In March 2025, the average prudential balanced portfolio returned 0.1% (February 2025: -0.2%). The top performer is the Allan Gray Balanced Fund, with 1.8%, while the NAM Coronation Balanced Plus Fund, with minus 1.4%, takes the bottom spot. Allan Gray Balanced Fund took the top spot for the three months, outperforming the ‘average’ by roughly 2.6%. The Stanlib Managed Fund underperformed the ‘average’ by 2.1% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 March 2025 reviews portfolio performances and provides insightful analyses. 

‘Hurricane Trump’ and the bigger picture

The US is much more than President Trump and will sail the seas long after his demise. So the bigger picture remains its global supremacy and singularity even after Hurricane Trump’. If it was left to Europe, the world would still live in peace for another three years. But will the East afford it the time, and must the investor now adopt a short-term strategy?

Market volatility is normal and should not derail a well-planned long-term investment strategy. Investors can navigate the ups and downs by staying the course, focusing on long-term growth, and taking advantage of market dips. Investors must know their needs and adapt their investment strategy to short-term needs.

Investing during times of uncertainty requires a balanced approach that combines defensive strategies with opportunistic investments. While the potential for global conflict and economic downturns poses significant risks, it also presents opportunities for those who can navigate the complexities of the market. By focusing on value, diversifying geographically, and being flexible in your asset allocation, you can position yourself to protect and grow your discretionary assets in future years.

These strategies should be tailored to your financial situation, risk tolerance, long-term goals and investment horizon.

Read paragraph 6 of the Monthly Review of Portfolio Performance to 31 March 2025 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In February 2025, the average prudential balanced portfolio returned minus 0.2% (January 2024: 1.6%). The top performer is the Allan Gray Balanced Fund, with 0.5%, while the Lebela Balanced Fund, with minus 0.8%, takes the bottom spot. NAM Coronation Balanced Plus Fund took the top spot for the three months, outperforming the ‘average’ by roughly 0.8%. The Stanlib Managed Fund underperformed the ‘average’ by 1.4% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 28 February 2025 reviews portfolio performances and provides insightful analyses. 

The new world order and your investments

The term "new world order" gained prominence during President George H.W. Bush's administration, particularly in the post-Cold War era and the Gulf War. In his 1991 State of the Union Address, President Bush shared his vision for this new order, emphasising a world where diverse nations collaborate to achieve universal aspirations such as peace, security, freedom, and the rule of law.

This envisioned order was characterised by strengthened international cooperation, collective security measures, and a commitment to resolving conflicts diplomatically. The aim was to move beyond the bipolar tensions of the Cold War, fostering a global environment where nations work together to uphold shared values and address common challenges.

In contrast, the new Trump administration's philosophy departs from this vision. President Trump's recent address to Congress highlighted a shift towards nationalism and a focus on American sovereignty. The administration's policies reflect a preference for bilateral agreements over multilateral institutions, emphasising "America First" principles. This approach includes reassessing traditional alliances and international commitments, focusing on protecting U.S. interests, reducing involvement in global governance structures, and unwinding all ‘woke’ practices and policies. At the recent Munich Security Conference, Vice President JD Vance gave further insight into the Trump administration’s new noble beliefs, criticising the European allies about their lack of democracy, suppression of free speech, failure to control mass migration and the resulting internal security challenges, practices of marginalising populist movements and restricting genuine democratic choice.

Read paragraph 6 of the Monthly Review of Portfolio Performance to 8 February 2025 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In January 2025, the average prudential balanced portfolio returned 1.6% (December 2024: 0.4%). The top performer is M&G Managed Fund, with 2.4%, while Stanlib Managed Fund, with 0.9%, takes the bottom spot. NAM Coronation Balanced Plus Fund took the top spot for the three months, outperforming the ‘average’ by roughly 2.2%. Momentum Namibia Growth Fund underperformed the ‘average’ by 0.7% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 January 2025 reviews portfolio performances and provides insightful analyses..

Market Outlook 2025: How to navigate opportunities and risks

As we head into 2025, global markets present a dynamic mix of opportunities and risks. Geopolitical tensions, shifting economic policies, and evolving consumer dynamics reshape the investment terrain. The ability to cut through short-term noise and focus on long-term fundamentals is more important than ever. By adopting a systematic and evidence-based approach, investors can navigate these complexities and position themselves to seize opportunities across asset classes.

Read paragraph 6 of the Monthly Review of Portfolio Performance to 31 January 2025 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In November 2024, the average prudential balanced portfolio returned 1.8% (October 2024: -0.2%). The top performer is NAM Coronation Balanced Plus Fund, with 3.3%, while Momentum Namibia Growth Fund, with 0.8%, takes the bottom spot. NAM Coronation Balanced Plus Fund took the top spot for the three months, outperforming the ‘average’ by roughly 2.8%. Allan Gray Namibia Balanced Fund underperformed the ‘average’ by 1.2% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 November 2024 reviews portfolio performances and provides insightful analyses.

An outlook on the world economy and financial markets in 2025

As we cross into 2025, the world faces many uncertainties that could severely impact economies and the financial market. During 2024, my main theme was that the world might drift into World War III. President-elect Donald Trump’s election statements on the US waging never-ending costly wars and ending the Ukraine war within 24 hours dim the prospect of a major military confrontation somewhat. My fear is, though, that there are very strong vested interests in driving global conflict.  Commentators refer to these interests as the military-industrial complex in the US. Where I would have expected the US war industry to pull back in anticipation of a change of direction by President Donald Trump, I am seeing the opposite happening. Pressure on Russia and its allies is being intensified unrelentingly. Most recently, we had to witness the fresh offensive of Jihadists in Syria and social unrest in several neighbouring countries of Russia.    Perhaps the US war industry intends to create facts for the new president that will force him to abandon his plans for America.

In the event of a global conflict, the dynamics would change drastically. It would severely disrupt international trade, financial flows, economies, and supply chains while reallocating resources towards the war economy and essential services.

Read paragraph 6 of the Monthly Review of Portfolio Performance to 30 November 2024 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In December 2024, the average prudential balanced portfolio returned 0.4% (November 2024: 1.8%). The top performer is Ninety-One Namibia Managed Fund, with 0.8%, while Allan Gray Namibia Balanced Fund, with -0.2%, takes the bottom spot. NAM Coronation Balanced Plus Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.8%. Allan Gray Namibia Balanced Fund underperformed the ‘average’ by 1.1% on the other end of the scale. These returns are before (gross of) asset management fees

The Monthly Review of Portfolio Performance to 31 December 2024 reviews portfolio performances and provides insightful analyses.

Will a meeting between President Putin and Trump provide direction for investment in 2025?

The political and economic environment has not changed since I expressed my views in this column last month, and I  stand by those views.  I concluded that the world faces many uncertainties that could severely impact economies and the financial market. During 2024, my main theme was that the world might drift into World War III. President Donald Trump’s election statements on the US waging never-ending costly wars and ending the Ukraine war within 24 hours dimmed the prospect of a major military confrontation somewhat. However, following his inauguration, his most recent rhetoric leaves doubt about his electioneering statements, and he has not yet ended the Ukraine war. A meeting between President Putin and President Trump may provide more direction.

Read paragraph 6 of the Monthly Review of Portfolio Performance to 31 December 2024 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In October 2024, the average prudential balanced portfolio returned -0.2% (September 2024: 1.8%). The top performer is NAM Coronation Balanced Plus Fund, with 0.08%, while Allan Gray Namibia Balanced Fund, with -0.5%, takes the bottom spot. NAM Coronation Balanced Plus Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.7%. Allan Gray Namibia Balanced Fund underperformed the ‘average’ by 2.0% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 October 2024 reviews portfolio performances and provides insightful analyses.

A guide for investors through uncertain times.

When you live in Namibia, the biggest portion of your wealth is invariably in Namibia, a bit in South Africa, and the balance is likely in the traditional offshore investment markets. If you have liquid capital you want to invest, you should be concerned about a major confrontation looming between the 'global West' and the 'global East' as evidenced by the war in Ukraine and the conflict in the Middle East. Should it come to a global conflict between the West and the East, your offshore capital will become inaccessible because of capital controls. Your offshore investment could also face severe impairment from war causes, for being invested in countries that are a party to the global conflict. Hopefully, southern African countries will not become parties to the global conflict which will likely happen in the next five years. It would conceivably carry on for about five years. The outcome would be -

1. a stalemate between the parties resulting in the establishment of a more balanced new world order not dominated by the US, while global multilateral institutions such as the UN, the IMF and the World Bank would emancipate from the US hegemony;
2. the global West and the US hegemony prevail and would more forcefully impose the capitalist system and the US hegemony on the rest of the world.
3. the global East prevails and would forcefully impose its economic interest on the rest of the world, implying a new international economic order being established over many years as the existing global multilateral institutions would be restructured and re-orientated.

Given the current geopolitical landscape, approaching one’s investments focusing on regional stability, defensive asset classes, and sectors that may remain resilient is prudent... Read paragraph 6 of the Monthly Review of Portfolio Performance to 31 October 2024 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In September 2024, the average prudential balanced portfolio returned 1.8% (August 2024: 1.3%). The top performer is NAM Coronation Balanced Plus Fund, with 2.7%, while Stanlib Managed Fund, with 1.0%, takes the bottom spot. M&G Managed Fund took the top spot for the three months, outperforming the ‘average’ by roughly 0.8%. Stanlib Managed Fund underperformed the ‘average’ by 1.3% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 September 2024 reviews portfolio performances and provides insightful analyses. 

Avoid any permanent loss, but be prepared to give up value.

If you own something you do not use, chances are you will lose – “use it or lose it” is a rugby rule. It applies to all spheres of life. No one can take what you use from you if we equate ‘using’ to ‘consuming.

This wisdom also applies to your investments. Since you do not use your investments, chances are you will lose. This is not to say that you will permanently lose, but there will be times when you will lose. The best thing you can do is to be prepared for losing at times.

One also needs to distinguish between different types of losses, namely, temporary and permanent losses. You cannot recover a permanent loss as opposed to a temporary loss. To the analogy of a house: if you bought the house for N$ 1 million and the valuator now values the house at N$ 850,000, you made a temporary (or unrealised) loss. The market may pick up again in a year when the home may be worth more than N$ 1 million. However, if you sold the house for N$ 850,000, you made a permanent (or realised) loss. If you own shares in a company listed on the stock exchange and its price declines, it is only a temporary loss. However, it is a permanent loss if the company goes into liquidation (like Steinhoff).

Since we are dealing with pension funds and personal investments, in terms of market conditions, we find ourselves in a situation where we feel we have been on a losing streak for quite some time. But how do you define loss in these circumstances? Is it a loss relative to inflation, or is it a loss relative to the returns one has seen in investment markets until the advent of the financial crisis (GFC) at the end of 2008? I suspect many investors are still clamouring for past returns of 20% and more. Importantly, it should only be your above-inflation return; inflation should be your bottom line!

Where would you have invested had you anticipated developments in financial markets since the financial crisis? It was not too difficult to predict the impact of quantitative easing, the low interest rate environment, and the COVID-19 stimulus. Still, no one would have expected such a strong recovery for the four years since the GFC, followed by a flattening of financial markets afterwards.

What alternative investments could you possibly have made in anticipation of what was expected - property, life stock, vintage cars or other exotic objects? Well, test them one by one. Property in Namibia would not have been a good idea until the COVID-19 shock. Life stock in Namibia would have been a dull investment. Gold or any other exotic object?.

Read paragraph 6 of the Monthly Review of Portfolio Performance to 30 September 2024 for our views on investment markets and global political developments. It also reviews portfolio performances and provides insightful analyses.

In August 2024, the average prudential balanced portfolio returned 1.3% (July 2024: 2.0%). The top performer is Investment Solutions Balanced Fund, with 2.10%, while Allan Gray Namibia Balanced Fund, with 0.40%, takes the bottom spot. Momentum Namibia Growth Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.2%. Allan Gray Namibia Balanced Fund underperformed the ‘average’ by 1.2% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 August 2024 reviews portfolio performances and provides insightful analyses. 

How to hedge your bets on the road to a new world order

In a global conflict, the dynamics would change drastically. It would severely disrupt international trade, financial flows, economies, and supply chains while reallocating resources towards the war economy and essential services. While global investment diversification is a sound investment principle, keeping your belongings under your control and close to home will be wise, as your foreign assets are likely impaired and inaccessible in a global conflict.

We live in a time between a fainting old and a new world order. One cannot foresee what the new world order would look like. It could be a capitalist autocracy, a more pragmatic multipolar order or a socialist autocracy. The old world order is likely to end within the next five years. The world will then witness a global confrontation, laying the foundation for the future world order. In this interregnum, we will experience high levels of market volatility and large swells between out-of-favour and in-favour sectors, but markets generally drifting along. Stock-picking skills will prove superior to index investing. The investor must understand how the feared conflict will impact stocks to select the right stocks.

The Monthly Review of Portfolio Performance to 31 August 2024 reviews portfolio performances and provides insightful analyses.

In July 2024, the average prudential balanced portfolio returned 2.0% (June 2024: 1.7%). The top performer is Allan Gray Balanced Fund, with 3.6%, while NAM Coronation Balanced Fund, with 1.3%, takes the bottom spot. Old Mutual Pinnacle Profile Growth Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.2%. NAM Coronation Balanced Fund underperformed the ‘average’ by 1.5% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 July 2024 reviews portfolio performances and provides insightful analyses.

Navigating investment decisions amid global uncertainty

As a Namibian investor with a diversified portfolio, navigating the complexities of global financial markets has always required a thoughtful approach. However, the current international landscape presents unique challenges and opportunities. With geopolitical tensions escalating and economic conditions fluctuating across different regions, making informed investment decisions more crucial than ever. This article provides strategic guidance for those looking to invest their discretionary assets over the next one to two years and beyond.

Understanding the current market landscape

Before diving into specific investment strategies, it’s essential to understand the financial ratios and economic indicators that shape the global markets. Here’s a snapshot of the key financial ratios for major bourses:

• FTSE 100 (UK): P/E Ratio: 19.6 | Earnings Yield: 3.7% | Dividend Yield: 3.7%
• DAX (Germany): P/E Ratio: 18 | Earnings Yield: 2.5% | Dividend Yield: 4.2%
• Nikkei 225 (Japan): P/E Ratio: 14.9 | Earnings Yield: 18.2% | Dividend Yield: 1.1%
• S&P 500 (USA): P/E Ratio: 20.9 | Earnings Yield: 4.8% | Dividend Yield: 1.35%
• JSE (South Africa): P/E Ratio: 10.2 | Earnings Yield: 9.9% | Dividend Yield: 2.2%

South Africa’s economy is grappling with significant headwinds, including persistent power shortages, depressed mineral markets, and infrastructure challenges. Conversely, there is rising concern about potential global conflicts involving major Western nations. In such a scenario, the demand for minerals and resources from countries like South Africa, Namibia, and other resource-rich regions in Africa and South America could surge...

The Monthly Review of Portfolio Performance to 31 July 2024 reviews portfolio performances and provides insightful analyses.

In June 2024, the average prudential balanced portfolio returned 1.7% (May 2024: 1.2%). The top performer is Momentum Namibia Growth Fund, with 2.8%, while Allan Gray Balanced Fund, with 0.01%, takes the bottom spot. Momentum Namibia Growth Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.3%. Allan Gray Balanced Fund underperformed the ‘average’ by 2.0% on the other end of the scale.

The Monthly Review of Portfolio Performance to 30 June 2024 reviews portfolio performances and provides insightful analyses.

In May 2024, the average prudential balanced portfolio returned 1.2% (April 2024: 1.0%). The top performer is Allan Gray Balanced Fund, with 1.7%, while Lebela Balanced Fund, with 0.7%, takes the bottom spot. NinetyOne Managed Fund took the top spot for the three months, outperforming the ‘average’ by roughly 0.8%. Lebela Balanced Fund underperformed the ‘average’ by 1.0% on the other end of the scale.

The Monthly Review of Portfolio Performance to 31 May 2024 reviews portfolio performances and provides insightful analyses.

Should you still try to make hay while the sun shines?

Would you invest in Europe or the US if you knew that Russia would launch missiles armed with nuclear warheads tomorrow? It is perhaps a hypothetical question now but closer to reality than most people might think.

When we think of investing, we think of Europe, the US and Japan. Every other destination would only be considered hesitantly. Pension fund asset managers’ asset allocation reflects the same thinking. Besides their compulsory domestic exposure, most of their funds are invested in Europe, the US and Japan. The investment in other markets is usually well below 10%. I have never seen any Chinese, Indian or Turkish share in their top ten. It is a bit of herd mentality aimed at protecting their interests. They do not want to be the tallest poppy getting its head chopped off.

The West is facing a severe threat to its economic system that dominates the global economy. As a result, many prominent commentators agree that World War III is already raging in Ukraine and now the Middle East. Europe is not ready to enter the war yet. Europe is propping up Ukraine while it gears up to join the war with all its resources. In the meantime,  it will push ever more resources into Ukraine, hoping it will last long enough until Europe is ready. Will Russia afford Europe the time to prepare? It is inconceivable as it would drastically weaken Russia’s chances of surviving. As things stand, Russia’s best bet is to overrun Ukraine before Europe is ready to engage it. However, Russia is facing a dilemma.

Read on in paragraph 6 of the Monthly Review of Portfolio Performance to 31 May 2024. It also reviews portfolio performances and provides insightful analyses

In April 2024, the average prudential balanced portfolio returned 1.0% (March 2024: 1.3%). The top performer is Ninety One Managed Fund, with 1.6%, while Allan Gray Balanced Fund, with 0.3%, takes the bottom spot. Namibia Coronation Balanced Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.3%. Lebela Balanced Fund underperformed the ‘average’ by 1.5% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 April 2024 reviews portfolio performances and provides insightful analyses.

Africa’s role in the emerging global conflict: Implications and strategies for Namibia and Africa

The world is teetering on the brink of a potentially devastating conflict as the geopolitical landscape shifts from a unipolar world dominated by the United States to a multipolar world championed by Russia, China, and the other BRICS countries. The Ukraine conflict and tensions in the South China Sea are manifestations of this struggle, with the US seeking to contain and wear down Russia and China’s economic and military capabilities to preserve its hegemony. As these global powers jockey for position, Africa, specifically Namibia, will inevitably be drawn into the fray. This article explores how the impending global conflict might affect Africa, specifically Namibia…

Read on in paragraph 6 of the Monthly Review of Portfolio Performance to 30 April 2024. It also reviews portfolio performances and provides insightful analyses

In March 2024, the average prudential balanced portfolio returned 1.3% (February 2024: 0.7%). The top performer is Allan Gray Balanced Fund, with 2.0%, while Lebela Balanced Fund, with 0.5%, takes the bottom spot. Namibia Coronation Capital Plus Fund takes the top spot for the three months, outperforming the ‘average’ by roughly 1.7%. Lebela Balanced Fund underperformed the ‘average’ by 1.6% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 March 2024 reviews portfolio performances and provides insightful analyses.

Namibia must avoid contracting the ‘Dutch Disease’

I was recently invited to M&G Investments Leonard Krüger’s insightful presentation on ‘Resource Discovery: best practice and avoiding the resource curse’. Yes, I am sure many readers also noticed how many media commentators are already counting their blessings and awaiting the new dawn in great anticipation of securing personal riches. Leonard’s talk aimed to put our newfound riches into perspective to moderate exaggerated expectations and warn that things can go horribly wrong, as they have in many other countries, if Namibia does not promptly establish sustainable resource exploitation policies.

Leonard pointed out that while Namibia is one of the world’s ‘hottest exploration plays’, there were many other significant discoveries worldwide in 2022 and 2023, notably Guyana, Iran, and Namibia only in third place. Namibia’s resource represents less than 1% of the global fossil fuel resource. Namibia is competing against many other countries and faces the challenge that its resource is in ultra-deep waters on the edge of what can be exploited economically with current technology, making it very expensive for investor.

