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03 Oct 2016

Why Don’t We Switch to Cash?


Why don’t we switch to cash, where one can get more than 6% per annum, or to conservative income funds where we can get more than 9% taxable, (in other words after 40% tax only 5.4% which is less than inflation)?  It is of course better to get only 5.4% rather than -20% or even -40% in the case of a share market crash.


Clients who have been invested in our funds since 1995 will know that we switched timeously to cash before the 1998 crash, the 2000 IT Bubble crash, the 2001 Currency crash and to a certain extend during the 2008 crash.  The big institutions like Old Mutual, Sanlam, Allan Grey Equity, etc. believe that one cannot time the markets, but as mentioned above we have timed the big share market crashes. Not because we are more clever or more experienced, but because we can switch most of our unit trust fund of funds to cash within 24 hours. When it becomes clear to us that we are in a share market crash or that it is eminent, we can switch to cash without delay, while companies with more than R50 billion or R100 billion under management cannot.


We do however agree that it is very difficult to time short term market corrections and to time these short term market corrections incorrectly can be very harmful to an investment portfolio. If you switch to cash when the market has already dropped with more than 20% or if the market is not dropping, but in fact growing and you switch back into the market from cash after the market has already grown with 10% or 15% you will lose capital instead of allowing it to grow.


We do not expect a share market crash at the moment. Market crashes are normally expected after markets have grown with 20% per annum or more, for a few years, with price earnings ratios and interest rates continually increasing.  The JSE ended 2015 with minus 6% and is still only at ± 2% year to date.  That does not mean that we are saying that the South African market cannot crash.  It can crash, because socio-political circumstances locally and internationally are very unstable, but we do not try to predict these in advance.  Under the circumstances, as our Fund of Funds consists of the best amongst the best quality growth funds in South Africa, we believe it is best to follow the Warren Buffet philosophy of buy and hold. Conservative money markets or income fund portfolios may outperform us over the short term, but eventually, over the long term, we will outperform portfolios like that, 2 to 3 times and more. 


It is important to know that the 12% to 16% per annum CAR (cumulative average rate of return since inception) of all our Fund of Funds has not been achieved evenly over the past 22 years.  It hasn’t been 16% divided by 12, equals 1.33% per month.  It has been earned in terms of bursts and pockets of growth.  The 12% to 16% growth per annum appears unexpected (usually within only a few months of a one year cycle), although expected because of the fundamentals.  Therefore you must be in the market (not in the money market) to be able to benefit from that.


Paul Hansen of Stanlib said in his last newsletter that he believes the South African growth market is close to its turning point and Efficient Frontiers mentioned in their letter that it is now the first time this year that inflation was recorded within this specified band of 3 to 6%.  In the light of this, the Reserve Bank indicated that they consider inflation to stabilize, with the Governor suggesting that we may have reached the end of the hiking cycle — given the short-term improvement in South African economic prospects.


Friendly greetings


Andre Delport  

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