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Newsletter - March 2015

TAX FREE SAVINGS ACCOUNTS


As you may have read in the press or heard on the radio, everyone is abuzz with the news that government has created a new savings scheme which will incentivise individuals through tax exemptions. It is supposed to encourage a savings culture in South Africa.

Is it worth the hassle?

It is a small scheme, you can only save R30 000 a year into your Tax Free Saving Account, (TFSA). The overall maximum that you can put into this account, is set at R500 000 over your life time. These limits will probably go up over time, to allow for inflation. You may make withdrawals at any time, but you may not pay the funds back into the account within that specific tax year.

If you are in the 41% tax bracket, these accounts will grow tax free, unlike endowment policies that are taxed at 30%. No Dividend tax, no CGT, no tax on interest within the policy and no tax on withdrawals. In short, no tax!!

Assuming you pay R2 500 per month, i.e. R30 000 a year, the possible values are:



You can quite clearly see the effects of compound interest. *When looking at the investment performance over 15 years the growth @ 15% p.a. is double, for the same period @ 8% p.a.

It is important that you are on the right investment platform, in the right investments.

For some of you, the above may seem like a mere drop in the ocean. In our view, it is worth the hassle to sign the document and benefiting from this saving scheme. You may also open TFSA accounts for your children which could be a very effective means of saving for their education.

If you like to know more please contact Anneline at 021 424 5225


Nick Russell
Certified Financial Planner CFP


Please note: This article does not constitute advice


Newsletter - December 2014

2014 and a Year of reflection for Investors?


2014 has been an interesting year for investors around the globe. There have been some interesting aspects in the markets.

Oil has come down dramatically from a high of about $120 per barrel to about $70. In 2015 a lot of economies in the west should benefit from these low prices, but oil producing countries dynamics will change.

Resources, gold, platinum and other metals and minerals have also come under pressure. The gold price has declined from about $1380 to $1200’s in 2014, a far cry from $1800’s in July 2011!

For South Africa the balance of payments may improve as the beneficial effect of the lower oil price, oil we import, should outweigh the negative effect of lower resources prices, resources we export, as long as the Rand remains relatively stable.

Another anomaly we are seeing, is the effects of index funds. Index funds are seen to be cheaper and more fail proof as they do not have any fund managers input. They just replicate the market. In the past the markets have been steaming up, hence the popularity of index funds that just can't go wrong...go wrong... go wrong!!

The problem that we, and some fund managers, are seeing is because of the popularity of index funds, there are huge walls of money being invested in them, and the fact that they have to replicate the market, share prices in these indexes are increasing for the wrong reasons. Demand for these shares are due to the necessity of replicating the market and not due to financial economic sense. The result may be that these shares become over valued in a bubble sort of way and could result in an extensive market correction for them.

So it appears from the above that indexed funds may not be the answer. There is no such thing as a free lunch and it may be better not to be penny wise and pound foolish and to rather pay for good advice and for good fund managers.

The next few years may have difficult markets, but still profitable for those who are diligent or who pays for diligence!

We wish our clients a Merry Christmas and Hanukkah and all the best for 2015.

Kind Regards from

All at Pinto Russell


Please note: This article does not constitute advice


Newsletter - May 2014

MARKETS AND TIMING


Of late I have had some clients concerned that this year we will see a correction or a crash in the world stock markets. It is impossible to predict the future. History does repeat itself - but often with a twist.

Sarasin of London, citing Robert Schiller and Bloomberg, presented the following:

The duration of bull markets are on average just under 6 years. At present we are approaching 5 years. The shorter bull markets were from 1906 to 1909 - 3 years - and 1969 to 1973 - 4 years. The longest bull markets were in 1948 to 1961 and 1987 to 2000 - each over a period of 13 years!

To what extent; how much will the markets increase in value? The average is about 250%.

The longer bull markets increased more than 800% while the shorter ones - for example 1969 to 1973 - increased just short of 100%. Currently we are at about 140% from the base values of the last bear market.

