go negative, you would have had the same problem, namely, that if the Rand would not appreciate again, but depreciate even further than -30% against the USD, inflation would most likely have increased to a similar level of 35% and more, which could cause the real rate of the money markets, at the moment +/- 4%, to go negative with more than 30% (35% - 4% = 31%)!

 

 

5.4.  In retrospect, it is a pity that we switched out of income funds to Stanlib USD money market during COVID-19. If we had just closed our eyes, we would have been by the end of September YTD at +/-6%, but the COVID-19 was a scary situation with unpredictable consequences and we had to protect clients against that. Our exposure in the case of Passive 1 and Active 1, are back to cautious with 80% in income funds and 20% in locally registered offshore funds, which should do well in the months to come, with first world countries coming back from a low with the prospect of the availability of a vaccine.

 

5.5.  See below your investment summary report, which clearly shows the name of your investments in the above-mentioned funds under the column “Fund Name”.




  1. Active 2, Active 3, Active 4, Kanaan Balance FoF and Kanaan Wrap Investec:

 

6.1.  We have not even considered SA funds or Unit Trusts funds, now, for quite a while, (some of them now at -10% or more, for the year), taking into account 10 years of mismanagement by the Zuma government, SAL busy going bankrupt and Eskom not knowing how to pay even the interest on their debt and now with COVID-19 to make things even worse. We would have been in positive territory instead of the -9.04% YTD until the end of September 2020, in the case of Active 2. Properly managed locally registered offshore funds have been doing quite well and it is a pity that we switched out to USD income funds during COVID-19, losing out when the offshore growth funds started to make a comeback, but as mentioned, the COVID-19 was a scary situation with unpredictable consequences and we had to protect the clients against that. We would have been by the end of August at 19.06% after fees and end of September at 14.72%, going down during September with -3.65%, mainly because the Rand made a comeback. Active 2 is YTD September 2020 at -9.04%, Active 3 YTD September 2020 at 14.72%, Kanaan Balanced FoF and Wrap +0.72%.

 

6.2.  Locally registered offshore funds where we have just (buy and hold,) has grown up to the end of September up to 14.72%, which represents our active 3 wrap fund for younger people who do not mind huge volatility and drawdowns, but ironically our Active 2, mainly for our Living Annuity clients is now -9.04%, up to the end of September.

 

6.3.  COVID-19 has caused a lot of pain, but as mentioned, we are positive that there will be a vaccine available within the next few months after which first world countries should surge back from a very low point. We have increased our exposure to locally registered offshore funds like Sygnia which has a very good CAR of 23.67% but with a high STD of 21.84% and is now YTD September 2020 40.54% compared to the 29.25% of Mi Plan Global. Although we have not bought Sygnia previously because of the very high STD, we have now increased our offshore exposure from 40% to 50% in the case of Active 2, so as to accommodate Sygnia. In other words, we have a 10% exposure to offshore, locally registered funds, in the case of Passive 1 and Active 1, a 50% exposure in the case of Active 2, a 100% exposure in the case of Active 3 and a 25% exposure in the case of Kanaan Balanced FoF and Kanaan Wrap, with the balance in income funds.

 

6.4.  The income funds are giving stability and protection to the strategies, of which Old Mutual Income fund below as one of them, is a good example.




6.5.  Above you can see that our income funds as represented by old Mutual Income above are making a good comeback with YTD September 2020 already at 6.14% and our three locally registered offshore funds have made a very good comeback during April with MiPlan 8.8%, Old Mutual Global 13.73% and Sygnia 18.28%. We have missed out on that because we have switched out to Stanlib USD cash as mentioned above, but we are now fully invested again, with MiPlan now September YTD at 29.08, Old Mutual Global September YTD at 18.5% and Sygnia September 2020 YTD at 40.54%. As mentioned, we believe there is still a lot of steam left in the global growth markets that are busy making a comeback from a low.

 

  1. Active 3:

The best option for a medium to a long term outcome has always been to be 100% invested in the top Growth funds and to buy and hold, as in the case of our Active 3 where we have now 100% exposure to above-mentioned locally registered offshore funds and a YTD up to September 2020 growth of 14.72%. The problem with our other South African strategies, where the majority of the clients are drawing an income, is that we cannot buy and hold if the market has a big drawdown, sometimes more than 60%, which can sometimes last for months and even more than a year.

                

  1. Active 4:

Our exposure here is very similar to that of Active 1 & 2, but a little bit more aggressive with 25% in locally registered offshore funds instead of 20%. Active 4 accommodates compulsory funds where regulation 28 limits us to 30% in locally registered offshore funds.

 

  1. Kanaan Balanced FoF, Kanaan Balanced Wrap Investec:

9.1.  Our exposure here is the same as in the case of Active 4, where we have to adhere to regulation 28 applicable to the compulsory contribution funds. The ZAR compared to the USD is now only -25% negative for the year, but some economists believe that the Rand can appreciate even further. We believe that the underlying growth of our offshore funds will be more than further possible Rand appreciation for the rest of the year.

9.2.  We have mentioned previously that we are busy changing our Kanaan Balanced FoF to a Wrap fund where we are, in the case of Living Annuities, not exposed to all the limitations of regulation 28, but it is unfortunately a lengthy process. At the moment, we can (in the case of our Active 3 Wrap fund) invest up to 50% in locally registered offshore funds, even in the case of Living Annuities, which are doing much better than local growth funds, but we are not allowed to move compulsory contribution funds to Mauritius from where we can pick much better offshore funds worldwide. See more about your options via our administrator, IAL in Mauritius, in paragraph 7 below. As you can see in paragraph 4.1 under the column “Product type”, your investment is a voluntary contribution fund and we would advise you to move it to Active 3 in the meantime where we are allowed to move 100% to locally registered offshore funds until you have built it up to the minimum investment of Moriah Global which is $15 000. See below that Active 3 has been growing quite well but Moriah Global even better.

 

10.         Active 5 USD, Active 5 GBP, Moriah Global FoF:

10.1. Our Active 5 USD offshore fund is managed similarly to our local Active 3 fund via Mauritius, making use of the administrator IAL, aggressively for younger clients who are willing to invest for 10 years or longer.

10.2. Our Active 5 GBP offshore is managed moderately, mainly for pensioners.

10.3. Our Moriah Global FoF in Mauritius is managed moderate/aggressively. Moriah Global has had an exposure of 70% to quality hedge funds which have proven themselves during the 2008 crash and because we could identify two other upcoming hedges funds, knowing how to hedge during a crash up to the end of March, we could invest      in them since April 2020, increasing our exposure to quality offshore hedge funds to more than 90%. Moriah Global FoF has grown YTD 30 September to 9.5% net of all fees in USD and YTD 30 September 2020, 30.99% in ZAR

 

 

 

Friendly greetings,

Andre Delport

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