Category Archives: MARKET

Taking an interest in interest rate risk

Education around the basics of wealth creation and preservation is like a good, solid diet packed with healthy food staples, it can help you enjoy healthy finances for years and create a strong foundation for building your future.

Bonds are a healthy part of any portfolio or ‘diet’, and most people think they understand them. Today, we want to talk about an aspect of investing in bonds most people misunderstand or simply don’t know about – interest rate risk.

In today’s highly uncertain market, bonds remain an attractive option. Not subject to having the sudden market-related dips (or spokes) that equities do, it’s a lower risk option for preserving or growing your money in most environments.

Sounds great, right? Potentially.

Most bonds pay a fixed rate of interest over a defined period of time.

What many investors don’t understand about bonds is that the rate is set according to prevailing market interest rates at the time of issuing the bond, but the market interest rates that occur afterwards during the period of the bond may not be even remotely similar to the ‘weather conditions’ when you first took out the bond.

What this means for your money is that, should interest rates rise, your bond’s value will lessen. Should interest rates fall, the reverse will happen – your bond is now worth more. Because this is directly related to inflation (interest rates rising are usually due to CPI itself rising above what’s been predicted for it), a good way to understand this is inflation. If inflation increases, even though you have the same notes and coins in your wallet, that money is effectively worth less. If inflation decreases, slowly your money will be worth more in relation to the rest of the market (price of eggs etc.). It is not the notes or rands themselves that have changed if the inflation rises, it’s the market.

This is interest rate risk, and it’s a vital element which affects how much return you’ll get once a bond matures.

It is seldom that we truly know what is going to happen to the market in the next two to three years with absolute certainty, but in the case of interest rate risk, it seems that we do. South Africa will be hiking rates for the foreseeable future, as announced at the end of last year when the Reserve Bank’s Monetary Policy Committee (MPC) said it would raise the repurchase rate quite significantly to 6.75% per year as of November 2018.

What does this mean for our bonds? Well, if you look at the above in SA in isolation, it means that a bond’s value will lessen if interest rates rise (which they have) and will continue to do so if interest rates continue to climb (which it looks like they will).

A word of warning – any investment in any form should be underpinned by knowledge. Choosing to put money into a bond of any kind is no exception. Taking interest rate risk by investing in a certain bond without knowing every aspect inside and out is like getting onto a horse and expecting to ride it when you don’t know how a horse moves.

However, if you only ever invest in things you already understand, where will that leave you? Your money may grow, but your own horizons and understanding won’t.

Consider this a call to adventure – not to invest in bonds necessarily, but rather for us to chat about things you don’t fully understand, perhaps interest rate risk being one thing, and start an exciting new chapter in your financial awareness and confidence!

Learning from others’ (big) mistakes – notes from Steinhoff

For those who tell you not to worry so much and just invest in anything, no need to do much research, you need only say one word: Steinhoff.

Steinhoff has been called the largest corporate scandal in SA history, but what many people don’t know is it’s fall was also the largest failure ever on the JSE. The collapse promoted months of headlines, in which South Africans read, shaken, about the demise of the brand which had been every investor’s darling. It wasn’t just the death of a retail titan, it was the death of the concept of ‘too big too sink’ corporates.

In a world post-Steinhoff, all previous bets about how investment works are off. If everyone – and it was pretty much everyone, high and low – was wrong about Jooste and his African champion, couldn’t we be wrong about everything else? It’s not comfortable stuff to ponder, but actually there are valuable lessons in the Steinhoff fallout for investors willing to look.

Lesson 1 – Recommendation is no match for your own research

Many of the most knowledgeable and powerful men and women on the SA investment scene were overweight on Steinhoff. Some, like Christo Wiese and insurance champions Johan van Zyl and Len Konar, were even members of Steinhoff’s board and had decades of investor experience on their sides. This shows the importance of checking out financials for yourself, corporate governance frameworks and growth patterns and projections. If something seems too good to be true, with meteoric out-of-the-ordinary growth from nowhere, then it probably is.

