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Our KMB (Kanaan Met Balanced) KMF (Kanaan Met Flexible) unit trust funds on the various platforms of AIMS, Glacier, PSG and Momentum.

 

Since the middle of 2010, we had a minimum amount in equities because of the increasing dangers quantitative easing of the first world countries posed to emerging markets. We had nothing in the Money Market as interest rates reached a 40 year low of ±4.5% after costs, which gave a guaranteed negative real return. Within the South African Unit Trusts space we had an option between three main asset classes, namely, The Money Market, Bond Funds and Equity Funds.  As explained previously,  although Bond funds re-act much quicker than equities,  on Market indicators, like for instance when the Reserve Bank would increase or decrease interest rates, it is also much less volatile than equities.  Both equities as well as bonds, had a huge potential after 2008 for capital appreciation, but not without risks as intervention by first world governments to bail out banks and companies which had too much debt, being at the point of insolvency, was seen by most economists as an intervention in the free market that would disrupt the normal economic cycle and it would eventually cause a lower growth over the long term.  First world governments like the USA thereafter followed  up with  quantitative easing where they have now been making USD86 billion per month, at very low rates available to the market, which has been causing an accumulation of debt for the USA.  The idea of course, is that the availability of more debt at cheap rates would stimulate these economies to such an extent that the result in growth would cause the necessary amount of tax, so as to help these governments to pay off the mentioned government debt.

If this strategy would back fire it would have caused another global crash much bigger than that of 2008 and fund managers, including ourselves worldwide become very cautious to invest in anything other than the money market. To invest though in the money market for a long term is unfortunately also a disaster, as the low rates after tax, after inflation, would guarantee eventually huge losses.

After 2008 we had a peculiar situation where interest rates went rock bottom but in inflation started to pick up which put many governments in a catch twenty two situation where they had to curb a runaway inflation with higher interest rates, which they could not afford, as that would wipe out the little growth they had since the 2008 crash.  There was an urgent need worldwide to create growth after the 2008 crash especially in first world countries.

Certain Bond fund managers saw the opportunity and structured their funds so as to benefit from the mentioned catch twenty two situation where inflation tends to grow and governments could not afford to increase interest rates.  Where bonds would give in a good year 8%, our KMB and KMF FoF funds in inflation linked bonds, made more that 13% during 2012.

Bond funds unfortunately became so popular that they became over valued and when Mr. Ben Bernanke announced during May this year that he sees growth in the American economy and that he might be able to taper off the quantitive easing, first world money started to flow back out of merging markets, in anticipation that there would be more growth and eventually higher interest rates in the more stable first world countries.  That of course caused emerging markets bonds to decrease in value as well as depreciation of their currencies.

“Is the Money Market now our only option?”

No, not at all! Unit trust fund of funds managers are not allowed to hedge, you must go with the flow. Go where there is a potential for growth. First world countries where the credit problems started in 2008 have been very undervalued and in the USA we are seeing the first signs of growth.  There is still the possibility that the quantitative easing will not have the necessary effect, but many economists believe that that will eventually be a problem for the long term, not for the short term or medium term.

Unfortunately, if you are locked into a pension fund or a living annuity, on a platform, the maximum we are allowed to invest offshore is 25%. We have decided to switch to  huge funds with good liquidity, where we can switch out quickly. Our biggest danger there is not that equities will suddenly drop over the short term, but that the rand might start to appreciate back to R8.50 or even R7.50, which many economists believe is most unlikely. I agree with Scotia bank that ongoing domestic labour strife, still wide current account gap and lower commodity prices, will limit any upside potential for the currency in the months ahead.  We hold a year- end USD/ZAR target of 9.80.

“What do we do with the rest?”

Because of the above mentioned, equities in South Africa are a bit dicey but still by far much better than the money market.  There is though a solution within a few so called “protected growth” funds where the funds are allowed, like in the case of hedge funds to short during down turns, within certain limits.  We have increased our exposure there to 20% but have decided to switch 55% to money markets where we are receiving at the moment the highest South African money market rate of 6.3%.

In the case of KMF we are not restricted by the pension fund act. We have switched the 55% to the so called protected growth funds, which did more than 30% for 2012.  We though expect much less for the next 12 months as growth in SA, is slowing down as mentioned previously, but we hope to get back soon to the long term performance record of 14.68% and 12.97% as shown respectively in par 7 of the factsheets of the predecessor funds of KMB and KMF namely KB wrap and KF wrap.

Kanaan Trust

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