A significant value to monitor is the price earnings ratio (PE ratio). Markets tend to get over exuberant and with relatively high PE ratios they can stall and crash.

On average, market valuations peak at a PE ratio of roughly 22. At present we are at a PE ratio of 18. Having said that, the 1982 to 1987 bull market peaked at a PE ratio of about 26. The 2002 to 2007 bull market peaked at about 29 and the 1920 to 1928 peaked at about 32. The best of all - the dot com crash from 1987 to 2000 - peaked at a PE ratio of just below 40!

A crash or correction normally happens when there is a dislocation in the markets which then leads to some sort of crisis. It could be financial, it could be war. It could be something insidious; a change in social norms.

One aspect that today’s markets differ significantly from the past is the way that major central banks have been printing money to inflate their way out of recessions. Governments have never been more dependent on taxes (VAT as well as personal and company) and they simply cannot afford recessions. Hence the printing of money!

The value of company shares may still go up considerably, but as long as their earnings can keep up, company valuations should remain firm and bullish.

One cannot say when exactly the next correction or crash will occur. That is why it is not wise to commit all of your capital to the stock market. It is sensible to have a balance between equities, property, bonds and cash. What exactly that balance should be depends on your circumstances and perceptions. There is no one-solution-fits-all.

Lastly, a comment on Index Funds which have recently come into vogue: Index Funds track the market. They minimise management risk of underperforming the market. They are cheaper to run and by and large they are more economical to use than equity funds run by fund managers. That is "by and large". If you have a good financial adviser who is monitoring your portfolio and advising on changes to its composition, you should be able to enjoy better performance - after fees - than the vanilla Index Funds.

In closing, if you think that there is going to be a market crash you may not want to track the losses with index funds! Index funds have their place and how wonderful they would have been if you had put all your money into one in 2009. R1 000 000 then would be about R2 400 000 now!

You need balance and good talent to deal with the future. That is where the team at Pinto Russell comes in.

Nick Russell

Certified Financial Planner CFP

Please note: This article does not constitute advice

Newsletter - August 2013

A Lifetime with Trusts


Trusts have come under the spotlight by the tax authorities in recent years. Trusts can be used in many different ways, they can be complicated and costly or simple, cheap and still very effective in carrying out their tasks.

Overseas, we have simple trusts where there is one endowment policy in the trust. Within that endowment policy there can be unit trust and even shares which can effect efficient and transparent growth. Simple trusts are relatively inexpensive to set up and in some cases cost relatively little to run.

Here are some uses where a trust can be effective.

From generation to generation. Like a will, it is a good instrument to regulate how wealth will be transferred from one beneficiary to the next. It can also be used to regulate how the money should be used, i.e for education. It is more powerful than a will and unlike a will, it is unlikely to be contested. So for those with difficult families, that make TV programs like Dallas pale into insignificance, a trust would help you considerably.

Tax advantages. A simple trust with an endowment still has tax advantages if you are in the 40% tax bracket. Income and CGT is taxed at the insurer's tax rate of 30%, which is lower than the 40% flat rate that is applied to Trust and to high earning taxpayers. CGT is effectively levied at 10% in the endowment as against 26.6% for normal trusts and 13.3% for high earning tax payers.

Administration advantages are considerable in a simple trust. With all the income and capital gains taxed within the endowment policy, the complex income tax deeming provisions for trusts do not apply, which simplifies the tax administration completely. Trust meetings can be simple. In short, trust administration can be very basic, cheap and very effective.

Protection of assets. A trust that is properly set up, will afford the protection of assets against creditors. In divorce, unlike retirement benefits that in terms of the divorce act are subject to division on divorce, trust assets are not part of an estate of a person and has nothing to do with trust beneficiaries who are getting divorced. For parents who have children who are in dubious marriages, trusts can be an effective tool in protecting their wealth in possible divorce actions.

In retirement a beneficiary can receive income, tax free, from a trust. Furthermore loans from a trust may be created to fund living expenses. These loans have to be repaid only at death which in turn is deductible in the estate duty calculation. The estate duty savings may be considerable.