Read a summary of Leonard’s interesting talk and our view on global investment markets in the Monthly Review of Portfolio Performance in the Monthly Review of Portfolio Performance to 31 March 2024.

In February 2024, the average prudential balanced portfolio returned 0.7% (January 2024: -0.2%). The top performer is Namibia Coronation Balanced Plus Fund, with 1.8%, while Lebala Balance Fund, with -0.3%, takes the bottom spot. Namibia Coronation Capital Plus Fund takes the top spot for the three months, outperforming the ‘average’ by roughly 1.8%. Ninety One Namibia Managed Fund underperformed the ‘average’ by 1.6% on the other end of the scale. Note that these returns are before (gross of) asset management fees

The Monthly Review of Portfolio Performance to 29 February 2024 reviews portfolio performances and provides insightful analyses.

The band keeps playing while the Titanic is sinking

Watching the situation in and around Ukraine and listening to US and Western media, I perceive the US wanting to rid itself of any further financial commitments to the Ukraine war and to put the Europeans in front of that cart. It seems the US wants to push the Europeans into a major confrontation with Russia, and be ‘the laughing third’. Both sides will be badly bruised militarily and economically. Russia already stated that it will use its nuclear arsenal if its national survival is threatened. The European media are on a mission to prepare their citizens for a war against Russia, and too often in history, such war propaganda has become a self-fulfilling prophecy.

In such a prospective conflict, China cannot sit on the sideline as NATO would advance to its border should Russia lose. We will inevitably have World War III! Investment markets will take a severe knock during such a conflict and remain in the doldrums. Once the conflict ends, the world will move to a new economic order, likely multipolar, unless the West prevails. Investment will not be what it has been since the Second World War. In the run-up to such a war, only very few investment managers will take bold action in preparation for the great conflict. The action will, in most cases, also be too late. I perceive that we are sailing into troubled waters, but the band keep playing while the Titanic is sinking!

In the Monthly Review of Portfolio Performance to 29 February 2024, we elaborate on the strategies an investor should follow under the above circumstances. It also reflects the editor’s views on current developments and their impact on investment markets.

In January 2024, the average prudential balanced portfolio returned -0.2% (December 2023: 1.7%). The top performer is Namibia Coronation Balanced Plus Fund, with 0.4%, while Allan Gray Balanced Fund, with -0.8%, takes the bottom spot. Namibia Coronation Balanced Fund takes the top spot for the three months, outperforming the ‘average’ by roughly 3.5%. Hangala Capital Absolute Balanced Fund underperformed the ‘average’ by 2.2% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 January 2024 reviews portfolio performances and provides insightful analyses.

The world needs competing financial systems

I observe with trepidation how the US got half the world to firmly toe its line in meeting the concerted challenge to its dominance relating to Russia, the Middle East and the Far East. I perceive a vigorous US will to reinforce itself by all means. Its economic measures proved to be ineffective against Russia. It has not yet instituted any determined economic measures against China, as it could be a double-edged sword. As for Europe, in the case of Russia, the US prefers to let its European allies carry the costly burden of its economic measures. While there is still too much at stake for sanctioning China, shifting manufacturing away from China will make it easier to put the thumbscrews on China. In the cases of other smaller countries, in particular the smaller BRICS member states, the US will pursue its maxim of ‘divide et empera’. The unjustified Rand weakness is a symptom of political pressures on ‘unruly’ countries. However, Africa has the market and the natural resources to withstand any pressure from anywhere, provided it stands together to the motto, ex unitate vires.

The US is now left with one of two options. Either it accepts the establishment of a multipolar world and finds its best fit into the new global order, or it embroils all its geopolitical adversaries in a third World War. Reading European media, one must become very concerned about the evident shift from a pacifist tone since World War II to creating a war atmosphere more recently. I believe the stakes for the US are too high to give up its global dominance. It does not seem that its major global adversaries will relent in their challenge of US dominance. Because the Ukraine proxy war is unlikely to subjugate Russia, and because China will unlikely backtrack on its chosen path, the US will only have a chance to maintain its dominance by going to war.

European leaders have stated in unison that Russia may not win this war. It becomes evident that Ukraine will not withstand the Russian pressure for too long. The fact that one reads more regularly about peace initiatives supports the assertion that Ukraine is losing this war. Russia’s progress in the war would leave the European leaders with only one face-saving alternative: to get involved actively. If it were left to Ukraine, NATO would have been drawn into the war a long time ago with claims of a Russian missile attack on Poland that later proved to be a Ukrainian missile. Now, Poland wants NATO to help it protect its airspace. In my reading, it is another pretence for drawing NATO into the war, unleashing World War III. It seems governments worldwide believe another great war will be good for the world and solve many problems it is currently facing.

In the Monthly Review of Portfolio Performance to 31 January 2024, we elaborate on the strategies an investor should follow under the above circumstances. It also reflects the editor’s views on current developments and their impact on investment markets.

In December 2023, the average prudential balanced portfolio returned 1.70% (November 2023: 5.9%). The top performer is Namibia Coronation Balanced Plus Fund, with 2.4%, while Ninety One Namibia Managed Fund, with 0.8%, takes the bottom spot. Namibia Coronation Balanced Fund took the top spot for the three months, outperforming the ‘average’ by roughly 1.7%. Hangala Capital Absolute Balanced Fund underperformed the ‘average’ by 1.9% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 December 2023 also reflects the editor’s views on current developments and their impact on investment markets.

Is anyone out there concerned about another ‘great war’?

I observe with trepidation how the US got half the world to firmly toe its line in meeting the concerted challenge to its dominance relating to Russia, the Middle East and the Far East. I perceive a vigorous US will to reinforce itself by all means. Its economic measures proved to be ineffective against Russia. It has not yet instituted any determined economic measures against China, as it could be a double-edged sword. As for Europe, in the case of Russia, the US prefers to let its European allies carry the costly burden of its economic measures. While there is still too much at stake for sanctioning China, shifting manufacturing away from China will make it easier to put the thumbscrews on China. In the cases of other smaller countries, in particular the smaller BRICS member states, the US will pursue its maxim of ‘divide et empera’. The unjustified Rand weakness is a symptom of political pressures on ‘unruly’ countries. However, Africa has the market and the natural resources to withstand any pressure from anywhere, provided it stands together to the motto, ex unitate vires.

The US is now left with one of two options. Either it accepts the establishment of a multipolar world and finds its best fit into the new global order, or it embroils all its geopolitical adversaries in a third World War. Reading European media, one must become very concerned about the evident shift from a pacifist tone since World War II to creating a war atmosphere more recently. I believe the stakes for the US are too high to give up its global dominance. It does not seem that its major global adversaries will relent in their challenge of US dominance. Because the Ukraine proxy war is unlikely to subjugate Russia, and because China will unlikely backtrack on its chosen path, the US will only have a chance to maintain its dominance by going to war.

European leaders have stated in unison that Russia may not win this war. It becomes evident that Ukraine will not withstand the Russian pressure for too long. The fact that one reads more regularly about peace initiatives supports the assertion that Ukraine is losing this war. Russia’s progress in the war would leave the European leaders with only one face-saving alternative: to get involved actively. If it were left to Ukraine, NATO would have been drawn into the war a long time ago with claims of a Russian missile attack on Poland that later proved to be a Ukrainian missile. Now, Poland wants NATO to help it protect its airspace. In my reading, it is another pretence for drawing NATO into the war, unleashing World War III. It seems governments worldwide believe another great war will be good for the world and solve many problems it is currently facing.

In the Monthly Review of Portfolio Performance to 31 December 2023, we elaborate on the strategies an investor should follow under the above circumstances. It also reflects the editor’s views on current developments and their impact on investment markets.

In November 2023, the average prudential balanced portfolio returned 5.9% (October 2023: -1.5%). The top performer is Namibia Coronation Balanced Plus Fund, with 8.0%, while Hangala Capital Absolute Balanced Fund, with 4.0%, takes the bottom spot. For the three months, Allan Gray Namibia Fund takes the top spot, outperforming the 'average' by roughly 0.4%. Namibia Coronation Balanced Plus Fund underperformed the 'average' by 0.8% on the other end of the scale. Note that these returns are before (gross of) asset management fees. (Refer to graphs 3.1.3 to 3.1.5 for a more insightful picture of the relative long-term performances of the portfolios and the asset classes.)

The Monthly Review of Portfolio Performance to 30 November 2023 also reflects the editor’s views on current developments and their impact on investment markets.

Navigating the shifting economic landscape

The undervaluation of the Rand introduces challenges and opportunities for Namibian and South African investors. The potential for capital repatriation, attractive yields in government bonds, and the tax efficiency of returns contribute to a complex investment landscape. Careful consideration of exchange rate dynamics, risk-reward profiles, and tax implications is paramount in making informed and strategic investment decisions. As the global economic landscape evolves, savvy investors in Southern Africa can leverage these insights to navigate uncertainties and position themselves for financial success.

In the Monthly Review of Portfolio Performance to 30 November 2023, we elaborate on the strategies an investor should follow under the above circumstances. It also reflects the editor’s views on current developments and their impact on investment markets.

In October 2023, the average prudential balanced portfolio returned -1.5% (September 2023: -2.3%). The top performer is Investment Solutions Balanced Growth Fund, with  -0.9%, while Namibia Coronation Balanced Plus Fund, with -2.4%, takes the bottom spot. For the three months, Allan Gray Namibia Fund takes the top spot, outperforming the 'average' by roughly 2.4%. Namibia Coronation Balanced Plus Fund underperformed the 'average' by 2.1% on the other end of the scale. Note that these returns are before (gross of) asset management fees. (Refer to graphs 3.1.3 to 3.1.5 for a more insightful picture of the relative long-term performances of the portfolios and the asset classes.)

The Monthly Review of Portfolio Performance to 31 October 2023 also reflects the editor’s views on current developments and their impact on investment markets.

Navigating the Investment Landscape: A Guide for Residents in the SA Rand Common Monetary Area

Investing in the SA Rand CMA presents both challenges and opportunities. By carefully considering the global context, understanding SA Rand's dynamics, and seeking professional guidance, investors can make informed decisions that maximise their potential returns while managing associated risks.

The Benchmark Default Portfolio is a globally diversified portfolio appropriate for the average fund member with a long-term investment horizon. Graph 6.2 shows how well the black line of the Default Portfolio stood up against the yellow line of the average prudential balanced portfolio and the various underlying asset classes since 2010.

Graph 6.2

The Fund’s board of trustees actively manages it in consultation with NMG, our investment consultants. It is aimed at members and employers who are hesitant to make investment decisions.

In the Monthly Review of Portfolio Performance to 31 October 2023, we elaborate on the strategies an investor should follow under the above circumstances. It also reflects the editor's views on current developments and their impact on investment markets.

In September 2023, the average prudential balanced portfolio returned -2.3% (August 2023: 0.4%). The top performer is Hangala Capital Absolute Balanced Fund, with -1.1%, while Namibia Coronation Balanced Plus Fund, with -4.0%, takes the bottom spot. For the three months, Allan Gray Namibia Fund takes the top spot, outperforming the 'average' by roughly 1.6%. On the other end of the scale, NinetyOne Managed Fund underperformed the 'average' by 1.9%. Note that these returns are before (gross of) asset management fees. (Refer to graphs 3.1.3 to 3.1.5 for a more insightful picture of the rolling long-term performances of the portfolios and the asset classes.)

The Monthly Review of Portfolio Performance to 30 September 2023 also reflects the editor’s views on current developments and their impact on investment markets.

How do you invest when the Namibia Dollar is weak and political risks are high?

Investing when the Namibia Dollar is heavily undervalued and global tensions - such as those arising from the Ukraine and Palestine conflicts, and not to forget the Taiwan tensions between the US and China - requires a strategic approach prioritising capital preservation and wealth protection. Diversifying your assets across different currencies and international markets can help mitigate the impact of a Namibia dollar devaluation and economic instability in the Common Monetary Area. Consulting with a financial advisor specialising in international investments may also be beneficial in developing a tailored strategy.

In the Monthly Review of Portfolio Performance to 30 September 2023, we elaborate on the strategies an investor should follow under the above circumstances. It also reflects the editor’s views on current developments and their impact on investment markets. Download it here...

In August 2023, the average prudential balanced portfolio returned 0.4% (July 2023: 1.1%). The top performer is Allan Gray Balanced Fund with 1.6%, while M&G Managed Fund with -0.3% takes the bottom spot. For the three months Momentum Namibia Growth Fund takes the top spot, outperforming the 'average' by roughly 1.4%. NinetyOne Managed Fund underperformed the 'average' by 2.0% on the other end of the scale. Note that these returns are before (gross of) asset management fees. (Refer to graph 3.5.1 for a more insightful picture of the rolling long-term performances of the portfolios.)

The Monthly Review of Portfolio Performance to 31 August 2023 also reflects the editor’s views on current developments and their impact on investment markets.

The bumpy road ahead to a new global economic order

Where we are now, it does not look as if the Ukraine conflict will escalate into a fully blown war between the US and its allies on the one side and Russia, China and their allies on the other. It means that global financial markets will not be unhinged but will continue fairly orderly, given the impact of global economic restructuring. Another result of the global economic restructuring will be a global hunt for alternative supplies of commodities. This hunt should advance the economic fortunes of commodity-based economies, which are mostly emerging economies such as SA and Namibia.

We will likely experience a transition to a new bipolar world dominated by the US and China, each with its financial system and hegemonical territory. The two financial systems would likely be linked over time to promote trade and financial flows, but it will not be ‘smooth sailing’. Given the dissipation of the great uncertainty that the Ukraine conflict could have resulted in a global confrontation, the investor should review his investment strategy now. Clearly, the global economy will experience a new dawn, offering lots of investment opportunities while at the same time eliminating lots of existing businesses. It will undoubtedly be a rough ride with lots of volatility on the road to the new global order.

The new bipolar world and a global decoupling dictate that one should focus on international diversification. Global equities would be appropriate to counter the impact of rising inflation and interest rates. Such diversification should consider the expected re-orientation between the two global poles, with Western countries shifting manufacturing, production, and development of goods and services away from China.

In July 2023, the average prudential balanced portfolio returned 1.1% (June 2023: 2.4%). The top performer is Momentum Namibia Growth Fund with 2.1%, while Ninety One Namibia Managed Fund with 0.3% takes the bottom spot. For the three months NAM Coronation Balanced Plus Fund takes the top spot, outperforming the 'average' by roughly 2.0%. NinetyOne Managed Fund underperformed the 'average' by 2.3% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 July 2023 also reflects the editor’s views on current developments and their impact on investment markets.

How will the de-dollarisation impact global financial markets?

De-dollarisation is the process of reducing reliance on the U.S. dollar in global transactions and financial systems. It has been a topic of significant debate among experts and economists.

The ongoing trend of de-dollarisation has garnered attention from both developed and emerging economies. While the pace and extent of de-dollarisation can vary across countries, its potential impact on global financial markets is undeniable.

Firstly, de-dollarisation could lead to increased currency and interest rate volatility. As countries diversify their foreign exchange reserves away from the dollar, the demand for other major currencies, such as the euro, yen, and yuan, may rise. This could result in fluctuations in exchange rates, affecting international trade and investment. Countries will use the local interest rate to cushion currency volatility. Companies engaged in cross-border transactions would need to manage increased currency risk, potentially impacting their profitability.

Secondly, the shift away from the dollar could alter the dynamics of sovereign debt markets. Historically, many countries have issued bonds denominated in U.S. dollars to tap into the deep and liquid dollar-denominated markets. A move towards issuing bonds in local currencies or alternative currencies could reshape the global bond landscape. Investors may face challenges in assessing the creditworthiness of sovereigns issuing debt in non-dollar currencies, leading to increased credit risk considerations….

The Monthly Review of Portfolio Performance to 31 July 2023 also reflects the editor’s views on current developments and their impact on investment markets.

In June 2023, the average prudential balanced portfolio returned 2.4% (May 2023: 0.7%). The top performer is Hangala Absolute Capital Balanced Fund with 3.8%, while Investment Solutions Balanced Growth Fund with 1.3% takes the bottom spot. For the three months, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the 'average' by roughly 1.5%. NinetyOne Managed Fund underperformed the 'average' by 1.9% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 June 2023 also reflects the editor’s views on current developments and their impact on investment markets.

Tread carefully, but the point of inflection is nearing!

It is improbable that the man on the street who dares to choose between the three main asset classes would have been as successful as the prudential balanced portfolio manager. However, prudential portfolio managers invest for the long term. Their decisions are based on experience heavily weighted by market behaviour over the past 70 years and assuming that markets will revert to normal following any prospective catastrophe. They might tweak their portfolios but will not make radical changes as it might become a self-fulfilling prophecy.

An individual investor should consider two factors that are not important to the prudential balanced portfolio manager. Firstly, what is long-term for a portfolio manager may not be long-term for an individual investor. The investment horizon of many investors can be substantially shorter, and they should consider any prospective catastrophe. Secondly, the individual investor must consider substantial irregular cash flows, where timing is crucial. Not investing when the market peaks or withdrawing investments when it troughs is common sense. But how does one know when it peaked or bottomed? Going by history provides pointers but no certainty on whereto the market will move. Spreading large cash flows over a period (Nam Dollar-cost averaging) will reduce the risk of getting the timing wrong.

The Ukraine conflict constitutes a prospective catastrophe for the world and investors…

The Monthly Review of Portfolio Performance to 30 June 2023 also reflects the editor’s views on current developments and their impact on investment markets.

In May 2023, the average prudential balanced portfolio returned 0.7% (April 2023, 2.3%). The top performer is NAM Coronation Balanced Fund, with 2.1%, while Momentum Namibia Growth Fund, with -0.3%, takes the bottom spot. Hangala Absolute Capital Balanced Fund took the top spot for the three months, outperforming the 'average' by roughly 2%. M&G Managed Fund underperformed the 'average' by 2.1% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 May 2023 provides a full review of portfolio performances and other insightful analyses. 

Is China back in vogue?

In the latest diplomatic charm offensive, US foreign secretary adopted a totally different posture towards China during his visit. He did his utmost to flatter China as a global superpower and eye-level partner of the US. This is the same person who was vociferous in his anti-China polemic, the same government that sent high emissaries to Taiwan and made a point of challenging China by sending warships to the South China Sea, imposing sanctions on the export of microchips, edging Huawei out of 5G projects across Western countries, and much more, knowing full well that it would upset the China-US relationship. Even Germany has changed its tone towards China and recently approved China’s investment in the Hamburg Container Terminal business. Could it be that the Doves, spurred on by other US commercial business interests, took control of US foreign policy? Or is this just a ploy by the US government to appease China pretending not to present any threat to it, and to secure China’s cooperation and support in subjugating Russia (as a first step)?

The Monthly Review of Portfolio Performance to 31 May 2023 also reflects the editor’s views on current developments and their impact on investment markets.

In April 2023, the average prudential balanced portfolio returned 2.3% (March 2023: 0.3%). The top performer is Allan Gray Balanced Fund with 3.1%, while Hangala Capital Absolute Balanced Fund with 1.9% takes the bottom spot. For the three months Allan Gray Balanced Fund takes the top spot, outperforming the 'average' by roughly 2.1%. M&G Managed Fund underperformed the 'average' by 1.6% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 April 2023 provides a full review of portfolio performances and other insightful analyses. 