Lesson 2 – Look at management, not results

The common thing to do when considering an investment option is to look at results as a predictor of future dividends, but growth can be misleading. This is especially true of a depressed economic period like the one we’ve had for a while, in which good companies can suffer in their results due to the market, while bad ones’ shortcomings can be masked. Instead, look at the corporate governance of the board and how transparent the company is for a feel. Steinhoff, for example had amazing figures on paper, but their complex two-tier management structure was, in hindsight, a sign of deliberately complicating matters to hide the truth.

Lesson 3 – Not everyone will be a Steinhoff

The reason Steinhoff made the news is that it’s the exception rather than the rule. Although there have been a few corporate governance lapses though none as severe as Steinhoff, it doesn’t mean that our corporate governances metrics themselves are broken. On the contrary, South African governance law and the JSE itself have been proven to be quite robust in the crucible that was Steinhoff. The internationally respected Frankfurt Sock Exchange (FSE) took just as hard a hit as the JSE, after all. The chances are very low that you will invest in an unsound company of the Steinhoff ilk – especially after the scandal meant corporates undergoing extra scrutiny.

And if you’re worried about existing investments of yours? Let’s chat, revisit our due diligence, and remember – Steinhoff happened once, but that doesn’t mean it’ll happen again.

Your starter guide to alternative investments

In the wake of very lacklustre JSE performance and plenty of uncertainty, many investors have started considering thinking… alternatively.

In a nutshell

Alternative investments are different to the standard stock market approach; investing in assets outside the usual asset classes or in companies outside of the JSE-listed crowd.

But can you invest alternatively? The first thing to note is that, like anything bespoke, alternative investing is far more expensive and less easily accessible than good ol’ equities. However, if you have significantly more cash than the average Joe and the financial know-how these alternatives can easily outperform the normal market.

Assuming you can, should you? Here, we break down some of the main and most popular alternative investment options:

Hedge funds

Hedge funds are by far the most common and easily accessible of the alternative investing options. Due to this, they enjoy better regulation and options than other alternative asset classes. They are smaller, boutique funds often operating with much higher fees than traditional equities investing. But hedge funds routinely beat equities in the returns stakes, although not as handily of late.

The phrase ‘hedging your bets’ explains what hedge funds do well – hedge funds have a unique ability to ‘hedge’ themselves so that the investors behind the hedge fund manager can do well whether a stock appreciates or depreciates.

Hedge funds are essentially an exclusive pool of investors aggressively investing in a variety of opportunities not often available to the mainstream market. This can suit investors who have money to spare (the minimum investment requirement for most funds is high – sometimes R1 million just to get in the door) and want a long-term investment vehicle that’s safer than the stock market that offers similar or higher returns.

Venture capital and private equity

Usually only available to private equity of venture capital funds themselves, this is long-term investment in promising businesses near the beginning of their lifespan, with a view to share in their success later down the road when the company is turning a profit.

Venture capital investing, specifically ‘seed round’ investing during which the company invested in is very young, is typically a long relationship with the funder in an advisory role to the business and an aid in growth.

Private equity, although often grouped with and sometimes mistaken for venture capital, is different. Private equity often buys out these companies wholly or in part and so is the primary decision-maker, rather than the advisor.

This is attractive because private equity traditionally outperforms equity. Options here are limited to those with a private equity fund registered with SAVCA.

Socio-economic investments

Even more rewarding than the idea of private equity can be socio-economic investing – which is putting in finance and sharing in the returns later, not in a company, but in the country. So-called ‘impact investing’, these investment alternatives address issues in society like infrastructure, education for lower classes, renewable energy innovation and the creation of low-cost houses, to name a few examples. Few funds offer such options as it’s still a relatively new concept for SA, but it’s a great vehicle for those who can access it and are looking to improve and contribute meaningfully to the world while making returns on their money at the same time.

It’s important to remember that alternative investing is generally more difficult, exclusive, expensive and time-consuming than the well-oiled default of listed stock market options or old-favourite vehicles like unit trusts. They’re also newer here in south Africa, with less variety and regulation for now because there is simply less demand. But if you’re something of a pioneer and you want something very long-term, it may be worth a try. Just be sure to talk to your financial advisor and consult your personal financial plan before making any sudden movements.