Keeping things sensible. A trust is very useful to regulate the financial affairs of a person suffering from Dementia and other such diseases that normally afflicts one in old age. The trust sets out how the financial affairs of the beneficiary be governed and unlike a power of attorney, does not give unlimited powers to another person.

So as you can see a simple trust and other trusts can be very useful, need not be costly, and can do many things for one through a lifetime. The art is in the start of the trust. The flexibility and usefulness of the trust depends on the initial setup of the trust.

Pinto Russell Trusts and Estates can advise you on simple and other types of trusts.

Nick Russell

Certified Financial Planner CFP

Please note: This article does not constitute advice

Newsletter - September 2011

Double Dip?


There is always some degree of volatility in the world markets, but of late, this phenomenon has been more prevalent than usual. The main fear in the markets at present is whether we are heading for a full blown recession and depression? There are some differences in the circumstances of today to that of the 1930's depression.


Today, the World is much more in real time than it was in the 30's when there was no VAT or GST and no computers. Governments did little to prevent the banking system from failing and allowed banks to go bust which in turn caused businesses to go bust, which fuelled the depression. There was little in social benefits provided by the governments. Today the governments have a real interest in keeping their economies going. They immediately feel the effect when VAT receipts start to fall with the slowing of the economy. Nowadays most governments offer social benefits for the unemployed. An unemployed person represents a double negative in tax terms. He does not pay tax nor does he spend much, so there is little in tax paid in VAT and furthermore they have to pay him social benefits. The other problems these governments have are that the unemployed people vote! This could spoil the fun for the government in power. Even if you do not have a democracy and you have a well established dictatorship you can be thrown out of power! You can ask Gaddafi of Libya or Mubarak of Egypt!


Take a look at South Africa. In South Africa Malema has grasped the aspirations of the ANC youth, most of whom do not have jobs. Malema has become a real headache for the ANC.


If you look at what is going on in America, UK and Europe, the governments are doing their utmost to avoid the collapse of their economies. The medicine is money. Money has been printed and lent to the banks at zero or very low interest rates, which has helped the banks to survive and to keep the economies going.


In South Africa, the government has asked the Governor of the Reserve Bank, to do what is necessary to keep the economy growing rather than concentrate on inflation targeting. The government has promised to create jobs rather than destroy them with high interest rates. Low interest rates would seem to be the order of the day here and for many parts of the world. In South Africa we may expect another cut in interest rates.


So what are the side effects of all this medicine? Inflation. When the economies start to recover inflation will reappear. Who will be most affected in the future? Those who have fixed incomes and money on deposit. Interest rates will remain low and inflation rates will exceed interest rates, robbing the real worth of money over a period of time.


It is important that when retiring, you invest your retirement capital in unit trust based Living Annuity, which if invested wisely, can combat the problems of inflation. In this regard it is important to have a dedicated investment advisor not just a general financial advisor.


Nick Russell


Please note: This article does not constitute advice

Lagoon News Article – September 2011


Newsletter - July 2011

Pensions

In South Africa the most common type of pensions are the Living Annuity and the Life Annuity.

The Life Annuity is the older conventional annuity, which is based on the life expectancy of the annuitant and the current bond rates at the time the annuity is taken out. There can be certain conditions, sometimes known as whistles and bells, added into the annuity contract such as, joint survivor, 10 year guarantee and a yearly percentage increase in the pension. For each of these conditions the pension income will drop.

To obtain the maximum pension in the beginning, a straight Life Annuity with no whistles and bells, is the best. On the death of the annuitant, a Life Annuity comes to an end unless it is subject to conditions such as joint survivor or the remainder of the 10 year guarantee.

Some of you may have acquired your life annuities when interest rates were extremely high in the early 1990’s. Your returns on your capital, over this time, have been good.