Tread carefully until the dust settles

In the last few columns, I expressed my concerns about the consequences of the Ukraine conflict, which is just one symptom of bigger global developments. China, Russia, South Africa, Brazil, and a few other countries are trying to break the shackles of the US hegemony. Will the US just be watching these efforts, or will it use all its means, including those of the collective West, to prevent the shackles from being broken? I cannot see the US just watching its global hegemony being dismantled. But how far are its adversaries prepared to go? Russia has shown that it is not prepared to return on its resolve to break the US shackles. South Africa just experienced a serious decline in the Rand exchange rate from 18.39 to 19.31 during the second week of May after rumours that it entered into an arms deal with Russia. Is this a sign of what countries siding with the US adversaries can expect to happen, and will they have the means to withstand the US and the collective West’s pressures?

Given these severe global uncertainties, an investor should tread carefully until the dust settles and consider the possibility of a market crash in his investment decisions…

The Monthly Review of Portfolio Performance to 30 April 2023 also reflects the editor’s views on current developments and their impact on investment markets.

In March 2023, the average prudential balanced portfolio returned 0.3% (February 2023: 0.2%). The top performer is Hangala Capital Absolute Balanced Fund with 2.4%, while M&G Managed Fund with -1.1% takes the bottom spot. For the three months Namibia Coronation Balanced Plus Fund takes the top spot, outperforming the 'average' by roughly 1.4%. M&G Managed Fund underperformed the 'average' by 1.0% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 March 2023 provides a full review of portfolio performances and other insightful analyses. 

What keeps me awake at night

What keeps me awake at night is whether the US has accepted the decline of its Dollar as the global reserve currency or if it will go all out to prevent it from happening, and what the possible consequence of the latter will be. The US never shied away from waging war to protect the Dollar, witness what happened to Libya as one of the latest test cases. Libya was a small county, but now it is China and a whole string of other countries that have expressed urgency in de-dollarisation.

The worst-case scenario will be if the US intends to maintain the US Dollar’s status. It will have to take on China and do so sooner rather than later, as China is hell-bound to build its military capabilities. A pointer to the US’s intentions is when NATO will continue to push into Russian territory. It would mean that no security guarantees were given to China, and China would be next in line. That would, of course, cause major global disruptions in all spheres of life. In such an event, it will be best to avoid exposing one’s investments to unforeseeable risks offshore and instead invest at or close to home.

From an investment and business point of view, the best case scenario is that the US has accepted the decline of its Dollar as a global reserve currency, and the de-dollarisation and deglobalisation trend will not cause massive disruptions one needs to be concerned about. However, foreseeing the consequences of this trend should guide one’s investment decisions.

The Monthly Review of Portfolio Performance to 31 March 2022 also reflects the editor’s views on current developments and their impact on investment markets.

In February 2023, the average prudential balanced portfolio returned 0.2% (January 2023: 5.5%). The top performer is Allan Gray Balanced Fund with 1.0%, while NinetyOne Managed Fund with -0.7% takes the bottom spot. For the three months, Namibia Coronation Balanced Plus Fund takes the top spot, outperforming the 'average' by roughly 2.6%. Hangala Capital Absolute Balanced Fund underperformed the 'average' by 2.1% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 28 February 2023 provides a full review of portfolio performances and other insightful analyses. 

When conventional investment management becomes redundant

In the phase to the final resolution of the East: West conflict, one way or another, inflation and interest rates are likely to be much higher. Governments may have to raise taxes to fund the conflict and higher interest rates on their debt. Higher interest rates, inflation, and taxes will curb consumer demand and will result in a recession over the next decade until the dust settles. There will be a decoupling of global equity markets, and local equity markets will be driven by local and regional rather than global developments. Because of the global political turmoil, foreign investors will withdraw from the local markets for ‘safe havens’. Investors’ definition of ‘safe havens’ will change as investors are likely to onshore or friend-shore their investments even further than they started to do in the aftermath of COVID and global supply change disruptions. Foreigners’ support of local equities and other assets will dwindle, impacting our local currency and equity markets negatively. Should the worst-case scenario realise, equity markets will take a deep dive and will not recover before the situation has been resolved, one way or another. Economies will not disappear unless their people disappear. As long as there are people, they have needs that the economy must meet, and life will continue. Today’s winners may not be tomorrow’s, but basic life necessities will always exist. Markets will undergo significant changes, and with it will come a lot of volatility…

In January 2023, the average prudential balanced portfolio returned 5.5% (December 2022: -0.9%). The top performer is Namibia Coronation Balanced Plus Fund with 7.85%, while Hangala Prescient Absolute Balanced Fund with 3.1% takes the bottom spot. For the 3-months Namibia Coronation Balanced Plus Fund takes the top spot, outperforming the 'average' by roughly 1.99%. Hangala Prescient Absolute Balanced Fund underperformed the 'average' by 4.4% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 January 2023 provides a full review of portfolio performances and other insightful analyses. 

The Default Portfolio is well-positioned for future political developments

In this column of last month’s newsletter, I described the Ukraine conflict as the defining event for global markets and economies. Unless the US-led anti-Russia and anti-China alliance prevails in this conflict, the world, its economies, and its markets will look different from todays. We will have a multi-polar world not dominated by the US Dollar and the US financial system. There will be more customs and currency controls and less free global trade and flow of capital. As the result, countries will have to become more self-reliant, and people will experience more shortages in many areas. If the US-led alliance should prevail, we will have a much more dominant and autocratic US advancing its economic and financial interests above everything else. China will not be an economic factor anymore but will be harnessed to advance US interests. In the worst-case scenario, the nuclear powers will use their nuclear arms, which will cause massive disruption in every respect across the world. Under all scenarios, we will experience a lot of uncertainty and volatility. One will find it difficult to invest elsewhere but a home, and it may not be possible to repatriate one’s foreign investments

In such a scenario, the cautious structure of the Default portfolio should produce better returns than the average prudential balanced portfolio. It can still underperform the average prudential balanced portfolio, particularly when shares do well. So, will shares do well or continue doing poorly as they did since the beginning of last year? The reason shares have done poorly is that central banks started to drain liquidity from the financial system and increased their policy interest rates. An investor now earns interest on interest-bearing investments and sometimes even earns a positive real return after inflation. The investor can no longer borrow money cheaply to invest in shares and other assets, which drove up the price of these assets until the end of 2021. Supply chain disruptions resulting from COVID lockdowns and a drastic increase in energy prices because of the Ukraine-Russia conflict, paired with a strong consumer demand recovery after the lifting of COVID lockdowns, led to a rapid increase in inflation, forcing the Fed, the ECB, and other central banks to unwind their super-accommodative monetary policy.

The Monthly Review of Portfolio Performance to 31 January 2023 also reflects the editor’s views on current developments and their impact on investment markets.

In December 2022, the average prudential balanced portfolio returned -0.9% (November 2022: 3.0%). The top performer is Allan Gray Balanced Fund with 0.8%, while Stanlib Managed Fund takes the bottom spot with -2.1%. For the 3-months Allan Gray Balanced Fund takes the top spot, outperforming the 'average' by roughly 2.1%. Hangala Prescient Absolute Balanced Fund underperformed the 'average' by 4.0% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 December 2022 provides a full review of portfolio performances and other insightful analyses. 

The defining development for economies and markets in the next decade

Russia and China have global ambitions, despise being subservient to the US, and resist it wherever possible. Russia, for one, had the audacity to frustrate US attempts to topple President Assad of Syria. China has been taking a more indirect approach to challenging US domination, such as its belt and road project.  Many other countries, who simply cherish their autonomy, do not have the means to resist but will take the opportunity of ridding themselves of the US straight jacket.

It seems to me that the US picked Russia as the weaker link in the chain of resistance. At the same time, the fall of Russia to the west would give the west access to China’s backdoor. Under former President Jeltzin, the US had nearly achieved its goal, but then came President Putin, whose purpose was and still is to restore the former Soviet Union’s position in the world. Subjugating Russia is not a recent US strategy if one considers the colour revolutions all around Russia’s periphery. John Bolton, former US ambassador to the UN, proudly acknowledged that the US carried out several regime’ changes that he was personally involved in. He did not say where, but the fact is that the US uses such tools to cement its hegemony. Henry Kissinger and Angela Merkel are reported to both have acknowledged that the Ukraine conflict is by the design of the west.

I believe the US will not relent on its goal to subjugate Russia as a first step, and China to follow, even if Russia is prepared to offer a compromise. Should Russia get the better of Ukraine, Poland will likely be ‘sent to the front’, possibly with other former eastern bloc and Nordic countries. If that does not ‘do the job’, we will likely see a further expansion, another world war. In fact, some political commentators, like US economist, Nouriel Roubini, believe the third world war has already started...

The Monthly Review of Portfolio Performance to 31 December 2022 also reflects the editor’s views on current developments and their impact on investment markets.

In November 2022, the average prudential balanced portfolio returned 3.0% (October 2022: 4.4%). The top performer is Ninety-One Managed Fund with 4.2%, while Hangala Prescient Absolute Balanced Fund with 1.0% takes the bottom spot. For the 3-months Ninety-One Managed Fund takes the top spot, outperforming the 'average' by roughly 1.9%. Hangala Prescient Absolute Balanced Fund underperformed the 'average' by 3.4% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 November 2022  provides a full review of portfolio performances and other insightful analyses. 

A decade of roller coaster markets

I listened to a very interesting interview with Felix Zulauf by Ed D’Agostino of Mauldin Economic on 9 December 2022. Felix Zulauf was the global strategist for UBS Bank and was the head of its institutional portfolio management group. He founded Zulauf Asset Management and manages Zulauf Consulting, where he consults to some of the world’s largest and most influential institutional investors.

Because the views of Felix Zulauf mirror my views of financial markets and how they will be impacted by global political developments, I will focus on this interview in this column. He, of course, has a much deeper insight and understanding of the subject and throws some light on questions I could not answer for myself…

Zulauf expects a mild recession in the US and very serious recessions in Europe, the UK, and the worst in China. The US recession will not be as severe as that in Europe and the UK as the US is virtually energy independent, unlike the others. The lockdowns are suspected to be a camouflage of China’s recession. As a result, China will not be the locomotive for the world economy as it was for the past 15 years. However, even under these circumstances, there will be individual companies doing well, such as defence contractors and energy companies.

For the investor, the essence of the economic environment is that we will go through a decade of roller coaster markets, with ups and downs like probably a whole generation has never experienced before. Under these circumstances, a passive strategy will produce disappointing returns, and one may even lose in real terms. The investor must make important decisions on buying and holding for a certain period and to sell to be liquid and preserve capital for buying again later on or going short on a declining market.

The Monthly Review of Portfolio Performance to 30 November 2022 also reflects the editor’s views on current developments and their impact on investment markets.

In October 2022, the average prudential balanced portfolio returned 4.4% (September 2022: -2.3%). The top performer is NAM Coronation Balanced Plus Fund with 5.7%, while Hangala Prescient Absolute Balanced Fund with 2.3% takes the bottom spot. For the 3-months Allan Gray Balanced Fund takes the top spot, outperforming the 'average' by roughly 2.1%. Stanlib Managed Fund underperformed the 'average' by 1.8% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 October 2022  provides a full review of portfolio performances and other insightful analyses. 

Investment markets have not normalised yet!

Since the global financial crisis in 2008, the US Federal Reserve has expanded its balance sheet from US$ 1 trillion to US$ 9 trillion by March 2022. Since then, it started its quantitative tightening and intends to runoff its balance sheet by between US$ 2.2 and US$ 3 trillion over the next three years and by selling off treasuries and mortgage-backed securities of up to US$ 95 billion per month

Graph 6.1 – Fed balance sheet

While the Fed expanded its balance sheet 9-fold since 2008, it dropped its policy rate from 5.25% to 0.25%. As of March 2022, it started to raise the policy rate to 4%. The real Fed rate, net of inflation, was an average of 1.8% over 20 years until November 2007, the onset of the global financial crisis. Since then, the real Fed rate averaged minus 1.3% until February 2022 and was minus 3.75% in October 2022.

One may say that we had normal market conditions until the global financial crisis. From then until February 2022, we had artificial markets resulting from the Fed's quantitative easing and zero interest rate policies. These policies were aimed at supporting the US economy and achieved colossal asset price inflation.

The Monthly Review of Portfolio Performance to 31 October 2022  provides a full review of portfolio performances and other insightful analyses. 

In September 2022, the average prudential balanced portfolio returned -2.3% (August 2022: 0.0%). The top performer is Allan Gray Balanced Fund with -0.9%, while NAM Coronation Balanced Plus Fund with -4.3% takes the bottom spot. For the 3-months Hangala Prescient Absolute Balanced Fund takes the top spot, outperforming the 'average' by roughly 1.5%. Momentum Namibia Growth Fund underperformed the 'average' by 1.6% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 September 2022  provides a full review of portfolio performances and other insightful analyses. 

The Benchmark Default portfolio – ideal for the average pension fund member!

A well-known investment adviser once remarked, "in a hurricane, even turkeys can fly"! He was talking about investment managers' performance. Since the Covid crisis struck share markets in March 2020, they experienced a hurricane worldwide until the end of 2021. The S&P 500 grew 42%, and the SA Allshare 33% (annualised)! Over this period, the average prudential balanced portfolio produced a return of 21.5%, and the Default portfolio 19.9% (annualized). Table 6.1 reflects the prudential balanced portfolios' point-in-time returns over various periods until December 2021. Over each but one period, the Default portfolio produced worse returns than the average portfolio! Many Default portfolio investors were disappointed and dissatisfied with its performance; one can understand why.

Table 6

 The Monthly Review of Portfolio Performance to 30 September 2022  provides a full review of portfolio performances and other insightful analyses. 

In August 2022, the average prudential balanced portfolio returned 0.0% (July 2022: 2.9%). The top performer is Hangala Prescient Absolute Balanced Fund with 0.6%, while Old Mutual Pinnacle Profile Growth with -1.0% takes the bottom spot. For the 3-months Allan Gray Balanced Fund takes the top spot, outperforming the 'average' by roughly 1.0%. Momentum Namibia Growth Fund underperformed the 'average' by 2.3% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 August 2022  provides a full review of portfolio performances and other insightful analyses. 

Foreign investment – a time to reassess your risk

For local pension fund investors, one probably needs to take a different view of the risks of investing offshore. In the past, developing countries, particularly in Africa, were loaded with a political risk premium. The Cyprus experience has exposed the political risk in developed countries. To quote John Mauldin's assessment of the Cyprus debacle for investors back in 2013 - "Capital controls have shattered the monetary unity of EMU. A Cypriot euro is no longer a core euro…. The complicity of EU authorities in the original plan to violate insured bank savings – halted only by the revolt of the Cypriot parliament – leaves the suspicion that they will steal anybody's money if leaders of the creditor states think it is in their immediate interest to do so. The IMF doesn't get off easy here, either: The IMF's Christine Lagarde has given her blessing to the Troika deal, claiming that the package will restore Cyprus to full health, with public debt below 100pc of GDP by 2020."

John Mauldin's suspicion that "authorities … will steal anybody's money if leaders … think it is in their immediate interest to do so" was justified! The US-lead western sanctions on countries such as North Korea, Iran, Venezuela, and Russia more recently, and the freezing and impounding of their foreign investments, caused severe losses for all who invested in those countries. These countries raised the irk of the US for challenging its dictates, and it can quickly happen to any other country, including SA and Namibia. Namibia already accommodates a Chinese space station in Swakopmund that may double up to guide intercontinental rockets. Imagine what the US will do to Namibia, and Namibian offshore investors should it come to an open conflict with China. It is currently a very realistic scenario! Add huge demographic risks for a more callous view on investment in developed countries. In contrast, the political and demographic risks in Africa are readily comprehensible.

The Monthly Review of Portfolio Performance to 31 August 2022  provides a full review of portfolio performances and other insightful analyses. 

In July 2022, the average prudential balanced portfolio returned 2.9% (June 2022: -3.7%). The top performer is Stanlib Managed Fund with 4.0%, while Allan Gray Balanced Fund with 2.0% takes the bottom spot. For the 3-months Allan Gray Balanced Fund takes the top spot, outperforming the 'average' by roughly 1.2%. Momentum Namibia Growth Fund underperformed the 'average' by 1.9% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 July 2022  provides a full review of portfolio performances and other insightful analyses. 

We are all in the hands of the Fed

The investor cannot foresee any new crisis hitting financial markets nor how and when the Fed will respond to it. Chopping and changing one’s investment portfolio in response to what happened in the markets, stands a good chance of wrong timing. Investing is a long-term game. Saving is a short-term game. One must have a long-term strategy for one’s investments. One may change one’s investment strategy in response to changing personal circumstances and apply short-term tactical measures in the transition process. One should not employ short-term tactical measures to respond to what happened in the markets. The typical prudential balanced portfolio is an ideal vehicle for the long-term investor. It comprises of all the main asset classes and is managed pro-actively based on prevailing and expected market- and economic conditions.

The Monthly Review of Portfolio Performance to 31 July 2022  provides a full review of portfolio performances and other insightful analyses. 

In June 2022, the average prudential balanced portfolio returned -3.7% (May 2022: 0.4%%). The top performer is Allan Gray Balanced Fund with -1.9%, while Momentum Namibia Growth Fund with -5.2% takes the bottom spot. For the 3-months Allan Gray Balanced Fund takes the top spot, outperforming the 'average' by roughly 4.0%. NAM Coronation Balanced Plus Fund underperformed the 'average' by 3.3% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 June 2022  provides a full review of portfolio performances and other insightful analyses. 

Global investment markets are not rosy!

The prospects for global equity markets, including our local markets, are not rosy. Coupled with the global political turmoil, local investors must expect foreign investors to withdraw from the local markets for safe havens. Their support of local equities and other assets should wane, which will impact our local currency negatively, as one has already seen. At the same time, the increasing global interest rates negatively impact fixed interest assets.

Although the general backdrop to investments is negative, investment markets always offer opportunities arising from the political turmoil and shortages resulting from the Ukraine crisis and the sanctions the West instituted against Russia. Interestingly, 'politically correct' investments are likely to fall out of favour creating opportunities with alternatives. Europe, for example, will reduce the focus on climate-neutral energy as it is forced to return to fossil fuels and nuclear power, and scorned military technology industries will regain popularity.

The Monthly Review of Portfolio Performance to 30 June 2022  provides a full review of portfolio performances and other insightful analyses. 

In May 2022, the average prudential balanced portfolio returned 0.4% (April 2022: -0.7%). The top performer is M&G Managed Fund with 1.0%, while Hangala Prescient Absolute Balanced Fund with -0.5% takes the bottom spot. For the 3-months Allan Gray Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 1.5%. NAM Coronation Balanced Plus Fund underperformed the ‘average’ by 2.1% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 May 2022  provides a full review of portfolio performances and other insightful analyses. 

You better stay at home and lock your doors when it is getting rowdy on the streets!

A few years ago, I suggested in this column that asset managers must consider the global political environment in their investment decision. I addressed my concern with some of these managers. They responded that it is more important to focus on investment fundamentals as one cannot predict political developments. Once the political upheavals fade, investment fundamentals will prevail once again.

I am not sure one can ignore the political environment but accept that the time horizon impacts one's approach. For investors, the time horizon is 40 years at most. If political upheaval does not settle within that time horizon, the investor may have a serious problem. In such a scenario, the investment principles become irrelevant to the investor.

Today's political system has been established over the past 75 years. Most alive today only know this system and may think it can never change. However, life changes continuously, sometimes slower, sometimes faster. Over the past 75 years, the political system has changed, but generally gradually and in a very controlled fashion, except if one dared to challenge the US hegemony…

The Monthly Review of Portfolio Performance to 31 May 2022 also reflects the editor’s views on current developments and their impact on investment markets.