The true cost of load shedding

Load shedding has cost all of us over the past few weeks, but do you know exactly how much?

Neither did we, until we did a little digging.

Cost to the economy at large

According to Chris Yelland, load shedding costs SA approximately R1 billion per stage, per day. Those Stage Four blackouts… they cost about R4 billion for each 24 hour period. That’s more than the national police service receives every year from government.

Investec’s Annabel Bishop says it’s even more dire than that – she estimates that it could have cost the country R2.4 trillion by the end of 2019’s first quarter, which is half of SA’s GDP, according to The South African.

Cost to business

Load shedding this year has been nothing short of brutal for business owners, with many struggling or even failing to keep their doors open in the tidal wave of load shedding-related costs and losses.

Among the chief things plaguing businesses are cost of business interruption, operating hours and the profit with them being lost, perishable stock damaged or expired and damage to electrical outputs when power surges and dips occur. Another newer trend is the rise of ‘load shedding burglaries’, in which criminals watch the schedule and hit workplaces during hours when security measures like electric fences are likely to be offline.

This obviously creates a negative feedback loop for both economy and enterprise. The less South Africa produces across various sectors, the less money is made and the more the rand weakens. The more the rand weakens, the harder it is to turn a profit as a local business and enough local business closing affects the rand further.

The hardest hit are undoubtedly the SMEs. The last time load shedding rolled around, SMEs voted load shedding the number one risk to small businesses in the 2015 SME survey. We can see why – numerous businesses have had to close down or scale back on operations due to loadshedding. They are the least likely to have generators and adequate insurance cover and the most dependent on the customers and vital profits likely to leave when the lights go out.

Cost to you as an individual

Because it affects the rand, long term savings vehicles like your investment portfolio or retirement fund is also almost definitely affected by load shedding – and for those very near retirement that can be a bitter pill to swallow indeed.
Food and steel-related products may also become more expensive, as manufacturers and farmers are feeling the pinch just like every other industry and may be forced t ratchet their prices up accordingly.

Large companies facing crippling increases in the cost of doing business may also roll out mass retrenchment if load shedding is not put to rights.

Remember, despite any short-term problems in the market like load shedding and its effects, it is still not wise to make financial decisions which may affect your portfolio based on impulse and emotion and without the advice of a trained financial advisor.

Can finances be a family affair?

Throughout the year there are clusters of holidays and long weekends when family comes to the fore. These moments are often an opportunity to step out of the frenetic hamster wheel of life, we now have long weekends and, for some, religious holidays to spend with those nearest and dearest to us. Which got us thinking – how much does your inner circle feature in your finances?

We often think of finances as a solitary thing, something for you to sort out alone – sometimes paying bills, sometimes lying awake worrying at 3am. You may nod your head thinking, ‘well that’s the way it has to be.’ But think about this: that is exactly what your parents, friends and family and sometimes even your spouse and children are going through, too. Do you want your sister lying awake worrying about her budget, all alone? Would she want that for you?

What if it didn’t have to be that way? Finances needn’t be a taboo subject and can be something the family can discuss all together. Share these conversations with those closest to you; your partner, your kids, your siblings, your parents, your grandparents and your grandchildren. Learn from their insight and teach them from yours. Then watch and see if you don’t all feel much closer by the end of the conversation.

Here’s one great place to start: at your next close family gathering, or long weekend, ask everyone to share a goal or a dream that they have. Then discuss how you can work together as a family to help that happen.

Not only could this be very useful for you in terms of financially planning for the future (like knowing your parents-in-law want to retire next year or your son has his eye on an expensive university) but it can also help ease the tension everyone typically feels about money all the time. The more you communicate and relate, the more you can dispel myths and fears about your future, your finances and the life you plan to live. You can plan for them, together, without the angst or the isolation that comes with how most people do it.

Even better, you can perhaps prioritise making someone else’s dream come true.

