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March 2013 News

First world countries industries are a little changed for the month of February. After housing inflation reflexes a continuation of economic improvement and groundbreakings of new year’s homes in the US fell 8.5%, however new permits for contracts rose to a four-and-a-half year high while producer prices rose the previous month for the first time in four months.

The data should enable the Federal Reserve to maintain its easy monetary policy in its efforts to stimulate the US economy. Investors will keep on looking for any indication as to how long the current US monetary policy will remain in effect.

Robert Lutts of Cabolt Money Managements said “Over time, clearly things are getting better, but the US economy is addicted to stimulus.”

This is unfortunately symptomatic of the other first world countries as well, which represent an overwhelming portion of the global economy. It will thus be very difficult for a small emerging country like South Africa to swim against that stream, taking various labour related and political problems at home, into account.

In the case of our two Unit Trust Fund of Funds, KMB and KMF (Kanaan Met Balanced and Kanaan Met Flexible, previously called Xhilarator), has given a return of 13% for 2012, however it would have been possible to produce returns in excess of 27% if we included more equities in these funds. Having such a low exposure to equities might not be very exciting, but our mandate is to safeguard our investors, not entertain them.

Our Rankings

The Kanaan Unit Trust Funds will currently rank poorly if compared with funds in their respective categories. The reason for this is that most managers blindly follow a buy and hold philosophy no matter what the risk-reward trade off is. In our opinion, the amount of risk that you currently need to take for the possible return in the general equity market is too high and is bordering on gambling. We are therefore focusing on delivering returns in excess of inflation and the Money Market after taking minimal risk. The 13% return of Kanaan Trust’s Unit Trust Funds last year exceeded this goal by substantially outperforming inflation of 5.67% and Money Market of 5.44%.

Quality Hedge Funds Outperform Unit Trusts

 

According to Hedge News Africa Magazine the Kanaan Trust Fund of Hedge Funds consistently ranks as one of the top 5 Fund of Funds over 5 years, 3 years, 1 year and 5 month periods. The Fund returned 18.63% last year and currently has an annualised compound return of 18.6% per annum since inception. The reason for the strong performance of the Hedge Fund as opposed to the Unit Trust is because Hedge Fund managers have access to various tools and structures that enable them to minimize the risk of exposure to equities, whilst taking part in the growth of various instruments in a much wider investment universe than Unit Trusts. For this reason we believe that Hedge Funds will be outperforming Unit Trusts during the next couple of years while global economic growth remains low and market risks remains high. The risk return will also be better.

Are you properly diversified?

As mentioned previously the well-known Prof. Martin Biggs of New York who predicted the credit crunch crash, says in his book “Wealth War and Wisdom” that one can predict a crash, but it is impossible to predict the timing of it. According to him there is no asset class that is perfectly safe (even gold) and had you invested all you assets into just one asset class over the past 300 years, you almost definitely would have experienced a period where your asset value would have been almost completely destroyed. For example, the average price of a home in Miami in the USA in 2007 was $257 000, today in 2013, it is only $160 000 (Source Bloomberg TV).

 

Diversification is therefore critical and we advise that you consider the following asset classes and that you ensure that you are not overweighed or underweighted in any one of the main asset classes. The following list of asset classes is by no means exhaustive and the subcategories of these asset classes are only examples of some of the more popular investments under these asset classes. If you have investments not listed below and you are not sure under what main asset class it belongs, contact us so that we can assist you in evaluating whether you have a diversified portfolio of assts.

1.      Property

1.1 Fixed Property

1.2 Property Syndicates

1.3 Property Unit Trust etc.

1.4 Industrial Property

1.5 Land

1.6 Timeshares

Take note that most property is illiquid, except for property Unit Trust and one should therefore add the necessary liquidity premium when considering this asset class.

2.      Equities

2.1 Unlisted Shares (shares in small business)

2.2 Listed Shares (as on the JSE)

2.3 General Unit Trust (There are various Unit Trust classes that do not invest

      in Equities)

2.4 Features and Derivatives

In the case of listed and unlisted shares it is imperative that you are well diversified in the sub-categories of this asset class, for example one should not have all one’s assets under the equity class invested in one share, one should rather further diversify into multiple shares and these shares should further be diversified into various sub-asset classes like industrials, commodities, financial services, consumer goods to name a few examples.

Pension funds usually have a substantial amount invested in equities and it is important to know how much of your pension is invested in equities and how much in other assets.

3.      Alternative Assets

 

3.1  Hedge Funds

3.2  Precious Metals and Stones (Gold Coins, Silver Coins, Diamonds, etc)

3.3  Art and Collectables

3.4  Exotic Assets (Sharing Private Jet, Yacht, Stainless Steel Containers)

There has been a perception that alternative assets is only for high net worth individuals, but in our Funds of  Hedge Funds a relatively small amount of R100 000 can be invested.

4.      Liquid Assets

 

4.1  Cash

4.2  Money Market Instruments

4.3  Corporate and Government Bonds

Due to the negative real return (return lower than inflation) an investor’s exposure to this asset class should be relatively low and only sufficient to cover unexpected emergency cost.

 

5.      Offshore Funds

 

5.1  Offshore Equities

5.2  Offshore Unit Trusts

5.3  Offshore Hedge Funds

5.4  Offshore Property

5.5  Offshore Currency

 

If you live in a third world country this class is especially important. You should however insure that you invest in assets diversified over various global markets and not overly weighted in emerging markets. It is therefore important to have your offshore exposure managed by a professional with experience in the field to assist you to diversify the offshore portfolio accordingly.

One should also expect to receive lower returns from your offshore investments than your investments in South Africa. Reducing your risk of exposure to the emerging market of South Africa by diversifying into stronger developed markets, with lower systematic risk, means that you should also expect lower return - The lower the risk, the lower the expected return.

One’s offshore investment should also be viewed as a long-term safeguard of your assets, rather than a source of income, as the fluctuation in currencies will make this an unsuitable source to draw an income from, except if the Rand decrease substantially because of economic and political deterioration like in the case of Zimbabwe. In this scenario it is proven that an offshore investment will be off great value and might become ones main source of income.

 

These are very good offshore Fund of Hedge Funds with a similar performance and risk return to our local KFHF.

Kanaan Trust

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