In April 2022, the average prudential balanced portfolio returned -0.7% (March 2022: -1.0%). The top performer is Allan Gray Balanced Fund with 1.2%, while NAM Coronation Balanced Plus Fund with -2.4% takes the bottom spot. For the 3-months Hangala Prescient Absolute Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 1.2%. NAM Coronation Balanced Plus Fund underperformed the ‘average’ by 1.6% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 April 2022 provides a full review of portfolio performances and other insightful analyses. 

Invest in what you consume to hedge against inflation?

Little has changed in global investment markets since last month’s commentary. Energy costs, inflation, and international interest rates, including S.A. and Namibia, continue to increase. Food shortages are growing, and the Ukraine crisis shows no sign of remission; instead, it is heating up further.

The Ukraine crisis is just a symptom of politics that investors must understand before investing. Politics constitute the outer framework within which economies and markets operate. As much as one may think that we live in a free-market economy, the market is not really free as the political framework sets it narrow constraints.

 The Monthly Review of Portfolio Performance to 30 April 2022 also reflects the editor’s views on current developments and their impact on investment markets.

In March 2022, the average prudential balanced portfolio returned -1.0% (February 2021: 1.2%). The top performer is Momentum Namibia Growth Fund with 0.6%, while Hangala Prescient Absolute Balanced Fund with -2.2% takes the bottom spot. For the 3-months Momentum Namibia Growth Fund takes the top spot, outperforming the ‘average’ by roughly 1.3%. Stanlib Managed Fund underperformed the ‘average’ by 1.5% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 March 2022 provides a full review of portfolio performances and other insightful analyses. 

How do you invest when a global recession is looming?

Corona lock-downs across the world highlighted the flipside of globalisation. The fact that lock-downs disrupted global supply chains made many companies rethink their manufacturing in foreign countries. We still experience electronic components delivery delays in the motor vehicle industry and other tech industries worldwide. The apparent strategic response to these disruptions is to indigenise manufacturing. However, indigenising manufacturing is not that easy, will take time, and negate many globalisation efficiencies. As a result, the cost of goods will increase.

The world now faces the next challenge where the Ukraine conflict badly disrupts the production of staple foods. Food-producing countries are imposing export halts. Again, as a result, food prices are increasing. I coincidentally came across graph 6.1 in CAM Daily Brief of 11 April, showing an extremely steep increase in global food prices since 2020 when COVID struck, and the impact of the Ukraine conflict has not manifested yet!...

 The Monthly Review of Portfolio Performance to 31 March 2022 also reflects the editor’s views on current developments and their impact on investment markets.

In February 2022, the average prudential balanced portfolio returned 1.2% (January 2021: -1.3%). The top performer is Hangala Prescient Absolute Balanced Fund with 2.4%, while Old Mutual Pinnacle Profile Gowth Fund with 0.5% takes the bottom spot. For the 3-months Hangala Prescient Absolute Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 3.1%. NAM Coronation Balanced Plus Fund underperformed the ‘average’ by 1.4% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 28 February 2022 provides a full review of portfolio performances and other insightful analyses.

Will China side with Russia, and what could be the implications?

In a recent interview with Ed D’Agostino of Mauldin Economics on the Russia/Ukraine conflict and the current political climate for investors and the world, George Friedman, chief executive officer of Geopolitical Futures, made some interesting comments of which somewhat cynical in my opinion. He believes that President Putin’s objective is to move the Russian Federation’s borders back to those of the old Soviet Union and that the invasion of Ukraine was a vital and logical move to restore Russia’s national security. It makes a great deal of sense says Friedman, but it threatens western security. He points out that everyone, including President Putin and himself, underestimated the power of the American economy and the Dollar as global trade takes place in Dollars. Anyone without access to Dollars cannot trade internationally.

He points out that the talk about a multipolar world is an illusion. The US economy towers over all other economies, and it is still a unipolar world. He points out that it is not a high priority to save President Putin’s face to the US. He believes President Putin gambled and lost, and it is more important to demonstrate to the world what it means to challenge the US. The US cannot give President Putin what he wants and has to force him backward. It will achieve this using economic measures instead of any military intervention. Whichever force the west applies will cause some form of pain, in this case, economic pain, but that is better than seeing soldiers dying.

The Monthly Review of Portfolio Performance to 28 February 2022 provides a full review of portfolio performances and other insightful analyses.

In January 2022, the average prudential balanced portfolio returned -1.3% (December 2021: 2.7%). The top performer is Allan Gray Balanced Fund with 0.6%, while Stanlib Managed Fund with -2.6% takes the bottom spot. For the 3-months Hangala Prescient Absolute Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 2.2%. Stanlib Managed Fund underperformed the ‘average’ by 2.4% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 January 2022 provides a full review of portfolio performances and other insightful analyses.

Forget yesterday’s winners, instead find yesterday’s loser that may shine tomorrow!

The disequilibrium in financial markets caused by low interest rates and fiscal stimulus is not sustainable and is up for correction this year. The Federal Reserve and the ECB are reducing their bond-buying programmes and contemplating lifting interest rates. The mere talk of rising interest rates caused the latest dip in the S&P 500. The stock markets produced clear winners and clear losers after the COVID crisis. Yesterday’s winners are unlikely to continue their winning streak while yesterday’s losers may shine again. I cannot see stock markets continuing their trajectory this year. Maybe I am over-cautious like I was in the run-up to the GFC.

Investors who align with my thinking and expectations should tread carefully. Forget to chase yesterday’s winners: instead, find yesterday’s losers that will shine tomorrow! If you find the right ones, you should achieve respectable returns on your shares investments this year.

The Monthly Review of Portfolio Performance to 31 January 2022 provides a full review of portfolio performances and other insightful analyses.

In December 2021, the average prudential balanced portfolio returned 1.8% (November 2021: 1.8%). The top performer is Hangala Prescient Absolute Balanced Fund with 3.3%, while NAM Coronation Balanced Plus Fund with 2.2% takes the bottom spot. For the 3-months Momentum Namibia Growth Plus Fund takes the top position, outperforming the ‘average’ by roughly 1.4%. Allan Gray Balanced Fund underperformed the ‘average’ by 1.8% on the other end of the scale. Note that these returns are before (gross of) asset management fees..

The Monthly Review of Portfolio Performance to 31 December 2021 provides a full review of portfolio performances and other insightful analyses.

Our outlook for investment markets for 2022

The year 2021 produced exceptional returns for pension funds, primarily derived from equities in which funds typically invest between 60% and 65% of their total assets. Graph 6.1 depicts the returns on the various assets classes in which funds invest. The average fund produced a return of around 18%, representing a real return of around 13.5% for 2021. My expectation for 2021 was that the average fund would generate a real return of 5%, or a nominal return of 9.5%, with an inflation rate of 4.5%. My call on equities was wrong. I also cautioned that local bonds yielding between 5% (GC 21) and 13% (GC 50) at the time would only do this if an investor holds them to maturity. Looking at graph 6.1, the return a fund earned on bonds for 2021 would have only been 8.4%, and this is SA bonds. Namibian bonds, in comparison, only yielded 4.4% (IJG ALBI) in nominal terms, which equals zero % in real terms.

The Monthly Review of Portfolio Performance to 31 December 2021 provides a full review of portfolio performances and other insightful analyses.

In November 2021, the average prudential balanced portfolio returned 1.8% (October 2021: 2.2%). The top performer is Momentum Namibia Growth Fund with 2.8%, while Stanlib Managed Fund with 0.8% takes the bottom spot. For the 3-months NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 1.1%. Stanlib Managed Fund underperformed the ‘average’ by 2.0% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 November 2021 provides a full review of portfolio performances and other insightful analyses. 

Do not expect the Default Portfolio to outperform!

The Benchmark Default Portfolio does not aim to outperform the average of the prudential balanced portfolios over the long term. Any long-term outperformance is a coincidence. Yet, since its restructuring at the start of 2010, it beat the average prudential balanced portfolio cumulatively. It was 2.7% ahead of the average at the end of October 2021 after reaching its peak outperformance of 12.4% in March 2020. In March 2020, when COVID hit our markets, the JSE Allshare Index fell 12.8%, from 51,038 to 44,490. In April 2020, the JSE Allshare Index grew by 13.1%, continuing its trajectory to 70,475 at the end of November 2021.

The Benchmark Default Portfolio can underperform and outperform the average prudential balanced portfolio in the short term. It’s currently more conservative structure means that it will likely beat the average prudential balanced portfolio when shares perform poorly, and it will lag it when shares perform strongly. Since the end of March 2021, shares performed strongly, and as a result, the Default Portfolio’s cumulative outperformance to the end of March 2021 declined steadily.

The Monthly Review of Portfolio Performance to 30 November 2021 provides a full review of portfolio performances and other insightful analyses.

In October 2021, the average prudential balanced portfolio returned 2.2% (September 2021: -0.4%). The top performer is NAM Coronation Balanced Plus Fund with 3.7%, while Investment Solutions Balanced Growth Fund with 1.5% takes the bottom spot. For the 3-months Old Mutual Pinnacle Profile Growth Fund takes the top spot, outperforming the ‘average’ by roughly 1.5%. Hangala Prescient Absolute Balanced Fund underperformed the ‘average’ by 2.1% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 October 2021 provides a full review of portfolio performances and other insightful analyses.

The folly of point-in-time performance measurement!

Interestingly, most investment performance reports present the performance by way of bar graphs. These bar graphs show the point-in-time investment performance, which is meaningless. It is like looking out of the window and concluding that Namibia must have a very humid climate because it happened to rain at that time. Weather bureaus usually present charts as line charts, or if they are bar charts, each bar will represent a month or a year over a specific time. You cannot judge investment managers’ returns by looking at bar chart performance tables. The folly of looking at bar charts becomes more pronounced when markets are very volatile.

To illustrate my point, let’s look at the one-year bar chart performance table for April 2020 and April 2021. For the twelve months to March 2020, shares (JSE Allshare Index) produced a negative return of 22.1%. For the following 12 months to March 2021, shares returned 49.4%!

Read part 6 of the Monthly Review of Portfolio Performance to 31 October 2021 to find out what our investment views are.

In September 2021, the average prudential balanced portfolio returned -0.4% (August 2021: 1.2%). The top performer is Allan Gray Nambibia Balanced Fund with 1.3%, while Hangala Prescient Absolute Balanced Fund with -1.9% takes the bottom spot. For the 3-months Old Mutual Pinnacle Profile Growth Fund takes the top spot, outperforming the ‘average’ by roughly 1.8%. Hangala Prescient Absolute Balanced Fund underperformed the ‘average’ by 2.4% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 September 2021 provides a full review of portfolio performances and other insightful analyses.

Not being the top performer is not good enough!

The Benchmark Default portfolio is currently experiencing a difficult time, investors taking the fund to task for not featuring at the performance table’s top end.

Investing is like a sports game, whether it is soccer, rugby, hockey, or whatever, and the investor serves as the coach. His investment is his team; the opponents are the investment market. The coach may take one of two routes, a speculative route or a planned route. Taking the speculative course, the coach would attempt to capitalise on the opponent’s weakness as the game progresses, focusing on winning the game. The planned route requires the coach to know his opponents and his team and what result he wants to achieve. This knowledge will determine the strategy he must follow. He may not always want to win each game if that means preserving his team’s completeness, fitness, and health for the next game.

Investment is not a one-game matter but rather like winning the league. One can follow similar approaches when investing. The speculative course means that the investor tries to identify opportunities in the market and invest in these, focusing on making a killing on the investment. How one identifies opportunities is important. Laypeople would consider what has done well over the recent past and jump onto that band-wagon. Experts would use benchmarks for assessing whether an investment presents an opportunity. Often the benchmark considers the investment relative to other similar investments, the market, or the investment’s historical metrics. In a planned approach, the investor would define his ultimate goal and a strategy for achieving this goal…

Read part 6 of the Monthly Review of Portfolio Performance to 31 August 2021 to find out what our investment views are.

In August 2021, the average prudential balanced portfolio returned 1.2% (July 2021: 1.9%). The top performer is Old Mutual Pinnacle Profile Growth Fund with 2.3%, while Hangala Prescient Absolute Balanced Fund with 0.5% takes the bottom spot. For the 3-months Old Mutual Pinnacle Profile Growth Fund takes the top spot, outperforming the ‘average’ by roughly 1.6%. Hangala Prescient Absolute Balanced Fund underperformed the ‘average’ by 1.6% on the other end of the scale. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 August 2021 provides a full review of portfolio performances and other insightful analyses.

1. Parties to fund and their roles and responsibilities
2. Investment choice and return objectives
3. Investment range and portfolio composition
4. Performance characteristics of asset classes and portfolios
5. The default portfolio
6. The default portfolio vs the smooth growth portfolio
7. Income replacement ratio and contribution rates
8. Selection of investment managers
9. Combining investment portfolios and when to switch
10. Investment manager risks and manager diversification
11. Performance measurement

In the previous four newsletters, I covered the first eight topics.

Follow this link (link to website) to the monthly Performance Review and read paragraph 6.

In the previous four newsletters, I covered the first eight topics. In this newsletter, I will cover the remaining topics “Combining investment portfolios and when to switch,” “Investment manager risks and manager diversification,” and “Performance measurement.”

Read part 6 of the Monthly Review of Portfolio Performance to 31 August 2021 to find out what our investment views are.

In July 2021, the average prudential balanced portfolio returned 1.9% (June 2021: 0.4%%). Top performer is NAM Coronation Balanced Plus Fund with 2.6%, while Allan Gray Balanced Fund with 1.3% takes the bottom spot. For the 3-months Momentum Namibia Growth Fund takes the top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale, NinetyOne Managed Fund underperformed the ‘average’ by 1.2%. Note that these returns are before (gross of) asset management feess.

The Monthly Review of Portfolio Performance to 31 July 2021 provides a full review of portfolio performances and other interesting analyses.

Understanding Benchmark Retirement Fund Investments

In the last and the next few issues of our monthly Performance Review, I will provide background and guidance on investments to assist Benchmark Retirement Fund members taking charge of their fund investments.

1. Parties to fund and their roles and responsibilities
2. Investment choice and return objectives
3. Investment range and portfolio composition
4. Performance characteristics of asset classes and portfolios
5. The default portfolio
6. The default portfolio vs the smooth growth portfolio
7. Income replacement ratio and contribution rates
8. Selection of investment managers
9. Combining investment portfolios and when to switch
10. Investment manager risks and manager diversification
11. Performance measurement

In the previous three newsletters, I covered the first six topics. In this newsletter, I cover the topics “Income replacement ratio and contribution rates” and “Selection of investment managers”..

Read part 6 of the Monthly Review of Portfolio Performance to 31 July 2021 to find out what our investment views are.

In June 2021 the average prudential balanced portfolio returned 0.4% (May 2021: 0.3%). Top performer is Prudential Managed Fund with 1.0%, while Hangala Prescient Absolute Balanced Fund with -0.4% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale NinetyOne Managed Fund underperformed the ‘average’ by 1.4%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 June 2021 provides a full review of portfolio performances and other interesting analyses.

Understanding Benchmark Retirement Fund Investments

In the next few issues of our monthly Performance Review, I will provide background and guidance on investments to assist Benchmark Retirement Fund members taking charge of their fund investments.

1. Parties to fund and their roles and responsibilities
2. Investment choice and return objectives
3. Investment range and portfolio composition
4. Performance characteristics of asset classes and portfolios
5. The default portfolio
6. The default portfolio vs the smooth growth portfolio
7. Income replacement ratio and contribution rates
8. Selection of investment managers
9. Combining investment portfolios and when to switch
10. Investment manager risks and manager diversification
11. Performance measurement

In parts 1 and 2 of the previous two newsletters, I covered the first four topics. In the Monthly Review of Portfolio Performance, paragraph 6, I will cover the next two topics; the default portfolio and the default portfolio vs. the smooth growth portfolio.

Read part 6 of the Monthly Review of Portfolio Performance to 30 June 2021 to find out what our investment views are.

In May 2021 the average prudential balanced portfolio returned 0.3% (April 2021: 1.5%). Top performer is Hangala Prescient Absolute Balanced Fund with 3.0%, while Ninety One Managed Fund with -0.9% takes the bottom spot. For the 3-month period, Hangala Prescient Absolute Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 3.8%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 1.5%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 May 2021 provides a full review of portfolio performances and other interesting analyses.

Understanding Benchmark Retirement Fund Investments

In the next few issues of our monthly Performance Review, I will be providing background and guidance on investments to assist Benchmark Retirement Fund members to take charge of their fund investments.

• Parties to fund and their roles and responsibilities
• Investment choice and return objectives
• Investment range and portfolio composition
• Performance characteristics of asset classes and portfolios
• The default portfolio
• The default portfolio vs the smooth growth portfolio
• Income replacement ratio and contribution rates
• Selection of investment managers
• Combining investment portfolios and when to switch
• Investment manager risks and manager diversification
• Performance measurement

In Part 6 of last month’s Benchtest, I covered the first 3 topics. In the Monthly Review of Portfolio Performance, paragraph 6, I will cover the topic ‘performance characteristics of asset classes and portfolios.

Read part 6 of the Monthly Review of Portfolio Performance to 31 May 2021 to find out what our investment views are.

In April 2021 the average prudential balanced portfolio returned 1.5% (March 2021: 0.6%). Top performer is Hangala Prescient Absolute Balanced Fund with 2.4%, while Allan Gray Balanced Fund with 0.7% takes the bottom spot. For the 3-month period, Hangala Prescient Absolute Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 1.8%. On the other end of the scale Investment Solutions Balanced Growth Fund underperformed the ‘average’ by 1.4%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 April 2021 provides a full review of portfolio performances and other interesting analyses.

Understanding Benchmark Retirement Fund Investments

In the next few issues of our monthly Performance Review, I will be providing background and guidance on investments to assist Benchmark Retirement Fund members to take charge of their fund investments.

• Parties to fund and their roles and responsibilities
• Investment choice and return objectives
• Investment range and portfolio composition
• Performance characteristics of asset classes and portfolios
• The default portfolio
• The default portfolio vs the smooth growth portfolio
• Income replacement ratio and contribution rates
• Selection of investment managers
• Combining investment portfolios and when to switch
• Investment manager risks and manager diversification
• Performance measurement

In this issue I will cover the following topics:

• Parties to fund and their roles and responsibilities
• Investment choice and return objectives
• Investment range and portfolio composition

Read part 6 of the Monthly Review of Portfolio Performance to 30 April 2021 to find out what our investment views are.

In March 2021 the average prudential balanced portfolio returned 0.6% (February 2021: 2.6%). Top performer is Old Mutual Pinnacle Profile Growth Fund with 1.9%, while Investment Solutions Bal Growth Fund with -0.1% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 2.6%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 1.9%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 March 2021 provides a full review of portfolio performances and other interesting analyses.

Why the prudential balanced portfolio is the answer for pension funds

A typical statement made by fund members, in particular when markets are not doing so well, is that the Benchmark Default portfolio has been performing poorly over the past so many years and one should have rather been invested in the money market.

Well, when someone makes such a statement, one needs to establish what the commentator’s benchmark is for saying that the portfolio has been doing poorly. One also needs to understand what this portfolio aims to achieve before one can put such a statement into context. This statement is similar to saying ‘my Ferrari’s fuel consumption is horrific’. Really an empty statement when made out of context. The fuel consumption of a Ferrari will certainly be significantly higher than that of a 1.4 litre Golf TSI. Would you not have expected this, when comparing the technical specs of these two cars, particularly in terms of engine output? It’s simply an unreasonable comparison and a matter of ‘horses for courses’!

Read part 6 of the Monthly Review of Portfolio Performance to 31 January 2021 to find out what our investment views are.

In February 2021 the average prudential balanced portfolio returned 2.6% (January 2021: 2.3%). Top performer is Nam Coronation Balanced Plus Fund with 4.3%, while Stanlib Managed Fund with 1.5% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 3.5%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 1.9%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 28 February 2021 provides a full review of portfolio performances and other interesting analyses.