At present with interest rates being very low, the pensions offered on capital sums invested in conventional life annuities, is correspondingly low. This is because insurance companies buy government bonds which can provide the guaranteed return over a period of time, and then all the insurance company has to work out is on average how long you have yet to live.

Living Annuities, on the other hand, are normally unit trust based and the risk one runs here is how your investment performs. A Living Annuity has certain advantages. On death, the proceeds can be passed on to your loved ones. If a Living Annuity is run properly and responsibly, it should outperform a conventional Life Annuity.

Your pension from your Living Annuity should be reviewed every year, whereupon you may choose a withdrawal rate of between 2,5 – 17,5% of current capital. As your pension income can only be reviewed once a year, the anniversary date is very important.

Living Annuities should be reviewed at least every 6 months for small simple low risk profiles. The larger ones can have a share portfolio as well as unit trusts and should be reviewed more regularly, as often as every 3 months.

We inherit a number of clients who have been unhappy with the follow up service on their Living Annuities. If you are not happy you should have a second opinion to review your Living Annuity.

This article is for general information only and not specific advice.

Please call us if you would like a free consultation. We do service the West Coast area.

Nick Russell

Please note: This article does not constitute advice

Lagoon News Article – July 2011

Newsletter - June 2011
Investing and Common Sense

The problem with common sense in the investment world is that it is not so common. Common sense tells us that one should buy low and sell high. However, we often see investors buy high and sell low. The main cause of this is too much emotion and no real financial planning to have faith in. Over the last couple of years there have been some tricky times. Markets have been difficult and returns on investments have been fair.

Should we be out or in the stock market now? Should we wait and see? That is the million dollar question and millions are made and lost by how it is answered.

It is very difficult to time the market at the best of times. One is rarely given a clear time to buy as we were given in March 2009 when the markets were rock bottom. But then, you must have had guts, the liquidity and faith to invest in what seemed like the end of the world.

There is more to investing than just common sense.

You need to have an appropriate investment strategy to achieve your financial objective. This should be a written financial plan.

Your financial plan must take into account your individual needs, as no one financial plan fits all. You should have some understanding of the shares and unit trusts you are investing in. What do you approximate their intrinsic value to be? Then you have to consider whether you are investing for the long term, medium term or will you need your funds in the near future.

How do you sleep at night? When markets fluctuate are you very conservative and very concerned when investments lose value and are you tempted to sell.

Or are you a medium profiled investor, who will wait and watch performance of the investment for a year before making changes.

Or are you a very hardy investor and even if market conditions result in losses up to 20%, try to follow your long term investment plan. This better be a very good investment plan.

The art of investing is in the consistent, professional attention over time. Investing is not easy.

Using a good Investment Advisor will pay handsome dividends.

Nick Russell

Please note: This article does not constitute advice

Lagoon News Article – June 2011
Newsletter - May 2011

Taking Money Offshore

In the old days the only way to get wealth out of South Africa was by smuggling it out. A romantic way was to take a holiday abroad with your loved one and a suitcase full of cash. Rand notes are legal tender in this country but offshore they do have value albeit at a discount.

The less romantic way if you were emigrating, according to old urban myth, was to buy lots of Kruger Rand Gold coins, melt them into nails and use them in your wooden packing cases. The foreigners wherever you had emigrated, couldn’t begin to understand why South Africans were so possessive of the remains of some old packing boxes...

Today, things for the moment are much easier. The Rand is very strong, and the authorities are quite helpful. It is a golden opportunity to invest into the comparatively weak markets and cheap currencies. There are two ways. You can take up to R4 000 000 per annum per adult person. You have to obtain a tax clearance, i.e. your taxes have to be up to date, and you have to apply to the Reserve Bank for clearance, which is normally done by your bank or broker. At present it can take some time. With this money you can invest in whatever you want.

You can buy property, a yacht, invest in unit trust and shares, or donate to an offshore trust subject to donations tax.