You see, love looks like something, and if you are able to splash out on horse-riding lessons for your child, it will send a powerful message that her dreams are important to you. So go on, try being someone else’s dream come true.

On the road: the best road trips for the long weekend season

It’s that time of year coming up again when the public holidays flow thick and fast for South Africa. With a country as beautiful as ours, the ideal solution could be a road trip.

Here are some of the best to get you out of the city and on the road.

Got three days? Enjoy the Garden Route
It’s an oldie but a goodie for a reason, especially if you stay on the coast. Even if you’ve done the Garden Route many times, there’s always a new wine farm to check out and side roads to take. Add horseback riding into the mix for some extra adventure.

Got four days? Hit the Midlands Meander
Durban is a holiday favourite but just a little too far away, for some, for a long weekend trip. The Natal Midlands, however, are a whole two hours closer to Johannesburg and boast some of the most extravagantly verdant greenery in the country. There are countless antique stores, cafes and curio shops to stop in and the prices are far lower than in Cape Town or Joburg.

Got nine days? Try Namibia
If you’ve never done a road trip to Namibia, you can’t possibly imagine how strikingly lovely the scenery is, how meditative the open, uncongested road and how friendly the people are once you get there. If you can fit in the extra drive, check out the Skeleton Coast – it’s on international tourists’ bucket lists for a reason.

Got ten days? Head to Botswana
In between the lush Okavango Delta and some of the best game reserves on the continent, Botswana is the ultimate road trip for a South African nature lover. Lush green bush, mighty rivers, striking sandy plains… Botswana has got it all. You’re unlikely to find cities as clean, unpretentious and well-run as Gaborone either.

There you have it, some of the best road trips to get your spirit of adventure without the exorbitant price of air tickets.

Teach your children well

It’s an overwhelming feeling most of us recall vividly – that first job, the first month of rent to pay and the exhilarating yet terrifying knowledge that we have to keep ourselves alive for the rest of the month for the very first time.

For those with children in school, a new experience awaits: watching your own child navigate those same hurdles. And yet, it doesn’t have to be a gauntlet for them like it was for us. In a few simple steps, you can set your child up to leave the nest more confident and wise than your own former self.

The younger they start, the better
You may feel that you want your children to grow up unencumbered by the stress of money. In fact, many parents who grew up in relatively poor circumstances want to lavish finances on their children to the point where they don’t even think about money…

Until they leave the house, that is.

It’s important to understand that the later a person starts to think about managing their own money, the scarier it is. Teaching your children the importance of rands and cents as early as possible is not only better for you, but significantly less stressful for them. As soon as your children are old enough to understand the value of money and the arithmetic behind counting coins, teach them how to draft a budget. Make it as fun as possible and empower them young with their pocket money.

… but don’t make it all about spending
Many savvy parents teach their children about money from a young age – but almost always with a mind to spending.

‘You can save up your R50 now instead of spending it on sweets today so that you can afford that game you want in two months’ time.’

While this does teach kids the vital importance of budgeting to an extent, it also tacitly enforces a zero-savings mindset. From as young as possible, teach kids that they should never spend all of their money and always have something in savings. For example, tell them that, if they save R5 in their piggy bank each month, you will give them R50 at the end of six months. If they leave that R50 where it is, they can get R100 at the end of the year. This alone will set your children up to succeed where many South Africans fail – having the benefit of compound interest from early on. Also offer your advice to help them pick out their first savings account and retirement or living annuity when they leave home.

Rainy day smarts
Also, emphasise the wisdom of having emergency savings separate to general savings. The benefits of a short-term safety net are numerous and ensure that, should something happen to you or to the economy, your child will able to weather the storm. This tip is often the hardest for parents to take because an important part of this with older children is letting them bump their heads a few times.

If they haven’t got emergency savings or insurance and they’re in a bumper bashing, for example, don’t just rush in to save the day. Ask them about what steps they had taken to safeguard against misfortune and let them see that it’s up to them and no one else to ensure that they thrive financially without getting crippled by twists of fate.

And remember: the better you teach your children financially now, the better they’ll be able to look after themselves – and you – later.