In January 2021 the average prudential balanced portfolio returned 2.3% (December 2020: 1.9%). Top performer is Allan Gray Balanced Fund with 3.1%, while Old Mutual Pinnacle Profile Growth Fund with 1.3% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 4.2%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 2.8%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 January 2021 provides a full review of portfolio performances and other interesting analyses.

What to expect of global investment markets in 2021?

The inauguration of a new president of the United States has brough about quite a change to the outlook for global financial markets, particularly since he can speak with authority knowing that the Democrats now have a majority in both houses of parliament. President Biden intends to spend another US$ 1.9 trn to stimulate the US economy, and that is nearly 10% of US GDP. As the result global equity markets have responded positively to the new outlook. The SA Allshare index increased by 9.5% over the last 2 months, the SP&500 increased by 33.3%, the Dax increased by 5.2%, the Nikkei increased by 38.3% leaving only the FTSE that actually declined by nearly 25%. Similarly, the US 10-year bond yield increased by 27.1%, which for an investor unfortunately presented a severe capital depreciation. I expect that the US moves will force the hand of other developed countries to employ similar measures, not only to stimulate their economies but also to protect their currencies. The day of reckoning therefore seems to have been pushed forward by at least another year and the reversion to an equilibrium between the various asset classes is nowhere in sight. While the economies of most developing countries are still reeling under the consequences of COVID-19, the Chinese economy seems to be picking up speed and as the result global commodity prices are also on an upward trend. This of course is good news for commodity-based economies such as SA and also Namibia.

The Monthly Review of Portfolio Performance to 31 January 2021 provides a full review of portfolio performances and other interesting analyses.

In December 2020 the average prudential balanced portfolio returned 1.9% (November 2020: 5.7%). Top performer is Hangala Prescient Absolute Balanced Fund with 3.6%, while Allan Gray Balanced Fund with 0.6% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 3.4%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 2.0%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 December 2020 provides a full review of portfolio performances and other interesting analyses.

The 2020s are going to be about rifle shots, not the shotgun approach of index funds!

In his newsletter ‘Thoughts from the Frontline’ of 23 January 2021, John Mauldin presents a number of US market metrics that should make an investor think.

Consider the so-called ‘Buffet Indicator’ as per graph 6.1 (Source: Adviser Perspectives), that measures US equities as a percentage of nominal US GDP. It is at an all-time high and about as far above the ‘Exponential Regression’ line as it was at the end of 2000 when the S&P 500 dropped from its peak of 1,518 at the end of July 2000 to 815 by end of August 2002. That was a drop of 87%! It took the S&P 500 5 years to get back to the July 2000 level, i.e. by 2007, only to drop back to 735 at the end of January 2009 through the global financial crisis. That was a drop of 108% from the peak it reached at the end of April 2007. As we speak, the S&P 500 is testing the 4,000 level, evidently driven by quantitative easing that we have referred to repeatedly in earlier newsletters.

Graph 6.1

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The Monthly Review of Portfolio Performance to 31 December 2020 provides a full review of portfolio performances and other interesting analyses.

In November 2020 the average prudential balanced portfolio returned 5.7% (October 2020: -2.0%). Top performer is NAM Coronation Balanced Plus Fund with 8.0%, while Stanlib Managed Fund with 3.8% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 2.3%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 2.1%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 November 2020 provides a full review of portfolio performances and other interesting analyses.

Typical balanced pension fund portfolios should offer peace of mind!

Just recently I came across interesting information in John Mauldin’s Thoughts from the Frontline newsletter. A graph he presents, depicts the stimulus as percentage of GDP injected by a selected number of countries into their economies, namely the stimulus after the 2008 financial crisis and the stimulus in the face of the COVID-19 pandemic.

Take Germany whose 2008 financial crisis stimulus was a mere 3.5% of GDP and in line with that of the US. This time around the stimulus represents 33% of GDP, nearly 3 times the stimulus given by the US at 12.1% of GDP. With an economy of only US$ 3.8 trn representing only about 18% to the US economy’s US 21.4 trn, the German COVID stimulus of US$ 1.3 trn, amounts to half the US stimulus of US$ 2.6 trn. These figures are based on World Bank GDP data of 2019, before the decimation of global economies by COIVD-19. According to John Mauldin’s newsletter global debt will be US$ 300 trn by the end of the first quarter of 2021, that represents 340% of 2019 global GPD, estimated at US$ 87.8 trn by the World Bank!

If you want to put this into the context of a household, that is the equivalent of a household having borrowed around 11 times its annual household income. If your household income is your salary and that is N$ 1 million, your debt is just over N$ 11 million. If you had to repay this debt at the bank’s mortgage rate of currently 8.5% over say 20 years, you would be in deep trouble as the loan repayment of N$ 1.18 million per annum would already exceed your salary and you have not paid your bills yet. Of course, we know that some governments nowadays actually pay zero % interest on the money they borrow. Even at 0%, the repayments over 20 years still represent 57% of total government revenue, before government has spent any money on infrastructure, health, housing, education, government and social services.

Read part 6 of the Monthly Review of Portfolio Performance to 30 November 2020 to find out what our investment views are..

In September 2020 the average prudential balanced portfolio returned -1.5% (August 2020: 0.9%). Top performer is Old Mutual Pinnacle Profile Growth Fund with -0.3%, while NinetyOne Managed Fund with -2.2% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 1.8%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 2.2%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 October 2020 provides a full review of portfolio performances and other interesting analyses.

Typical balanced pension fund portfolios should offer peace of mind!

Just recently I came across interesting information in John Mauldin’s Thoughts from the Frontline newsletter. A graph he presents, depicts the stimulus as percentage of GDP injected by a selected number of countries into their economies, namely the stimulus after the 2008 financial crisis and the stimulus in the face of the COVID-19 pandemic.

Take Germany whose 2008 financial crisis stimulus was a mere 3.5% of GDP and in line with that of the US. This time around the stimulus represents 33% of GDP, nearly 3 times the stimulus given by the US at 12.1% of GDP. With an economy of only US$ 3.8 trn representing only about 18% to the US economy’s US 21.4 trn, the German COVID stimulus of US$ 1.3 trn, amounts to half the US stimulus of US$ 2.6 trn. These figures are based on World Bank GDP data of 2019, before the decimation of global economies by COIVD-19. According to John Mauldin’s newsletter global debt will be US$ 300 trn by the end of the first quarter of 2021, that represents 340% of 2019 global GPD, estimated at US$ 87.8 trn by the World Bank!

If you want to put this into the context of a household, that is the equivalent of a household having borrowed around 11 times its annual household income. If your household income is your salary and that is N$ 1 million, your debt is just over N$ 11 million. If you had to repay this debt at the bank’s mortgage rate of currently 8.5% over say 20 years, you would be in deep trouble as the loan repayment of N$ 1.18 million per annum would already exceed your salary and you have not paid your bills yet. Of course, we know that some governments nowadays actually pay zero % interest on the money they borrow. Even at 0%, the repayments over 20 years still represent 57% of total government revenue, before government has spent any money on infrastructure, health, housing, education, government and social services.

Read part 6 of the Monthly Review of Portfolio Performance to 31 October 2020 to find out what our investment views are.

In September 2020 the average prudential balanced portfolio returned -1.5% (August 2020: 0.9%). Top performer is Old Mutual Pinnacle Profile Growth Fund with -0.3%, while NinetyOne Managed Fund with -2.2% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 1.8%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 2.2%. Note that these returns are before (gross of) asset management fees.

Take note that we have added a new graph 3.5.3 which reflects the returns of low risk special mandate funds, being the Capricorn Stable Fund, the Sanlam Absolute Return Fund and the Sanlam Active Plus Fund.

The Monthly Review of Portfolio Performance to 30 September 2020 provides a full review of portfolio performances and other interesting analyses..

It’s tough times for any investor!

It’s tough times for any investor, particularly someone planning to retire within the next 5 years or having retired already. Conventional investment wisdom as implicit in the management of investments in prudential balanced portfolios, will find it hard to deliver positive real returns. Many an investor may feel enticed to take bigger risks in their investment decisions and invest more speculatively in the hope of these investments yielding the desired returns. Few will factor in the true risk properly, if at all.

In the past, wars proved to provide an escape from a desperate situation. Who is prepared to speculate on a war once again solving our prevailing problems and presenting a global economic and financial reset?

Investment managers of these portfolios should rather cast their nets further and find more ‘unconventional’ investment opportunities without venturing into highly risky and speculative investments. This requires some lateral thinking but it offers a significant opportunity to ‘win the race’ if one is first out of the blocks.

Read part 6 of the Monthly Review of Portfolio Performance to 30 September 2020 to find out what our investment views are.

In August 2020 the average prudential balanced portfolio returned 0.9% (July 2020: 1.7%). Top performer is Stanlib Managed Fund with 2.1%, while Allan Gray Balanced Fund with 0.1% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 2.2%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 2.7%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 August 2020 provides a full review of portfolio performances and other interesting analyses.

Pensioners beware - this is not the time to raise your investment risk!

...When one has been used to the longer-term achievements of the prudential balanced portfolio managers, one can understand that pension fund members and pensioners will be disappointed with the shorter term returns their pension investment will have produced. Tragically, shrewd brokers out in the market have seen this state of affairs as an opportunity to discredit proven prudential balanced portfolios and to coerce pensioners to transfer their retirement capital into high risk portfolios, using shorter-term investment returns some of these managed to produce, as the result of the distortions that occurred in the markets since the global financial crisis...

I strongly advise pensioners, in particular, to be cognisant of the following before taking a decision concerning the investment of their retirement capital:

• The prudential balanced portfolio has proven itself to offer the best risk adjusted returns to the pension fund member/ pensioner in the long-term;
• Clamouring for returns higher than what the prudential balanced portfolio typically produces, means taking higher excessive risk as a matter of course;
• Retail products are generally more costly than institutional products; latter offer economies of scale, former offers more personalised structuring;
• Do not put yourself at the mercy of a single individual who may no longer be around tomorrow;
• Understand how the investment returns of your capital are produced;
• Have a benchmark for comparing your returns;
• Understand all the costs associated with your investment that detract from the returns your capital earns; and
• Understand the termination conditions of the product you intend to invest in;

Last but not least, as a pensioner, you will lose confidence in taking your own decisions as you grow older. In a retail product you will then increase your dependence on your broker ever more, while many institutional products offer default options that the managers manage in the best interests of the member/ pensioner and that can relieve the member/ pensioner of the responsibility to take decisions when he no longer has the confidence or knowledge to do so. As a pensioner you must ascertain that you are at peace with the party/ies in whose custody your retirement capital is. You cannot afford and do not want to lose sleep over this!

Read part 6 of the Monthly Review of Portfolio Performance to 31 August 2020 to find out what our investment views are.

In July 2020 the average prudential balanced portfolio returned 1.7% (June 2020: 2.3%). Top performer is NAM Coronation Balanced Plus Fund with 2.5%, while Allan Gray Balanced Fund with 0.1% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 2.2%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 3.1%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 July 2020 provides a full review of portfolio performances and other interesting analyses.

When can we expect to see double digit returns again?

In our latest Benchtest newsletter 07.2020, we present two articles that effectively address the same subject. Firstly ‘Governments must beware of the lure of free money’ that appeared in the Economist of 23 July wherein it is pointed out that we are currently dealing with a profound shift in economics as the result of policy decisions taken by governments across the developed world in response to the COVID pandemic. It talks of 4 defining features of the ‘new epoch’ induced by COVID. Firstly, the extent of government borrowing, secondly, the extent of money printing by central banks, thirdly the governments’ increasing roles as capital allocators in their economies and fourthly, a persistently low inflation rate. These ‘epochal features’ lay the foundation for how economies and consequently the financial markets will evolve for many years to come.

The second article ‘Portfolios need to be more active and flexible to ensure returns’, international asset manager Schroders believes that both, equity and bond returns, are likely to be lower in the future than during the past 10 years. Equities are facing economic headwinds and record valuations, while interest rates are at record lows and likely to remain low for years, affecting both the income and price appreciation potential for bonds...

Read part 6 of the Monthly Review of Portfolio Performance to 31 July 2020 to find out what our investment views are.

In June 2020 the average prudential balanced portfolio returned 2.3% (May 2020: 0.7%). Top performer is Hangala Prescient Absolute Balanced Fund with 3.2%, while NinetyOne Managed Fund with 1.4% takes the bottom spot. For the 3-month period, Prudential Managed Fund takes the top spot, outperforming the ‘average’ by roughly 2.3%. On the other end of the scale, Allan Gray Balanced Fund underperformed the ‘average’ by 2.0%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 June 2020 provides a full review of portfolio performances and other interesting analyses.

Should you now buy, sell or stay put?

‘Factset’ journal recently published some rather disturbing statistics on the S&P 500 share index as depicted in graph 1 below. It shows record high cuts to earnings per share estimates for the second quarter of 2020. The Q2 bottom-up EPS estimate (which is an aggregation of the median Q2 EPS estimates for all the companies in the index) declined by 37.0% (to $23.25 from $36.93) during this period. This is the largest decline since a 34.3% decline which occurred in quarter 4 of 2008, when the global financial crisis struck global economies. This is evidently the result of COVID-19 and the lockdown imposed on the US economy.

Graph 1

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Read part 6 of the Monthly Review of Portfolio Performance to 30 June 2020 to find out what our investment views are.

In May 2020 the average prudential balanced portfolio returned 0.7% (April 2020: 8.3%). Top performer is Nam Coronation Balanced Plus Fund with 1.6%, while Allan Gray Balanced Fund with -0.5% takes the bottom spot. For the 3-month period, Stanlib Managed Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 3.7%. On the other end of the scale Momentum Namibia Growth Balanced Fund underperformed the ‘average’ by 4.3%. Note that these returns are before (gross of) asset management fees..

The Monthly Review of Portfolio Performance to 31 May 2020 provides a full review of portfolio performances and other interesting analyses.

Will equity markets take Corona in a stride?

Looking back at how global bourses have performed since the global financial crisis in 2007/ 2008, as depicted in graph 1 below, by 2014, all bourses had recovered the market slump resulting from the global financial crisis and since the only new one direction and that was up! This was of course up until Covid 19 struck and bourses plunged by around 20% from end of December 2019 to end of March 2020. At that point many investors went into panic mode and already saw the end of the world closing in on them. Tracking the bourse since then however, markets have recovered about half of the losses incurred up to the end of May and are on a good course June-to-date.

Read part 6 of the Monthly Review of Portfolio Performance to 30 April 2020 to find out what our investment views are.

In April 2020 the average prudential balanced portfolio returned 8.3% (March 2020: -8.2%). Top performer is Prudential Namibia Balanced Fund with 9.6%, while Momentum Namibia Growth Balanced Fund with 7.4% takes the bottom spot. For the 3-month period, Investec Namibia Managed Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 4.4%. On the other end of the scale Momentum Namibia Growth Balanced Fund underperformed the ‘average’ by 4.8%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 30 April 2020 provides a full review of portfolio performances and other interesting analyses.

After Corona the world will never be the same again

Every politician, every news medium, and of course Bill Gates, are all heralding that the world we knew before will never be the same again, after Corona. The abbreviations A.C. and B.C. have been given a new meaning – After Corona and Before Corona. Have you noticed like I, that this message is driven in particular by ITC companies and others, clearly wanting to capitalise on IT to promote their business?

In the 20 years or so B.C. we experienced a huge tidal wave of human movement across the world. One may probably differentiate between business movement and leisure movement. I believe these two will respond differently in the years A.C.

Maybe me, as a ‘baby boomer’, am still of the old school. I believe human beings are social animals. They like to socialise, meet face to face and interact on a personal level and have that feel-, smell-, taste experience, simply being a human being. We do not want to be prescribed to the n’th degree what we may do, what we may not do, where we may and may not be, how and when we may move around – like an animal in a zoo. We may live being shackled for a while, but we will not, as a species accept shackles for any extended period and the longer we are shackled down, the more violent the breaking of these shackles will eventually be. This is what history tells us. The virtual world may add a facet to our lives but it will not change our human genes. I am convinced that the new reality A.C. is a huge hype blown up by people with a vested interest and opportunists joining the band wagon.

Read part 6 of the Monthly Review of Portfolio Performance to 30 April 2020 to find out what our investment views are.

In March 2020 the average prudential balanced portfolio returned -8.2% (February 2020: -3.7%). Top performer is Stanlib Balanced Fund with -4.3%, while Momentum Namibia Growth Balance Fund with -11.2% takes the bottom spot. For the 3-month period, Stanlib Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 4.7%. On the other end of the scale Momentum Namibia Growth Fund underperformed the ‘average’ by 4.9%.

The Monthly Review of Portfolio Performance to 31 March 2020 provides a full review of portfolio performances and other interesting analyses..

It's not a good time to invest while the volcano is still active!

At this stage, the huge uncertainties and the unknown consequences linked to the prevailing lockdown, markets will remain jittery and volatile. A significant part of the economy will disappear over the lockdown with many companies closing down. Governments will focus on rebuilding their economies. They will make every effort to convince their citizens to travel within their countries and to spend their discretionary moneys within, rather than outside. Tourism for one will not anytime soon return to what it has been before the lockdown. A large number of people will be poorer so their spending capacity will have declined and they will spend less on travelling, hospitality entertainment and other discretionary expenses. Some industries will change their face for an extended period, others forever.

We now have to live with the economic and financial consequences of the COVID 19 measures taken across the world. The global economy was already in the doldrums even before COVID 19, and it’s now in much worse shape. The problem is that we cannot really reliably say how things are going to evolve after we are all out of this disaster nor how long it will take until global economies and global financial markets have found their bottom and will turn around. It is also pretty certain that some industries will be negatively impacted and others will be positively impacted

Read part 6 of the Monthly Review of Portfolio Performance to 31 March 2020 to find out what our investment views are.  

In February 2020 the average prudential balanced portfolio returned -3.7% (January 2020: 1.1%). Top performer is Investment Solutions Balanced Fund with -2.1%, while Hangala Prescient Balance Fund with -5.4% takes the bottom spot. For the 3-month period, Allan Gray Balanced Fund takes the top spot, outperforming the ‘average’ by roughly 2.0%. On the other end of the scale Momentum Namibia Growth Fund underperformed the ‘average’ by 2.8%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 29 February 2020 provides a full review of portfolio performances and other interesting analyses..

Will there be life after Corona?

By now we are all acutely aware of the sharp decline in global financial markets. The JSE Allshare Index declined by 33% from 57,084 at the end of December to 38,267 at the time of writing the column. Earnings of the index were 6.34% at the end of December while the dividend yield was 3.9%. If the underlying companies were able to maintain earnings at that level, earning should currently amount to 9.5% and dividend yield should amount to 5.8%. To put this into a more common context, if you let your house of N$ 2 million generating a return of 6.34% or a rent of N$ 10,600 per month. If you were to continue earning the same rent but your property agent tells you that the value of your house has dropped to N$ 1,3 million, why should you be concerned about this drop in value. Supply and demand should result in the market adjusting upward again in time to come.

Now let’s look at an investor who invests offshore. The S&P 500 index declined by 29% from 3,217 at the end of December to 2,284 at the time of writing. However, the Rand: US$ exchange rate at the same time weakened from 13.98 to 17.7. The value of the index at the end of December for a local investor would have amounted to N$ 44,974 while it now amounts to N$ 42,196, representing a decline in value of ‘only’ 6%. Something one can live with, I suppose. This once again shows the value of diversifying one’s investment across the globe. As readers will know, pension funds typically have invested around 30% offshore as the result of which one can expect the decline in value of pension fund investments to be ‘only’ in the region of 25% to the end of March.

Read part 6 of the Monthly Review of Portfolio Performance to 31 January 2020 to find out what our investment views are.  