A more simpler way to invest offshore is to use asset swops. Big insurance companies and unit trust investment companies offer asset swops through their offshore feeder funds. This allows you to invest and disinvest quite quickly compared to applying through the Reserve Bank. The only premise is that when you disinvest you will be paid out in Rands. There is a small cost to using the capacities of these companies but it is quite low and very competitive.

Persons using asset swops are those who have used up their R4 000 000 allowance for the year and desire to rand hedge and those whose tax affairs are not up to date and therefore cannot obtain a tax clearance in the short term.

As I wrote before, South Africa has some of the finest fund managers in the world. A lot of expatriates from various countries are using South African companies and doing very well. Like our banking system, our investment companies are very modern, well run and in many cases far more cost efficient. So whether you invest directly offshore or by asset swop, you would do well to use your fellow countryman's talents.

Nick Russell

Please note: This article does not constitute advice

Lagoon News Article – May 2011

Newsletter - April 2011

Are All Speculators Bad?

What is the true value of gold? What is the true value of oil? Like most commodities the pricing is effected by speculation and may cause the price to be artificially high or low, against its intrinsic value.

Speculators are to an economy, like a suspension is on a car. They make a smoother ride over the bumps and pot holes.

When there is a surplus of a commodity they buy up supply to store and by doing so, keep prices reasonably firm and then sell at a time when that commodity is in relatively short supply and by doing so, keep the price from going sky high. In doing this they buy at a relatively low price and they sell at a higher price to make a profit. The economy benefits from smoother prices than there would be, without speculation. On the whole, speculators are good for an economy but there are times when speculators are too aggressive and indirectly harm an economy. In some cases the prices of commodities are affected by perceived situations rather than the real situations. An excuse to make a mountain out of a mole hill!

A case in point: - at present the markets are affected by the worry of oil supplies due to the fighting in Libya. Libya does produce a fair amount of oil, but the OPEC countries have pledged to increase their supply to offset the disrupted supply from Libya. In spite of this we have speculators buying and hoarding oil causing the price to climb which in turn causes inflation due to increasing energy costs which affects many aspects of an economy.

Gold. To many investors it is considered to be the reserve currency of the world. You may not know or remember, that gold did exceed the $800 mark in January 1980, but only for a few days before making a steep decent to its more intrinsic value at that time. For the years, between early 1980s and 2004, gold languished between $200 and $400 per ounce. This was a far cry from when it was over $800 an ounce in 1980! Since 2004, gold has been steadily climbing to where it is now at about $1450 per ounce.

Today we hear speculation on gold going to $2 000 per ounce and oil increasing to $150 per barrel! Will it happen? I don’t know. If it does reach these pricing levels, I would think that the prices would fall to an oversold position fairly soon as the oil price did in 2008 after reaching $150 per barrel.

Speculative bubbles are relatively short lived. Speculative bubbles become increasingly expensive to run to keep the buying momentum going, as the clever money begins to sell out. We may see the price of petrol coming down rather than going up over the next year. The price of gold, is it fairly priced now? Should you buy? Time will tell.

Nick Russell

Please note: This article does not constitute advice

Lagoon News Article – April 2011

Newsletter - March 2011

The "Grand Rand" Opportunity

The Rand is very strong and robust at present, which is very fortunate considering the volatility of the oil price.

Many economists and business people feel that the Rand is overvalued for its fundamentals but the Rand continues to do well due to momentum investing in the Emerging Markets of which South Africa forms a part, and the carry trade.

In 2000/2001, when the Rand was hitting record lows against major currencies, many South Africans were going offshore, investing in expensive offshore markets with weak Rands. It was a bad time to invest offshore.

Over the last 10 years, the Rand has been appreciating considerably against most major currencies, whilst in offshore markets many share prices have lost value over this period. Many of these investors have not seen a real return on these investments in the last 10 years.

Now times have changed. The situation seems to have reversed, with a strong Rand and relatively weak offshore markets with good dividend potential, it appears to be a very good time to invest abroad.

The South African economy is considered by some to be an emerging market. Yet, South Africa has 1
st class, 1st World banking and investment services, better than most other 1st World countries.