In January 2020 the average prudential balanced portfolio returned 1.1% (December 2019: 1.0%). Top performer is Investec Namibia Managed Fund with 2.0%, while Momentum Namibia Growth Fund with -0.3% takes the bottom spot. For the 3-month period, Namibia Coronation takes the top spot, outperforming the ‘average’ by roughly 1.3%. On the other end of the scale Momentum Namibia Growth Fund underperformed the ‘average’ by 2.3%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 December 2019 provides a full review of portfolio performances and other interesting analyses.

Does the global economy show any signs of recovery?

Since the performance of the global economy is the underpin of the performance of global equities, our hopes for an improvement of our retirement outlook is pinned to an improvement in the global economy. We have all been incensed by the negative impact of president Trump’s trade war with China in 2018, primarily on equities. Some glimmer of hope of the dispute being resolved reared its head in 2019 and lead to a pleasing recovery in global equities. In 2018, our average prudential balanced portfolio returned a mere 0.5% against the backdrop of an inflation rate of 5.1% - thus a negative real return of 4.6% for the year! In 2019 fortunes turned much to every pension member’s satisfaction. For the year 2019, our average prudential balanced portfolio returned 9.9% against the backdrop of an inflation rate of now only 2.1% - thus a positive real return 7.8% for the year! Many a fund member may not appreciate the fact that funds returned ‘only’ a single digit return having been spoilt in the 20 years or so up to the financial crisis in 2008. However, considering that the expected long-term real return on a typical prudential balanced investment portfolio is around 6%, the real return on our average prudential balanced fund for 2019 actually exceeded the expected long-term real return by around 2% - nothing to be dissatisfied with at all! This has been quite an unexpected turn of fortunes for pension funds.

I acknowledge that I did not expect this and I venture to say that very few people if anyone, expected this turn of fortunes. Certainly, going by the exposure of our prudential balanced portfolio to equities, a slight decrease of total equity exposure from 67% in September 2018 to 66% in September 2019 does not exactly reflect a mass piling into equities by the managers of these portfolios. Not a single manager increased its total equity allocation by more than 1%. Digressing briefly into the no-risk cash vs ‘high risk’ equity debate, the adamant cash proponent’s investment would have underperformed the average equity proponent’s investment by 2.2% for 2019, ranging between as little as no difference to the worst performing portfolio and as much as 5% difference to the best performing portfolio, at the expense of the cash proponent.

Will we see another great year for equities in 2020? Well in the previous two columns of this journal I concluded that it is unlikely. This month I take another perspective to try and form an opinion on this question. Oil is a bell-weather commodity for the global economy, so understanding which direction oil consumption is going in 2020 will give a fair indication for the direction the global economy is likely to take.

Read part 6 of the Monthly Review of Portfolio Performance to 31 January 2020 to find out what our investment views are.

In December 2019 the average prudential balanced portfolio returned 1.0% (November 2019: -0.7%). Top performer is Nam Coronation Balanced Plus with 1.6%, while Investment Solutions with 0.2% takes the bottom spot. For the 3-month period, Namibia Coronation again takes the top spot, outperforming the ‘average’ by roughly 1.3%. On the other end of the scale Investment Solutions Fund underperformed the ‘average’ by 1.1%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 December 2019 provides a full review of portfolio performances and other interesting analyses.

How to invest in 2020

Based on our above analysis, we see no increase in interest rates for 2020 in the US or in SA, everything being equal, perhaps still another reduction. We believe there is also not much scope for further reductions in the SA repo rate except if SA inflation dropped relative to US inflation or if the US reduced the Fed rate further. The Rand is currently noticeably undervalued. This is probably due to the poor shape of the SA economy which of course is unlikely to improve much over the medium term, particularly in the absence of another commodity run. That also does not seem to be on the horizon. We rather see a slow improvement on the back of a slow improvement in global economies and the settling of the US: China trade dispute. The Rand is thus likely to remain under valued in the medium term. We certainly do not see a rapid correction. Company earnings being as high as they are both in SA and much more so in the US, there is little support of equities deriving from improving company earnings but to some extent by declining interest rates.

Equities are unlikely to deliver the two-digit returns we have seen in the past in 2020 but are expected to out-perform cash returns slightly, i.e. in the region of 7% to 10%. Since we do not expect interest rates to decline much further, and certainly not to increase, bonds should deliver a return of around 10%, i.e. above that of equities and cash. Property is likely to remain in the doldrums for next year. Our expectations of the returns on the various asset classes for 2020 would suggest a conservative portfolio with a fair spread across global investment markets.

In November 2019 the average prudential balanced portfolio returned -0.7% (October 2019: 1.6%). Top performer is Old Mutual Pinnacle Profile Growth with 0.0%, while Investment Solutions with -1.0% takes the bottom spot. For the 3-month period, Namibia Asset Managers takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 1.4%. Note that these returns are before (gross of) asset management fees.

What do we expect of investment markets in 2020?

Based on our above analysis, we do not foresee a return to a normal interest rate environment in 2020 but rather expect real interest rates to decline further some into more negative territory. Global consumer and investor sentiment should stand a fair chance of improving rather than declining further. We believe locally consumer and investor sentiment is probably as low as it can get with a fair chance of also improving in 2020, just thinking of the early rains we thankfully experienced in parts of the region and a faint hope that the new Escom management may be able to make some progress. We would thus expect global equity markets to show some real growth in 2020. We expect the trend in interest rates to continue downward which in turn will impact positively on the performance of bonds. Bonds should also be able to produce a real return in 2020. Money market rates are consequently likely to decline globally. As the result, the typical prudential balanced portfolio should outperform the money market portfolio and we would expect it to achieve its long-term objective of inflation plus 5%.

In October 2019 the average prudential balanced portfolio returned 1.6% (September 2019: 1.3%). Top performer is Momentum Namibia Growth Fund with 2.2%, while Investec with 1.2% takes the bottom spot. For the 3-month period, Allan Gray Namibia Balanced Fund takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 1.2%. Note that these returns are before (gross of) asset management fees.

The Monthly Review of Portfolio Performance to 31 October 2019 provides a full review of portfolio performances and other interesting analyses.

Evaluating your investment managers and your investment portfolio

When evaluating investment managers, the text books will tell you that you should consider the 6 P’s:-

• the people responsible for managing the portfolio;
• the philosophy applied in managing the portfolio;
• the process followed in managing the portfolio;
• the characteristics and composition of the product or products available for investment;
• the price charged for managing the portfolio; and
• the performance track record of the portfolio.

Of these, only performance is an objective measure. All the other criteria are subjective and require the person who evaluates them to apply his personal judgment in order to reach a conclusion. When one considers performance track record, every expert will tell you that you cannot place any value on this criterium as historic performance gives no reliable indication of future performance and this has been shown to be true by just about every piece of research that has ever been published on this topic, but it is the only measurable criterium. When you consider all the criteria, aren’t you also only looking at historic evidence in any event, even if it was obtained a minute ago – it is history when you look at it and there is no way you can be sure that what you have seen today will be the same you will see tomorrow, as long as you consider anything that involves people.

The Monthly Review of Portfolio Performance to 30 September 2019 provides a full review of portfolio performances and other interesting analyses.

Should you be concerned about recent poor performance of your pension fund?

As a pension fund member you will no doubt be disappointed with the investment returns your (probably) biggest investment has earned over the last number of years. This investment is to carry you through retirement and in order to ensure a comfortable retirement. This assumes a typical total contribution by you and your employer of around 17% of salary and on the underlying expectation of long-term returns that your pension fund investment should earn of 5% per year in real terms, i.e. above inflation. Where inflation for the year to 30 September was 3.2%, your investment should thus have earned 8.2% for the year to 30 September. The average return of typical pension fund investments for the same period however, was only around 3.4% (after fees). Over a 5 year period inflation was 4.7% per year. Your investment should have thus earned 9.7% per year while the average return of typical pension fund investments for the same period however, was only around 6.8% per year (after fees). So over both periods, your investment has substantially underperformed the underlying expectation. One will have to extend the period to 8 years to get to the first measurement period where the average return of about 9.8% per year (after fees) actually achieved the expected real return of 9.9% per year (inflation of 4.9% plus 5% real return).

Any member of a fund who has been in the fund for 7 years or less certainly has good reason to be disappointed and to be concerned.

Read part 6 of the Monthly Review of Portfolio Performance to 30 September 2019 to find out what our investment views are.

In August 2019 the average prudential balanced portfolio returned 0.2% (July 2019: -0.7%). Top performer is Allan Gray Balanced Fund with 1.4%, while Momentum Namibia Growth Fund with -1.0% takes the bottom spot. For the 3-month period, Investec Namibia Managed Fund takes top spot, outperforming the ‘average’ by roughly 1.6%. On the other end of the scale Momentum Namibia Growth Fund underperformed the ‘average’ by 2.5%. Note that these returns are before (gross of) asset management fees.

How do you invest in times of political and economic unrest?

Since governments across the globe are net debtors, they all have to pay interest and they all have to repay their debt. The best friends of governments are economic growth and inflation. Economic growth raises tax collections while inflation reduces the real value of debt and both thus ease the burden of governments to service their debt.

In the aftermath of the financial crisis, followed by a deep slump in global consumer confidence and global economies, reserve banks across the globe, including Namibia, thought it wise to boost consumer confidence and consumer spending through massive monetary easing and an ultra-low interest rate environment, thereby creating massive liquidity in global financial markets. Unfortunately these measures never achieved the desired results and where we are today global economies, including those of China, the Eurozone and Namibia are in reverse gear. Consumer confidence has not really improved and the consumer has not really started to consume. Much of the global liquidity flowed into China. The result of that was a massive build-up of Chinese foreign reserves, and massive investment in economically unviable projects and infrastructure such as futuristic ghost cities centrally planned by the communist government.

Read part 6 of the Monthly Review of Portfolio Performance to 31 August 2019 to find out what our investment views are.

In July 2019 the average prudential balanced portfolio returned -0.7% (June 2019: 1.7%). Top performer is Allan Gray Balanced Fund with 0.1%, while Momentum Namibia Growth Fund with -1.6% takes the bottom spot. For the 3-month period, Investment Solutions Balanced Fund takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 1.8%. Note that these returns are before asset management fee.

When is a good time to switch to another investment manager?

Retirement fund members who have become used to Allan Gray ‘shooting the lights out’ often can no longer bear with its performance lingering right at the bottom or close to the bottom of the performance ranking tables of prudential balanced managers, for periods up to 5 years as depicted in graphs 1.2 to 1.7 in our review. For the month of July Allan Gray managed to rise to the top, given that it is a very short period and bears no relevance.

As the result, clients more and more often contemplate or even decide to move their investments away from Allan Gray to another manager. The questions are - is it a good time to move away from Allan Gray and when is a good time to move away from your trusted manager?

I guess when we talk about buying or selling a house, there will be little argument about not selling when the market is at the bottom and not buying when the market is at the top. This is a sensible principle that one should apply to one’s investments and investment manager as well. The difficulty however is to know when any asset has reached the bottom or the top.

Read part 6 of the Monthly Review of Portfolio Performance to 31 July 2019 to find out what our investment views are.

In June 2019 the average prudential balanced portfolio returned 1.7% (May 2019: -2.8%). Top performer is Hangala Prescient Balanced Fund with 2.8%, while Allan Gray Balanced Fund with 0.4% takes the bottom spot. For the 3-month period, Hangala Prescient Balanced Fund takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 3.3%. Note that these returns are before asset management fees.

Avoid permanent loss but be prepared to give up value

If you own something you do not use, chances are you will lose – “use it or lose it” is a rugby rule. It applies to all spheres of life. What you use, no one will be able to take from you, if we equate ‘using’ to ‘consuming.

This wisdom also applies to your investments. Your capital is something you do not use and chances are you will lose. This is not to say that you will always lose, but there will be times when you will lose. The best thing you can do is to be prepared for losing at times.

One also needs to distinguish between different types of losses namely, a temporary loss and a permanent loss. A permanent loss is something you cannot recover as opposed to a temporary loss.

Since we are dealing with pension fund and personal investments, in terms of market conditions we find ourselves in a situation where we feel we have been on a losing streak for quite some time.

Read part 6 of the Monthly Review of Portfolio Performance to 30 June 2019 to find out what our investment views are.

In May 2019 the average prudential balanced portfolio returned -2.8% (April 2019: 2.7%). Top performer is Investment Solutions Balanced Fund -1.3%, while Allan Gray Balanced Fund -4.0% takes the bottom spot. For the 3-month period, Stanlib takes top spot, outperforming the ‘average’ by roughly 1.1%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 1.0%. Note that these returns are before asset management fees.

Have investment markets normalised?

It is pretty much common knowledge that the situation we are and have been facing in investment markets globally for the past nearly 10 years, is the result of ‘ultra-loose’ monetary policy by central banks across the world, including Namibia. After the financial crisis, central banks poured money into the financial markets in order to encourage the consumer to pick up spending levels again after these had fallen flat in the aftermath of the financial crisis. Artificially low interest rates, designed to encourage spending, were great for the borrower, but bad news for the depositor, pensioners to a significant extent. In many instances depositors would earn negative real interest rates. To avoid this they would have been looking around for any asset class that offered any real returns. This is what we have seen, where all assets other than fixed interest investments experienced significant inflows resulting in their artificial and unsustainable growth.

This was certainly the case until the US Fed thought that it had achieved its objective of re-igniting economic growth. It started to raise the Fed rate for the first time in December 2015 when it looked like inflation was ticking up. At that point inflation has just turned positive and grew to 2.95% by April 2018, only to start turning down again since then to currently only 1.7%. The Fed rate was increased to 2.5% in December 2018 to stagnate since then and recent talk being for it to be lowered again.

The US Fed rate currently represents a real return of only 0.8%. Going by its long-term average the real rate should be around 1.7% in a normal interest rate environment.

Read part 6 of the Monthly Review of Portfolio Performance to 31 May 2019 to find out what our investment views are.

In March 2019 the average prudential balanced portfolio returned 1.4% (February 2019: 2.8%). Top performer is Allan Gray Balanced Fund (2.4%); while Investec Namibia Management Fund (0.7%) takes the bottom spot. For the 3-month period, Nam Coronation Balanced Plus Fund takes top spot, outperforming the ‘average’ by roughly 1.9%. On the other end of the scale Momentum Namibia Growth Fund underperformed the ‘average’ by 1.8%. Note that these returns are before asset management fees.

What history tells us about the current state of the JSE

Running for cash at this point in time is most probably too late having endured the pain of low returns on equities relative to cash over the past 5 years, give or take another few months. The difficulty of moving between asset classes is the correct timing. The chance of one’s timing being spot-on, is 50: 50 at the very best, but probably substantially lower than that. Moving between asset classes for the sake of improving long-term investment returns obviously requires moving out of equities into cash and back again. On the basis of probability the chance of moving out of equities at the right time is small and moving back into equities at the right time is small once again. The aggregate probability of a correct timing of these two moves is much smaller as one multiplies the two probabilities of a fraction of 1 with each other.

Those investors who moved out of equities some time ago because of their poor performance must move back into equities sooner or later. Unfortunately one will not know up front whether it should be sooner like immediately, or only in a few months. This is the risk the investor has to take after having moved out of equities.

In February 2019 the average prudential balanced portfolio returned 2.8% (January 2019: 1.2%). Top performer is Investec Namibia Managed Fund (4.4%); while Hangala Prescient Absolute Balance Fund (1.4%) takes the bottom spot. For the 3-month period, Investec Namibia Managed Fund takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Metropolitan Namibia Managed Fund underperformed the ‘average’ by 1.6%. Note that these returns are before asset management fees.

Can we allow pension fund returns being diluted even more?

To the end of February 2019 the average prudential balanced portfolio’s return of 8.2% represents a slightly improved outperformance of inflation of 5.1% and of the money market return of 7.6% over a 5 year period but still falling far short of both the money market portfolio and its long-term performance objective over any shorter periods. It only managed to achieve its long-term objective of inflation plus 5.5% over 10 years and longer.

Our concern is not so much that equities may not meet their long-term return expectations going forward.  Our concern is much more that pension fund investment returns are diluted ever more by what we have been referring to as a serious onslaught on the pensions industry that seems to be considered a duck that lays the golden egg. Consider the ever increasing cost as a result of increasing regulatory and governance requirements. Consider fiscal and monetary objectives of healing all sorts of ailments government and our national economy are experiencing where pension fund assets are forced into unlisted investments and where the local investment allocation will soon reach 45%, higher caps having been mooted already.

In our commentary in the September column of this investment brief, we speculated that the investment regulations will result in pension funds’ equity allocation effectively being capped at 60% as opposed to an implicit allocation of 75% that the current typical pension fund model presupposes. This will dilute expected long-term pension fund returns down from 6.3% to 4.6% before fees. After fees we will thus be looking at a net return of below 4% per annum whereas the pension model requires 5.5%.

We believe that this is a very unfortunate development pension fund members are facing without them being able to do much about it...

In January 2019 the average prudential balanced portfolio returned 1.2% (December 2018: 0.74%). Top performer is Namibia Asset Management Fund (2.7%); while Allan Gray Balanced Fund (-0.49%) takes the bottom spot. For the 3-month period, Hangala Prescient Absolute Balance Fund takes top spot, outperforming the ‘average’ by roughly 2.78%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 3.25%. Note that these returns are before asset management fees.

Read part 6 of the Monthly Review of Portfolio Performance to 31 January 2019 to find out what our investment views are.

The world of investment and retirement is not what it used to be!

Politicians, particularly those of the western world, would want to make us believe we live in an open global economy. However, where international trade is concluded in a single currency, where fiscal and monetary authorities intervene massively in financial markets, more will have to be done by the politicians to make the public believe.

The law of demand and supply, has no bearing on the behaviour of markets today. Savers are paying off the debt of borrowers through artificially low interest rates that are set by monetary authorities. So-called ‘safe haven’ investments are earning negative real interest rates and the investor is now conditioned to accepting that he will have to work until he drops dead, instead of realising his dream of retiring at an age where one might still be able to enjoy life for a while. Retirement ages are extended while pension entitlements are at best being questioned and already reduced in some countries.

With negative real interest rates seemingly having become the ‘new norm’, asset valuation models are now being questioned. Why should this be of concern to a pension fund member? Well the point is that pension fund contribution structures were established over the course of the past century or more based on the assumption of cash returning around 2% above inflation, bonds around 4% above inflation, property around 5% above inflation and equity around 8% above inflation. A typical balanced portfolio comprising of a mix of these assets based on conventional investment theory was expected to return roughly 5% above inflation, net of fees. Pension theory then arrived at a net retirement funding contribution rate of 11%+, to produce an income replacement ratio of 2% per year of membership.

Indications based on the ‘new norm’ are that one is now only looking at a net return of between 2% and 3% p.a.

In December 2018 the average prudential balanced portfolio returned 0.74% (November 2018: -1.73%). Top performer is Momentum (2.33%); while Namibia Asset Management (-0.56%) takes the bottom spot. For the 3-month period, Momentum takes top spot, outperforming the ‘average’ by roughly 1.74%. On the other end of the scale Namibia Asset Management underperformed the ‘average’ by 2.50%.

Can you currently invest anywhere but in cash?

In this month’s commentary we continue the discussion on the US repo rate and its implications for global financial markets and therefore on investment decisions. What is the risk of investing anywhere other than cash now and in which asset class can you otherwise invest? We have in last month’s commentary shown how closely correlated the SA interest rates and the JSE is to its US equivalents. Fiscal policy is driven primarily by the state of the economy which drives inflation and the tools used to drive policy are interest rates and the supply of money to the market. If the economy overheats inflation rises and this will result in the lifting of the Fedrate (or repo rate in SA). If the economy is moving into recession, the Fed will attempt to stimulate it by dropping its policy rate. Inflation will follow the decline in the economy.

When the global financial crisis struck at the end of 2007, the US economy turned into recession. The Federal Reserve responded by lowering its policy rate from 5.25% in July 2007 to 0.25% in December 2008, and by flooding the market with money, in order to support the economy. GDP did recover rapidly out of negative territory up until the middle of 2009 to peak at just below 6% in quarter 2 of 2014. Since then it has declined steeply to steady at around 2% barring a blip taking it to just over 4% in the middle of 2018, probably the result of changes to US tax laws (refer graph 1).

Read part 6 of the Monthly Review of Portfolio Performance to 31 December 2018 to find out what our investment views are.

It’s the dog that wags the tail - how the US economy impacts SA (and Namibia)

For those readers who may have overlooked our monthly investment commentary in last month’s Performance Review as at 30 November 2018, we present this here once again.

The US Repo rate is currently 2.25%.While the US annual CPI has steadily been creeping up from around 0% in January 2015 to 2.95% at the end of July, it has been on the decline again since then, contrary to the Fed’s expectation, to reach 2.18% at the end of November. This means that any US citizen investing in US treasuries is now for the first time since November 2015, earning a positive real interest rate. If this trend continues, the appetite of US investors for equities is likely to wane, removing the underpin of equities in the US and globally.

The declining inflation in the US is probably also at least part of the reason why the Fed has no raised the repo rate at its last sitting, contrary to a general expectation that it would. The US needs inflation to deflate its huge debt burden and expected quantitative easing to do this job. It seems though that this strategy has not worked and the risk of deflation is on the rise. This may present major structural challenges and may result in us treading a very uncertain path and in increased market volatility.  

A negative real interest rate is clearly not sustainable and is the cause of artificial imbalances in asset valuations that are due to correct once the situation returns to normal as we are starting to see now. The US repo rate should be around 1.5% higher than US CPI, going by historic evidence stretching back to 1988 and up to the onset of the global financial crisis.

Based on current US CPI of 2.2%, the US repo rate should be around 4%. Once the repo rate offers a real return of 1.5% or reaches 4% under current inflationary conditions, it would indicate a normalised interest rate environment. At the more recent rate of upward adjustment of the US repo rate and the state of the global economy we are once again looking at around 3 to 4 years now until we reach this point given that we saw 6 increases of 0.25% each over the past 4 years. This of course assumes that the global economy will pick up at the speed it has over the past 4 years, whereas at the moment it could go in either direction. So where will this leave SA?

Graph 1

Graph 1 above shows how closely correlated the SA and the US repo rates have been over the past 30 years plus, the SA repo (measured on the left vertical axis) generally lagging the movement of the US repo (measured on the right vertical axis). With an expectation that the Fed is unlikely to raise its repo rate given the current state of affairs, the SA Reserve Bank is unlikely to lift its repo further any time soon unless forced to do so because of a declining positive differential between US and SA real repo rates.

Graph 2

Since one would expect the interest rate to impact the exchange rate an interesting question is whether this is indeed the case. Graph 2 above measures the differential between the US and the SA real repo rate, i.e. the nominal repo rate minus annual inflation (the red line measured on the left vertical axis) and the Rand: US Dollar exchange rate (the blue line measured on the right vertical axis). Tracking the red line against the blue line, one will note a fairly distinct decline in the real repo rate differential (i.e. SA offers a higher real repo rate than the US) up until around 1994, coincidentally the time of the democratization of SA, despite a growing gap in real repo rates in favour of SA. There is hardly any correlation between these two lines over this initial period. Over this period the Rand weakened steadily against the US Dollar. From the beginning of 1999 up until about 2012 a relatively higher real repo rate in the US is accompanied by a weakening of the Rand and vise-versa, and we see much closer correlation between the red line and the blue line. Since 2012 the real repo differential hovered between minus 4% and 0% in favour of SA while the Rand continued to weaken significantly against the US Dollar from about 9 to its current level of around 14. It would be interesting to overlay political events in SA onto this graph such as the election of president Zuma and the end of his term. This graph does indicate that the Rand is currently excessively weak relative to the real repo rate differential between the US and SA, possibly for political reasons. This is also borne out by graph 5.1 in paragraph 5 above. Looking at the last few months, the real repo rate differential is closing in favour of the US and we simultaneously see a weakening of the Rand. This indicates that SA will be under pressure to raise its repo rate if the US inflation continues to drop or if the US lifts its repo rate.

Graph 3

As illustrated in graph 3 above, both the S&P 500 and the ALSI have grown strongly in real terms since the beginning of 1987. While the current S&P 500 price: earnings ratio at 18.9 is well below its 30 year average of 22.3, the current ALSI price: earnings ratio of 14.9 is now on its 30 year average of 14.7.

Graph 4

However looking at graph 4 above, the S&P 500 CPI adjusted earnings (measured on the left vertical axis) of currently 145 are twice its 30 year average of 71. The ALSI CPI adjusted earnings (measured on the right vertical axis) of currently 3,411 are 40% higher than is 30 year average of 2,400. This also indicates a risk of earnings declining to more normal levels and a consequent risk of equity markets adjusting downward.

With these expectations, the Rand and local interest rates will remain under pressure for the next 2 to 3 years and this will also impact negatively on local inflation. Equity markets are exposed to the risk of a downward adjustment. Low returns on equities and rising interest rates will also impact negatively on the consumer. On the flipside, a weak Rand should promote exports and support Rand hedge shares that benefit from the weak Rand and should promote local manufacturing and exports which should eventually create jobs and lead to improved consumer sentiment.

In November 2018 the average prudential balanced portfolio returned -1.73% (October 2018: -2.53%). Top performer is Hangala Prescient Absolute Balanced (-0.24%); while Allan Gray (-3.94%) takes the bottom spot. For the 3-month period, Investment Solutions takes top spot, outperforming the ‘average’ by roughly 1.94%. On the other end of the scale Nam Asset underperformed the ‘average’ by 2.15%.

It’s the dog that wags the tail - how the US economy impacts SA (and Namibia)

The US Repo rate is currently 2.25%.While the US annual CPI has steadily been creeping up from around 0% in January 2015 to 2.95% at the end of July, it has been on the decline again since then, contrary to the Fed’s expectation, to reach 2.18% at the end of November. This means that any US citizen investing in US treasuries is now for the first time since November 2015, earning a positive real interest rate. If this trend continues, the appetite of US investors for equities is likely to wane, removing the underpin of equities in the US and globally. The declining inflation in the US is probably also at least part of the reason why the Fed has no raised the repo rate at its last sitting, contrary to a general expectation that it would. The US needs inflation to deflate its huge debt burden and expected quantitative easing to do this job. It seems though that this strategy has not worked and the risk of deflation is on the rise. This may present major structural challenges and may result in us treading a very uncertain path and in increased market volatility.   
 
A negative real interest rate is clearly not sustainable and is the cause of artificial imbalances in asset valuations that are due to correct once the situation returns to normal as we are starting to see now. The US repo rate should be around 1.5% higher than US CPI, going by historic evidence stretching back to 1988 and up to the onset of the global financial crisis. Based on current US CPI of 2.2%, the US repo rate should be around 4%. Once the repo rate offers a real return of 1.5% or reaches 4% under current inflationary conditions, it would indicate a normalised interest rate environment. At the more recent rate of upward adjustment of the US repo rate and the state of the global economy we are once again looking at around 3 to 4 years now until we reach this point given that we saw 6 increases of 0.25% each over the past 4 years. This of course assumes that the global economy will pick up at the speed it has over the past 4 years, whereas at the moment it could go in either direction. So where will this leave SA?
 
Read part 6 of the Monthly Review of Portfolio Performance to 30 November 2018 to find out what our investment views are.

In October 2018 the average prudential balanced portfolio returned -2.53% (September 2018: -2.00%). Top performer is Investment Solutions (-1.66%); while Prudential (-3.51%) takes the bottom spot. For the 3-month period, Investment Solutions takes top spot, outperforming the ‘average’ by roughly 1.67%. On the other end of the scale Nam Asset underperformed the ‘average’ by 2.09%.

The mainstay of pension investments is failing its duty!

Equities are the mainstay of pension fund investments and comprise the bulk of the investments of the typical prudential balanced portfolios. Equities are expected to return around 6% before asset manager fees. However, when we consider graphs 1.1 to 1.10 in the Monthly Review of Portfolio Performance to the end of October 2018, covering various periods from 20 years to the latest month, it appears that other than the  15 and the 20 year periods, equities have not been able to achieve their expected real return. Adding dividends of around 3% to the returns reflected in these graphs, equities will also have achieved their goal over the 10 year period, the point at which equities had 10 years ago just recovered the losses sustained as the result of the global financial crisis. For all other periods, equities have fallen severely short of their return expectation. Fortunately the prudential balanced portfolio managers move pension fund investments between asset classes by buying in market troughs and selling when markets peak. Looking at the same graphs again it will be noted that the average prudential balanced portfolio has in most instances returned more than inflation plus dividends of around 3% p.a. Still the average prudential balanced portfolio did not return inflation plus 6% for any period up to and including the past 5 years.

It will be no secret to most that the poor performance of prudential balanced portfolios over the past 5 years is the result of the slow unwinding of the global low interest rate environment, which in turn was the result of quantitative easing through large scale asset purchasing programmes of the main central banks in the world. These programmes are being phased out now as the result of which we will see a normalization of the interest rate environment. Interest rates will go up until they represent a fair risk adjusted return relative to equities. In this adjustment phase global equities will remain under pressure.

Looking at various economic metrics it seems like global equity markets have run way ahead of themselves since the global financial crisis and that there is certainly lots of room for adjustment.

In September 2018 the average prudential balanced portfolio returned -2.00% (August 2018: 3.75%). Top performer is Investec (-1.45%), while Nam Asset (-2.97%) takes the bottom spot. For the 3-month period, Investment Solutions takes top spot, outperforming the ‘average’ by roughly 1.15%. On the other end of the scale Momentum underperformed the ‘average’ by 1.40%.

Investment regulations reduce your prospective pension by 27%

Namibian pension funds seem to have a serious problem and are unlikely to meet the implicit expectations of the retirement benefit one should expect them to provide. Typically pension funds are expected to produce an income replacement ratio of 2% per year of service. After having worked for 40 years, the expectation is that the fund member would receive a pension before commuting any portion of the retirement capital of 80% of the salary he earned just prior to retirement.

To achieve this implicit salary replacement ratio, pension fund assets should return roughly 6% above inflation, before asset manager fees. To achieve this return, it is assumed that funds would in practice invest around 75% in equity. The balance of the funds’ investments would be invested in other conventional asset classes (property, bonds and cash) in varying proportions depending on investment market conditions.

We know that investment regulations place certain constraints on asset managers and this may impact investment returns. Namibian funds are for example required to have invested in Namibia at least 45% of their assets by 31 March 2019, with a maximum of 10% that may be invested in dual listed shares. In practice this means that managers will invest around 48% plus in Namibia just to make sure that they do not expose their fund clients to any risk of penalties for being below 45%. Similarly, investment managers would in practice not invest more than 70% in equities in total to avoid any penalty for exceeding this cap. History corroborates this modus operandi of asset managers, who had on average invested 41% in Namibia at a time when the minimum was still set at 35%, given that an increase to 40% was anticipated already. The constraints placed on asset managers may produce lower returns on the various typical asset classes investment managers invest in, as they cannot freely invest in the highest yielding assets that may globally be available.

Assuming Namibian investment managers were to maintain maximum equity exposure of 72% as the highest yielding asset class, so as not to fall foul of the 75% cap too easily and assuming the asset classes would generate the returns they did from 1900 to 2016 (source – Prudential Investment Managers), table 1 shows that the managers should be able to generate a return of 6.3% before asset manager fees, typically around 0.8% or 5.5% after asset manager fees thus meeting the implicit return expectation of the traditional pension fund model.

Table 1

If we now use the above table but bring in the minimum Namibian exposure of 47.6%, so as to not fall foul of the 45% minimum Namibian allocation, apply the average asset allocation of Namibian asset managers to Namibian equities and allocate the balance in accordance with the spread across all other regions and asset classes that the average manager currently applies, this will reduce investment returns by 21%...

In August 2018 the average prudential balanced portfolio returned 3.75% (July 2018: 0.15%). Top performer is Investec (4.86%); while Hangala Prescient (2.31%) takes the bottom spot. For the 3-month period, Investec takes top spot, outperforming the ‘average’ by roughly 0.94%. On the other end of the scale Hangala Prescient underperformed the ‘average’ by 2.07%.

Prudential balanced or smooth growth portfolio – what should you expect the difference to be?

Smooth growth portfolios are notorious for the lack of transparency. For the employer or individual investor it is really difficult to ‘get a feel’ for the characteristics of these portfolios vis-à-vis financial markets. Most of us have ‘a feel’ for and follow financial markets to the extent that one would know whether financial markets are flying, diving or limping along. An investor would understand his portfolio doing badly when markets have tanked. An investor would start getting disorientated and concerned when his portfolio is doing poorly despite flying markets.

Some investors at times believe there are investment products around that defy the ‘laws of gravity’. Typically the smooth growth portfolios sometimes portray themselves and are seen as being such type of product. Of course thinking rationally about it, no one would really believe anything on earth can defy the laws of gravity. What goes up will come down again! The fundamental principle of every pension fund investment portfolio is that it invests in mostly conventional and publicly priced asset classes, i.e. equity, property, bonds and cash. The parameters are defined in sections 12 and 13 of part 7 of the schedule of regulations, recently promulgated under the Pension Funds Act (previously referred to as regulation 28).

In June 2018 the average prudential balanced portfolio returned 2.45% (May 2018: -1.61%). Top performer is Allan Gray (3.92%); while EMH Prescient (1.13%) takes the bottom spot. For the 3 month period, Allan Gray takes top spot, outperforming the ‘average’ by roughly 1.92%. On the other end of the scale Investment Solutions underperformed the ‘average’ by 1.09%.

A more conservative portfolio for now should let you sleep more peacefully

The relevance of a normalised interest rate environment is that returns of all other asset classes should start normalizing in other words, returning to inflation beating returns of all asset classes but perhaps cash, up to inflation plus 6% to 8% on equities. Until we reach normality we will see lots of volatility particularly in the more volatile asset classes and we will see similar returns on the various asset classes. This is also what we showed in last month’s column where we looked at the period 1 July 2014 to 31 May 2018. In such scenario, a more conservative portfolio structure should offer more peace of mind as it will avoid the painful draw-downs of the more aggressive portfolios.

This is exactly what the trustees of the Benchmark Retirement Fund did with its Default Portfolio when they decided to pair the Prudential Inflation Plus portfolio with the Sanlam Inflation Linked portfolio on a 50: 50 basis to 50% of the portfolio in October last year. This appears to have worked out quite well for the portfolio since October 2017, given that it is a very short period. Over this 9 month period the Default Portfolio returned 6.2% compared to the return of the average manager’s 5.3%. Graphs 1.1 to 1.6 above cover this period and mirror the positive outcome of the reduction of risk affected in the Default Portfolio.

The US Repo rate is currently 2%, while US CPI was 2.9% at the end of June. This relationship should be the inverse of what it is meaning that based on current CPI, a US Repo rate of around 4% would indicate a normalised interest rate environment.

In July 2018 the average prudential balanced portfolio returned 0.15% (May 2018: 2.45%). Top performer is EMH Prescient (0.88%); while Allan Gray (-1.12%) takes the bottom spot. For the 3 month period, Stanlib takes top spot, outperforming the ‘average’ by roughly 1.15%. On the other end of the scale Namibia Asset Management underperformed the ‘average’ by 1.43%.

The prudential balanced portfolio – the best choice for an investment horizon of 3 years and longer

Graph 1.7

Graph 1.8

Graphs 1.7 and 1.8 above depict the 5 year and the 10 year returns of prudential balanced portfolios to the end of July 2018, as blue bars. An article by Patrick Cairns in Moneyweb of 8 August 2018, shows the SA top-performing world-wide flexible funds for these periods to the end of July 2018. The table below sets out a comparison between the SA and Namibian funds.

Interestingly, the Namibian funds have stood their own very well despite the fact that the SA universe of available funds is so much larger that the Namibian universe. The Namibian top performing fund was just slightly behind the top performing SA fund over 5 years and over 10 years. The worst performing Namibian fund outperformed the worst performing SA fund by nearly 2% per annum over the 5 year period as well as over the 10 year period. The Namibian category average also outperformed its SA equivalent over both periods. The JSE Allshare index returned a mere 1.7% above inflation over the 5 year period and 2.2% above inflation over the 10 year period. This is pedestrian performance indeed. Fortunately dividends of around 3% per annum contribute to total return on equities and raises the near zero real return to close to 5% over 5 years and just above 5% over 10 years. These returns are of course before portfolio management fees of around 0.75% on the typical pension fund portfolio. This would produce a real return after portfolio management fees of 4% over 5 year period and 4.5% over the 10 year period on the typical Namibian pension fund portfolio. In the wake of the financial crisis that slashed the SA Allshare by 33% from 27,720 in July 2008 down to 18,465, pension fund members should be quite comfortable with the investment returns they have earned.

In May 2018 the average prudential balanced portfolio returned -1.61% (April 2018: 3.4%). Top performer is Stanlib (-0.56%); while Namibia Asset Management (-2.52%) takes the bottom spot. For the 3 month period, EMH Prescient takes top spot, outperforming the ‘average’ by roughly 1.09%. On the other end of the scale Momentum underperformed the ‘average’ by 0.75%.

Will we see investment markets improving anytime soon?

Year-to-date investment returns look rather depressing! Over this 5 month period, the best low equity portfolio produced only 3.2%, the best prudential balance portfolio produced 1.5% while the average prudential balance portfolio produced minus 0.2%. This state of affairs does not come as a surprise. In July 2014, we already expressed our opinion that “…we will see negative short-term interest rates, low to negative returns on longer dated stocks and muted growth in equities that are dependent on a growing economy and low interest rates. We would therefore not expect returns on equities to exceed 4% in real terms over the next 3 years…”

Well we were too optimistic about our expectation of muted returns for the next 3 years. In fact the JSE Allshare index, CPI adjusted produced minus 2.4% per annum over this nearly 4 year period. Adding back dividends of 3.2% the total return of the JSE Allshare index, CPI adjusted produced 0.8% per annum over this period – muted indeed as suggested. In contrast the average prudential balanced portfolio returned 7.7% nominal and 2.5% real per annum, outperforming the Allshare index, CPI adjusted by 1.7% per annum. The bond portfolio we are monitoring returned 7.6% per annum in nominal terms, just below the 7.7% produced by the average prudential balanced portfolio. Cash returned 7.7% in nominal terms or 2.1% in real terms. Clearly, in hindsight there was little to choose as between the different asset classes over the past 4 years.

For interest sake, the Benchmark default portfolio produced a return of 8.8% in nominal terms, or 3.6% per annum in real terms, outperforming the average portfolio by more than 1% per annum over this period.

Will we see investment market improve anytime soon?

Read part 6 of the Monthly Review of Portfolio Performance to 31 May 2018 to find out what our investment views are.

In April 2018 the average prudential balanced portfolio returned 3.4% (March 2018: -1.67%). Top performer is Namibia Coronation Balanced Plus (4.1%); while Stanlib (2.1%) takes the bottom spot. For the 3 month period, Investment Solutions takes top spot, outperforming the ‘average’ by roughly 1.23%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.49%.

Are we heading towards a global show-down?