South Africa offers excellent investment services and is well endowed with good fund managers who run good affective portfolios. For example, last year Kokkie Kooyman of Sanlam Global Financial Fund was named the top global fund manager by the international magazine, Investment Weekly. This is a very high accolade.

Foreigners living in South Africa can use the talent of South African fund managers and advisors to good effect.

Expatriates residing in South Africa can have their pensions transferred into a Qualifying Recognised Overseas Pension Scheme (QROPS) and have a wonderful opportunity to invest their pensions offshore in affective investments that can give meaningful returns.

South African companies can offer very competitive costing QROPS compared to some schemes in other countries.

Nick Russell

Please note: This article does not constitute advice

Lagoon News Article – March 2011

Newsletter - February 2011

Financial Lifestyle Changes

In the past, life was more certain. In the old days pensions were a certain percentage of your final salary, based on the years of service. Careers were more certain, there was not so much chopping and changing as there is today.

In the old days there weren’t the wonder drugs and medicines. So many people as young as 40, enjoy the medical benefits that keep them alive and in good health, to a very ripe old age.

Although there appears to be less certainty, there are lots of opportunities. Today there are good health and wealth practitioners to make the best of your talents, which includes money. When you are investing money you are investing in the goodwill of man.

Sometimes there is bad will in the markets, Madoff in the USA and closer to home Masterbond and Tannenbaum to mention a few. With a good qualified financial adviser, you should be able to keep clear of these shenanigans and make your money work for you now, and for however long the future holds for you.

Today we have interesting and viable investments, in equities, commercial and properties, both here and abroad, ETF’s which allows you to buy and sell gold without ever having to take delivery, unless you want to.

The most important aspect of investing is to keep up to date with the markets. You need to see your financial advisor at least once every 4 months and see if he recommends any switches or other action on your portfolios.

All too often we see investors who started out well only to find their investments fall to pieces due to a lack of attention by their financial advisors. If you are changing jobs, retiring or in retirement, you need to plan. If you inherit money you should honour the giver by planning wisely.

If it is a divorce settlement you owe it to yourself to plan a better life! At the end of the day you can get more out of life by good planning and making things more certain for yourself!

Nick Russell

Please note: This article does not constitute advice

Lagoon News Article – February 2011

Newsletter - October 2010
Dear Client

THE “GRAND RAND” OPPORTUNITY
The Rand is very strong and robust at present. The Reserve Bank Governor, Jill Marcus, may have been a bit dismayed last month when she dropped the interest rates by 50 basis points only to see the Rand strengthen rather than weakening. It appears that the markets were relieved that the interest rate drop was only 50 basis points and not a 100 basis points they were expecting. Although many economists and business people feel that the Rand is very strong, overvalued for its fundamentals, the Rand continues to do well due to momentum investing in the Emerging
Markets of which South Africa forms a part, and the carry trade.

In 2000/2001, when the Rand was hitting record lows against major currencies, many South Africans were going offshore, investing in expensive offshore markets with weak Rands. It was a bad time to invest offshore. Many of these investors have not seen a real return on these investments in the last 10 years.

Now times have changed. The situation seems to have reversed, with a strong Rand and relatively weak offshore markets with good dividend potential, it appears to be a very good time to invest abroad.

UNIT TRUST PERFORMANCE FEES
Many unit trusts are charging performance fees. This may make investing more difficult as there are timing problems involved. You may invest today and pay the performance fees for the performance of yesterday. Although the glossies may paint a rosy picture about good performance, the actual performance that you enjoy may be considerably poorer!

If we have paid a management fee, have we not already paid the manager to do his best?

Recently, in the Financial Times they published a fact that if you had invested $1000 in 1965 into Berkshire Hathaway it would be worth about $4.3 million at the end of 2009. If Warren Buffett had charged a performance fee of 20% on any gains and 2% management charge per year, then according to Terry Smith, the 4.3 Million would have been reduced to a mere $300 000! Performance fees make fund managers rich quick, not investors. Financial advisors have a lot of work to find the unit trusts that not only performs well, but do not over charge to negate the performance and that the clients enjoy the benefits for the risk and time they have taken with their capital.

INVESTMENT TRUSTS
An investment class that may become popular are investment trusts.

Investment trusts are like unit trusts except they are closed ended and their shares, (units), have to be sold on the open market rather than being redeemed by the fund. Therefore investment trusts can keep to strategies without being interrupted by the whims of the market. Unit trusts, on the other hand are open ended, and can land up with enormous amounts of money, leaving the fund manager struggling to find suitable shares to invest. When there is a run on the market the fund manager often has to sell the best shares to raise cash quickly for redemptions and having to modify his strategy.

Investment trusts are a little more complicated to assess. Depending on their management they may trade at a discount to their net asset value. Some trade at a premium, for example Warren Buffets Berkshire Hathaway.

A good financial advisor has quite a lot of responsibility to ensure that your investment objectives are efficiently met.

Yours sincerely
Nick Russell CFP Licensee
Please note: This letter does not constitute advice.

Newsletter - August 2010
Dear Client

When my wife told our young son that it was time to put his cash he had received for his 8th birthday, into the bank, he protested. He did not want to put all his money in the bank, - he wanted to save some of it! A sign of the times. Banks are being stress tested as sentiment changes and banks are being questioned if their house is really in order.

In spite of all the money that has been printed there has been no threat of inflation. The reason being is that this money is not being actively spent. It is being received and put under the bed. So the effect of printing money has perhaps stopped the economies descending into a full economic depression.

China is slowly but surely growing up. Their command government is shrewd and to a greater extent is able to effectively steer their economy towards prosperity. China is now the second biggest economy in the world, having overtaken Japan.

At the coal face, i.e. at the factories, the workers are starting to command more respect. That is to say, that as their factories have developed, the experienced workers have started to look for better wages and factories need to pay more to keep or replace experienced workers that they need. A lower middle class is starting to emerge in China.
China has had to revalue their currency. These things are good for the Western Economies. The playing field will become more level. Their consumers will want some of the Western World products and their products will become a bit more expensive which will allow some Western industries to compete better.

Although inflation appears to be benign at present, when the money does start to circulate more actively, as confidence improves, inflation may increase consdierably. Governments will have to sell more bonds to soak up excess money to curb inflation, and by doing so make interest rates increase. To what extent they will do this depends on their political situation and their country’s position in world economic trade. They may want some inflation if it stimulates growth.

So what does all the above mean for you and me?

Over the next few years the stock exchange indexes may be choppy, but will most probably, overall, remain flat. This is not a good time to buy an index to hold. You need to trade the index and you need to be good with your timing. Timing always appears easy in hindsight but rarely works out for most people going forward.

In the index you will have 3 types of companies. Those who are adapting to their markets and growing, (even in bad times there are always opportunities), those that are just muddling along and maintain their situation and lastly those that are dying. In these times there are a lot of companies whose markets are in trouble, and there are more companies dying than growing.

What we need to do is invest in those Unit Trusts that can actively invest in those companies that have potential, so that they can perform better than the index. This may sound like old news. Up until a few years ago, in the good times, investors were enjoying good returns in most investments, even if they did not keep up with the index. Those days are over.

There are always opportunities, but sometimes they are more difficult to find. South Africa appears to be blessed with some of the best unit trust fund managers. Good fund managers can find good opportunities in bad times.

That's what we need to do and that is where we can help you.

Yours sincerely
Nick Russell
Please note: This letter does not constitute advice.
Newsletter - June 2009
Dear Client

This is a time for investors not gamblers.

The last bull run was a great time for gamblers. Little thought or discipline or understanding
of the market was required to make money on the markets.

Now life is different. Share prices are still considerably low compared to their highs and there are a few companies paying a dividend. The press is starting to write a little good news than just doom and gloom. Some companies are restructuring and they understand that life does go on, although maybe in a slightly different way.