As stated previously, I believe one should not invest without considering the global political environment that will set the scene for global economic development. Speculating on the demise of the US Dollar as global trading and reserve currency, for example, to my mind is naïve as it does not take into consideration the means America has at its disposal to protect its economic interests, the ultima ratio being its military superiority – and the end to this is certainly not in sight barring the horror scenario referred to below materializing and ending in the demise of US hegemony!

President Trump’s election slogan was ‘America First’ – and he seems to mean it. This is probably to be understood to mean that America will not tolerate any challenge to its economic and military supremacy. His election apparently was the result of massive voter manipulation, without which Hilary Clinton would have won. She was part of the political establishment that may just have been the tail having tried to wag the dog for many years and the dog being business. Donald Trump in contrast seems to now be pushing the agenda of business unashamedly, doing all to re-establish American global economic dominance…

It seems that the US now believes that it can push through considering that it has withdrawn from the Iran agreement despite all opposition from all other signatories to the agreement. It is seemingly intent to deal with Iran. Once achieved, Syria will probably be the next domino to fall, followed by the demise of the Hezbollah as political factor in Lebanon and the fall of the Erdogan ‘regime’ in Turkey (ever noticed that every government striving for true autonomy is referred to as ‘regime’ in all Western media?). It will remove Russian presence in the Middle East and it will close potential transit routes for trade with China and it will close Russian access to the Mediterranean from the Black Sea. Russia will no longer need the Crimean peninsula or its Black Sea fleet. It will offer further means to throttle Russia economically until it submits itself. I believe there are two strategies the US may consider, the first will be a horror scenario unlikely to happen whereas the second scenario is very likely to happen. Investors must be on the alert and act according to how things are evolving.

Read part 6 of the Monthly Review of Portfolio Performance to 30 April 2018 to find out what our investment views are.

In March 2018 the average prudential balanced portfolio returned minus -1.67% (February 2018: 0.79%). Top performer is Investment Solutions (-0.74%); while Prudential (-2.35%) takes the bottom spot. For the 3 month period, Investment Solutions again takes top spot, outperforming the ‘average’ by roughly 1.68%. On the other end of the scale EMH underperformed the ‘average’ by -1.70%.

Do investors care about governance when there is money to be made?

Doing business presents risks as being alive and the adage that taking greater risks will deliver greater returns will always remain true. Somewhere there is a tipping point where the risk was just too high and resulted in the demise of the venture. When is a risk a normal business risk and when does it become morally questionable – whose morals do we apply as the measure anyway? And where is the boundary between business and politics? I do not believe there is a boundary between these two. Politics is but another arrow in the quiver of business while war is the ultimate argument of politics on behalf of business. Take US politics. Without business involvement, a candidate would get nowhere. So business interests are eventually dictating to politics what its interests are. US global hegemony is absolutely essential for US business interests to achieve their goals and to dominate the global economy. We are all experiencing in our own lives how we have to dance to the tune of the US be it when you want to open a bank account, when you want to enter into a business relationship with a North Korean company, or you want to consider a request by the Chinese government to set up an earth satellite tracking station near Swakopmund or to construct a naval base in Walvis Bay. What is morally wrong with this? The problem is that should the Chinese get a foothold in Namibia they might be able to challenge the US military dominance and consequently the global dominance of US business interests.

One can only conclude that there is ultimately no such thing as moral values when it comes to human interaction. The United Nations was established through US initiative on the noble ticket of promoting peaceful coexistence of nations across the globe. Yet how many times has the US enlisted so-called coalitions of the willing to enforce its interests as dictated by business without UN mandate and did these interventions make the world any better? It’s not that the US would need Denmark or Britain or France or Australia to make its point but it is merely trying to give its brute endeavours a moral coating. The first things one hears in the media after the recent attack on Syria how the ‘west’ can now get its foot in the door with the reconstruction of Syria. The ‘west’ of course being the US first and foremost, with some spoils left to the ‘willing’.

It seems to me a bit of a farce and an exercise in futility of the weak, applying ESG principles when the ultimate argument is brutal force.

So what does this have to do with investors and their investments you may ask?

Read part 6 of the Monthly Review of Portfolio Performance to 31 March 2018 to find out what our investment views are.

In February 2018 the average prudential balanced portfolio returned minus 0.79% (January 2018: 0.57%). Top performer is Metropolitan (0.39%); while EMH (-2.58%) takes the bottom spot. For the 3 month period, Metropolitan again takes top spot, outperforming the ‘average’ by roughly 2.74%. On the other end of the scale EMH underperformed the ‘average’ by 3.14%.

Why should we be concerned about the prospects of the US equity market?

Many experts are - and have been for quite some time - deeply concerned about the severely inflated levels of the US equity market. In the March newsletter (Benchtest 03.2017) we present an article titled ‘Mother of all yield shocks is about to crush stocks’ wherein David Stockman, the so-called “Father of Reaganomics,” hasn’t been shy — or close to right — about his frantically bearish calls in recent years. This justified concern is supported by graph 1 below. The red line depicts the growth of the S&P 500 over the past 31 years, and this in US CPI adjusted terms, thus removing the impact of inflation. Clearly the S&P 500 lingers at dizzy heights of around 2,700. The green line depicts the price: earnings ratio of the S&P 500. This puts the movements in the S&P 500 index into some context. What is evident from this graph is that the growth of the index has been largely supported by growth in earnings up until 2009. While earnings have picked up since the end of the financial crisis in 2009 the divergence between the two lines is now massive meaning that investors in the S&P 500 are today prepared to pay more than twice the multiple of earnings for the index than they have in general been over the past 30 plus years. On that basis the index should rather be in the region of 1,500!

Graph 1

In January 2018 the average prudential balanced portfolio returned (0.57%) (December 2017: -1.49%). Top performer is Metropolitan (1.22%); while EMH (-0.05%) takes the bottom spot. For the 3 month period, Metropolitan again takes top spot, outperforming the ‘average’ by roughly 1.9%. On the other end of the scale Investec underperformed the ‘average’ by 1.6%.

Will the ‘sweet spot’ soon be over?

What do you do if you are not patient enough to wait for your theory to realise? Well when all the SA news media were focusing their political attention on the upcoming elections of the new president of the ANC and it became ever more evident that Cyril Ramaphosa was the clear front runner the imminent strengthening of the Rand was a ‘no-brainer’ for any observer. Investment experts would have you believe that efficient financial markets would have duly discounted this development in the price setting of the Rand, and to some extent this is what indeed happened. The Rand did strengthen from over 14 to the US Dollar to around 13.60 just before the election. But since the election it went on a rampage strengthening to around 11.60 by the time of writing this column. So much for the theory of markets properly discounting certain foreseeable events and hurtful for the impatient speculator.

In the mean-time global equity markets have taken a bit of a beating but for foreign investors the strengthening of the Rand against the US Dollar by close to 20% over the past 3 months has delivered some awesome returns of 20% for the US Dollar investor and around 13% for the European investor. No wonder foreigners are starting to pile back into SA equity but are seemingly wary of fixed interest investments in the face of a rising interest rate tide. Over the past 3 months foreign investors invested R 51 billion in the SA equity market while at the same time some R 19 billion was withdrawn from the fixed interest market. Despite this significant inflow into our equity market over the past 3 months our equity market has not managed to rise but rather the contrary occurred. Well with a market cap of around R 16 trillion, 51 billion will not really move the SA equity market.

Will this sweet spot for foreigners and of a strong Rand soon be over or will we see more of this?

In December 2017 the average prudential balanced portfolio returned (-1.49%) (November: 0.40%). Top performer is Metropolitan (-0.60%); while Investec (-2.73%) takes the bottom spot. For the 3 month period, Stanlib takes top spot, outperforming the ‘average’ by roughly 1.13%. On the other end of the scale Allan Gray underperformed the ‘average’ by 1.34%.

What will 2018 hold in store?

The US tax code revision, the backlash against unfettered globalization, Bitcoin, the prospective withdrawal of quantitative easing by the ECB, the steep increase in crude oil prices, the possible return to a gold standard and the Korean crisis currently are probably the hottest topics that may impact financial and investment markets in 2018 and beyond.

The backlash against unfettered globalization has already led to the election of Donald Trump as president of the US in 2015 true to the adage that the wheel keeps turning. When the largest global economy is moving towards more protectionism and less globalization, other smaller economies will have to move towards more protectionism as a matter of course. Whatever one may think or say about president Trump’s lack of diplomacy and finesse, he is a businessman and not a diplomat unlike his predecessor, and he is starting to make an impact on the US economy that will reverberate on the global economy, with his America first credo. In its December 2017 approval of the most extensive tax-code revisions since 1986, the US Congress scrapped the previous international tax system for corporations - an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore and many were criticized for the moves.

In November the average prudential balanced portfolio returned 0.40% (October: 1.20%). Top performer is Stanlib (1.20%); while Nam Asset (-0.20%) takes the bottom spot. For the 3 month period, Investec takes top spot, outperforming the ‘average’ by roughly 1.37%. On the other end of the scale Nam Asset underperformed the ‘average’ by 1.07%.

The key to outperformance is to think different and better!

In a special newsletter of 9 December John Mauldin paints a grim picture of public finances in the US and the state of its financial markets. He points out that unfunded pension liabilities at state and local levels quintupled over the past decade to between US$ 4 to US$ 6 trillion and that a number of cities such as Detroit, Stockton and Harrisburg have filed for bankruptcy and that there are likely more to follow. Total federal debt has ballooned by over 120% over the past decade to US$ 20 trillion, more than US GDP of US$ 18 trillion. The interest burden will soon become unaffordable and will require drastic steps that “…will have a profound effect on our lives and portfolios.” That is, in the US in the first instance, but with knock-on effects on the rest of the world.

The Benchmark trustees have taken a clue from these concerns and have reduced the risk of the Benchmark Default Portfolio from an equity exposure of close to 50% down to around 40%, as opposed to the average equity exposure of around 61% of prudential balanced portfolios. Investors who are equally concerned about global financial markets as the trustees of the Benchmark Retirement Fund, should take comfort in the Benchmark Default Portfolio under- performing the average prudential balanced portfolio when equities perform well for the sake of a strong downside protection over the next few years.

In October the average prudential balanced portfolio returned 4.1% (September: 1.35%). Top performer is Investec (4.89%); while Investment Solutions (3.42%) takes the bottom spot. For the 3 month period, Investec takes top spot, outperforming the ‘average’ by roughly 1.83%. On the other end of the scale Momentum underperformed the ‘average’ by 1.39%.

Should you take your money and run?

The outlook for pension funds in Namibia is not great, unfortunately. The industry is facing a revolution that it may not survive! Firstly, a new body of law to be called Financial Institutions and Markets Act, the ‘FIM Act’, will present a revolution of the financial services industry. Secondly the regulator is now in the process of substantially increasing its requirements for pension funds and their financial service providers in terms of reporting. Thirdly, we are facing the introduction of a National Pension Fund that is poised to seriously undermine the financial services industry in general and the pension funds industry in particular. To round it all off, we have a government in dire financial straits that is looking for every possible avenue to capture financial resources to fund its operations. Unfortunately for the consumers of financial services but fortunately for government, their savings in regulated financial services institutions in general, and in pension funds more specifically are an easy prey for government and it is thus unashamedly pouncing on this opportunity.

Revolutions as we all know will turn the inside out, the upside down. This is a revolution imposed by first world experts on a small developing country that cannot really afford this. Reminds me a bit of Mukorob, erstwhile Namibian landmark with its ‘disconnect’ between body and head.

Read part 6 of the Monthly Review of Portfolio Performance to 31 October 2017 to find out what our investment views are.

In September the average prudential balanced portfolio returned 1.35% (August: 0.85%). Top performer is Investec (2.26%); while Momentum (0.59%) takes the bottom spot. For the 3 month period, Investec takes top spot, outperforming the ‘average’ by roughly 1.30%. On the other end of the scale Momentum underperformed the ‘average’ by 1.69%.

Do markets have any room to rise further?

The price of equities is a function of earnings and the rating investors attach to the earnings stream, or in short the price: earnings ratio. So let us investigate earnings and the price: earnings ratio to get a better feel for future growth prospects of the equity markets. Since the US equity market has by far the largest market capitalization, representing 40% of global market capitalization, let’s look at the US equity market, more specifically the S&P 500 as its proxy and the SA equity market, as the one closest to home.

The graph above reveals a few facts about the US equity market. Firstly, earnings in real terms over the past 30 years have generally been moving between 500 and 1,000, on average they were around 750. Secondly the graph shows that real earnings moved sideways with some volatility until 2004 to then rise steeply from 500 at the start of that period to just over 1,000 by 2008. Thirdly it shows that earnings have reached a peak of just over 1,000 and have been moving sideways with a slight declining trend since the beginning of 2008 with a brief slump following the global financial crisis. Real earnings on 1,000 are thus currently around 25% above their 30 year average. This indicates that the US equity market is more likely to decline to its average earnings than growing further.

Read part 6 of the Monthly Review of Portfolio Performance to 30 September 2017 to find out what our investment views are.

In August the average prudential balanced portfolio returned 0.85% (July: 3.55%). Top performer is Stanlib (1.50%); while Allan Gray (0.23%) takes the bottom spot. For the 3 month period, EMH takes top spot, outperforming the ‘average’ by roughly 1.10%. On the other end of the scale Allan Gray underperformed the ‘average’ by 0.93%.

Interest rates are on the way up – tighten your belt and reduce your return expectations!

Since the US Fed has now spelled out the way forward we expect volatility in global financial markets to decline and we expect low real returns on pension portfolios over the next couple of years. We see no opportunity to leverage returns for a better outcome. What is left to us to do, is to reduce one’s return expectations, reduce one’s draw-down rate if one is already in that phase of one’s life and tighten one’s belt.

Read part 6 of the Monthly Review of Portfolio Performance to 31 August 2017 to find out what our investment views are.

In July the average prudential balanced portfolio returned 3.55% (June: 1.21%). Top performer is Nam Asset Management (4.92%); while Stanlib (2.51%) takes the bottom spot. For the 3 month period, EMH takes top spot, outperforming the ‘average’ by roughly 0.92%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.10%.

Can you afford to be invested in the money market?

In last month’s Benchtest I tried to explain how difficult it is to get the timing right for switching to either more conservative, or to more aggressive portfolios and back. Take the last two months as a point in case. In June the average prudential balanced portfolio returned minus 1.2% for the month while the JSE Allshare index returned minus 3.6%. Had you taken this as your prompt to switch to the money market portfolio, you would have sacrificed July’s return of 3.5% of the average prudential balanced portfolio and 7% of the JSE Allshare index. Cash would have given you 0.7% for July.

Switching investments because of last month’s poor or good returns is clearly not the answer. One needs to have a goal and a strategy how to get there. Much like is implicit in a business’ vision, mission and philosophy. In terms of retirement investment, pension funds actually are structured around the implicit vision that a person should be able to replace his or her income at a rate of 2% of remuneration for each year of fund membership – referred to as income replacement ratio. Empirical evidence suggests that an income replacement ratio of 2% should support a reasonable life style in retirement at a reasonable cost. This replacement ratio is critically dependant on two factors, firstly the net contribution rate towards retirement by employee and employer and the investment returns earned over the working life. The following table illustrates the interdependency of these two factors.

Read part 6 of the Monthly Review of Portfolio Performance to 31 July 2017 to find out what our investment views are.

In June the average prudential balanced portfolio returned -1.21% (May: 0.21%). Top performer is Momentum (-0.72%); while Namibia Asset Management (-2.12%) takes the bottom spot. For the 3 month period, Momentum takes top spot, outperforming the ‘average’ by roughly 1.17%. On the other end of the scale Prudential underperformed the ‘average’ by 0.55%.

Money market, smooth bonus or prudential balanced?

Looking at investment returns over the past the time of reckoning has finally arrived and will shadow us for some time to come, as we have expected and written on in many previous columns.

Annualised returns of the typical prudential balanced portfolio over the past 3 years just managed to match the money market returns over this period. Over shorter periods, although quite volatile, the average prudential balanced portfolio has mostly underperformed the money market portfolio.

Since the beginning of 2009 I commented that bourses are likely to perform sluggishly in the face of rising interest rates. If I had then acted by moving out of a typical prudential managed portfolio, where should I have shifted my money to and what does that experience tell me about the alternatives I should consider now?

In May the average prudential balanced portfolio returned 0.21% (April: 1.95%). Top performer is Momentum (0.79%); while Prudential (-0.24%) takes the bottom spot. For the 3 month period, Momentum takes top spot, outperforming the ‘average’ by roughly 1.0%. On the other end of the scale Investment Solutions underperformed the ‘average’ by 0.8%.

“The everything bubble” – so where do you invest?

Further down this newsletter contains an interesting and somehow frightening article titled ‘the everything bubble’ making the point that just about every asset class in the world today represents a bubble, i.e. it is significantly overprized. This conclusion is corroborated by another article in same newsletter titled ‘Median p: e and forward 10 year returns’ specifically with reference to the US equity market. This article suggests that median returns on equities for the next 10 years are likely to be only around 4.3% per annum only based on the current median p: e ratio of the US S&P 500 of 24 being in the 5th quintile, the highest quintile of historic mean p: e’s.

In the Benchmark Monthly Performance Review of 28 February 2017 we presented graphs on the JSE Allshare index and its p: e, currently on 19.3 which is similarly way above its 30 year average of between 13 and 15. SA equities are thus also in ‘bubble territory’.

In April the average prudential balanced portfolio returned 1.95% (March: 1.95%). Top performer is Old Mutual (2.29%); while Investment Solutions (1.31%) takes the bottom spot. For the 3 month period, Metropolitan takes top spot, outperforming the ‘average’ by roughly 0.3%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 0.8%.

Oil and the ALSI

Since our previous newsletter, the global economic and political environment has not changed. Prevailing trends are thus likely to continue.

One of these is the long-term close correlation between the SA ALSI and the spot oil price in Rand as depicted in the chart below, that became undone as from the middle of 2014. Does this represent a permanent delinking of the SA ALSI from the spot oil price or is this a temporary phenomenon? Well, unless the spot oil price has delinked from global commodity prices the close correlation will re-establish and we do not believe the oil price has permanently delinked from other commodities. As we know SA is a resources driven economy and commodities are driving the ALSI to a significant extent. An increase in global commodity prices will drive the ALSI. Global commodity prices and with this the spot oil price will have to rise substantially again to link up with the SA ALSI or the ALSI will have to decline substantially to link up with the spot oil price as the chart indicates.

Will the ALSI decline substantially to link up with the spot oil price or vise-versa? Considering that there is not much scope for the commodity prices and the oil price to decline, all having reached a trough that made many producers unprofitable and many to actually shut down. The risk of a further decline in commodity prices is thus remote while the likelihood of an increase is much higher, particularly as the US and other global economies are in the process of recovering which will lead to an increase in the global demand for commodities.

In March the average prudential balanced portfolio returned 1.95% (February: -0.64%). Top performer is Investec (2.30%); while EMH Prescient (1.25%) takes the bottom spot. For the 3 month period Namibia Asset Management, takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Momentum underperformed the ‘average’ by 0.9%.

Is SA facing a financial tsunami?

There can be little argument that South African financial markets are experiencing turbulent times. Looking further abroad, there is no less argument for agreeing that global financial markets are experiencing turbulent times and there is no end in sight. As I previously opined, president Trump is not America, he is just a pawn in a well-established chess game that has been going for a very long time and that will not be diverted in its focus and intent by a president, of which there have been many. In the same way president Zuma is not South Africa. He too is just a pawn and I believe this is substantiated by the panicky spiking of the Rand after the dismissal of former finance minister and its speedy recovery once the hype of this move was out of the system. Certainly the media is playing a key role in inciting panic and making investors act against their own best interests. I do not believe it is rational to take any investment decision based on what any individual has said or done, how ever influential he may be, unless your intention is to speculate by pre-empting public response to such statement or act.