Many companies have or will reduce or suspend dividend payments and their share prices
have been hammered. In the next few years those companies that have been successful in
restructuring will start to pay dividends.

A typical example of such a share would be X. X was valued at R5.00 2 years ago and was paying dividends of R0.50 per year. Today such a share may be trading at only R1.00 and paying no dividends.

If you are an investor and you can establish that the company is a winner, buying today and
waiting for dividends may be very profitable. If you can wait 3 yrs for some sort of “normality” in the markets, and if the company starts paying R0.25 dividend, i.e. half what it used to, you have created real intrinsic wealth. Taking into account the opportunity cost of investing that R1.00 for 3 years, your cost would be less than R1.50 by the time dividends started paying again.

For you the PE ratio would be only 6, that is a return of 16.7% per annum tax free. At that
time the share may be trading closer to R2.50. 2 years later perhaps the dividend will be back
to R0.50 and the share may be trading at R5.00 as it was before. Your book value will be
R1.50 and the return on your original investment, taking into account the opportunity cost
while the share was not paying a dividend, will be more than 30%!! Now that is investing and
not gambling!

Unit Trusts are excellent if you do not have the knowledge or do not have the time to
consistently keep abreast with the markets.

For those of you who have Sanlam or Investec investments you may want to make up a suite
of shares that will hold you in good stead when the economies of the world become more
normal. We can help you keep abreast with markets.

For Sanlam share portfolios are available from R500 000 on non discretionary funds and
R1 000 000 for discretionary funds.

This has been a great Bear Market. It is not every day that we enjoy such opportunities.
If you are an investor and not a gambler, don’t let this opportunity pass, phone us for sound
advice.

If you are a gambler I suggest you wait a little longer.....

Nick Russell
Please note: This letter does not constitute advice.
 
Newsletter - March 2009
Dear Client

Over the last few months the markets have been very volatile, going down to incredibly low
levels. Overseas has been significantly affected with whole sale retrenchments being the order of the day. In China 20 million people have lost their jobs and are leaving the cities.

This has been caused not only by the sub prime debacle, that started in 2007, but by other
scandals in the banking sector that has in turn brought down western capital markets.

Where do we go from here?

Most of the Western Governments have lowered interest rates, printed money, which has caused Sterling to devalue considerably, and have shored up the banks one way or another. This is different to what happened in the 1929 and 30’s depression. At that time the Gold Standard was religiously observed, money was not printed and banks were allowed to fold.

The markets have come down because of the excessive leverage that existed and whether those investors liked it or not, they have been forced to sell and realise their losses. This is causing the current volatility as the price of stocks rise they offload shares that they cannot afford to hold any longer..

In our opinion the Government has given powerful medicine to the financial system that will have a positive effect in the short term, but the side effect will be inflation.

In the short term shares may appear to look unattractive, but this is when great opportunities arise. For those in the know, this appears to be a good time to invest. There maybe a lot of negativity in the press but there still a lot of positives going on. In South Africa interest rates are under pressure to go down. Outlook for dividends look good in the medium term, i.e.. 3 to 5 years.

The price of top company shares are very low compared to their net asset value and potential earning in the medium term. The price of poor quality company shares are also low and will remain low or come to nothing in the short to medium term. The trick is to get the shares of the good companies that are able to trade, restructure and adapt to the new market conditions.

Unfortunately I cannot tell you when the market, which is still full of emotion and irrationality, will bottom out and realise positive valuations. However there are lots of pension funds compared to the 1930’s. Pension Funds are significant players in the markets and will need to invest their assets into performing shares when treasuries and gilts fail to deliver good returns.

Now is maybe the time to invest. Do not miss the boat!! This may be a good time to leverage up, if you are in a position to do so. It is also a great time to buy good shares directly or through good aggressively managed unit trusts. As some of you know you can buy shares directly either on the JSE or on the LSE through our Glacier Investment Platform.

Nick Russell
Please note: This letter does not constitute advice.