House News: – Lancaster take-over bid?
The changes that Stacey Lancaster alluded to in our last newsletter (May 2014) went further than she predicted – we now have not one, but two Lancaster’s on board! Despite the graphic, which may have brought back memories for some of our clients, I am not referring to the famous British WWII bomber – but rather to the fact that Kirsten Lancaster, Stacey’s sister, has joined the team for a while to bolster our client relationship and process management. Kirsten is a qualified primary school teacher keen to return to the profession but doing a wonderful job at Finlaw while she seeks a suitable full time teaching post. Several clients will recall that many years ago, Sue Lancaster [now Mitchell] was part of the Finlaw team and she happens to be Stacey and Kirsten’s Mom – so in keeping with our business values, we follow high quality “pedigree” lines! We welcome Kirsten, who has replaced Deirdre Strydom, and appreciate the value she is already adding to the team.
ABIL is no longer ABLE.
Perhaps the BIG news in the local market over the past quarter was the collapse of African Bank Investments Limited [ABIL]. Parallels were quickly drawn by the fearful to the collapse of Northern Rock [2007] and Lehman Brothers [2008] which triggered the Global Financial Crisis and a record share market plummet not seen since the 1920’s. However – our Reserve Bank stepped in quickly and decisively with a carefully structured plan, 
welcomed by all and supported by a consortium of major banks who will underwrite some R10-billion to recapitalise a new entity to take over the “good” loans. In essence, African Bank remains in business but under Curatorship so that the regular operations of the bank and collection of debts can continue effectively and efficiently. Performing loans and assets will be identified and moved to a new “good bank” while the Reserve Bank will purchase a substantial portion of the non- and under-performing assets and other high risk loans to keep them separate from the “good bank”.
It is important to understand that this is not a wholesale “bailout” for creditors or investors. Losses have been incurred and more may follow depending on the success of the Curatorship and the transitions to the new “good bank”. African Bank shareholders have been the hardest hit. In the past 5 years ABIL shares traded at a high of R30,00 and at an average of over R21,00 with the share price averaging around R10 in the past 12 months. All that dropped to 0,31 cents per share when trading was suspended in early August.
A hard knock indeed and yet further vindication for investors who choose to invest via reputable Collective Investment Schemes (unit trust funds) where they enjoy a generous spread of many different shares under structured mandates which mitigate against individual share losses such as happened to ABIL. Even those Fund Management Companies known to have fairly large shareholdings in African Bank, like Coronation and 
Stanlib, held less than 1% of funds under management in ABIL. Frankly, the stock market moves by more than 1% up or down in any given week [sometimes even in a day] so the impact on our investors has been zero to minimal.
There has in fact been a more measurable impact on certain money market and income funds where exposure was held to Wholesale Deposits and/or Corporate Bonds issued by African Bank. Unlike Capitec Bank and all other major South African banks, African Bank did not have meaningful direct retail client depositors from “the man in the street” so they had to raise nearly all their money to lend out on micro-loans by obtaining Wholesale Deposits from and issuing Corporate Bonds to other banks and financial institutions.
The few retail depositors’ they did have will not lose anything while the Wholesale Depositors and Senior Debt Holders [or prime Corporate Bonds] will take a 10% knock on the face value of their loans to African Bank. These debts will be moved to the new “good bank” which is to be listed on the JSE.
Once again though, the impact on our Finlaw clients with their diversified portfolios has, in the vast majority of cases been zero, while a few have suffered a negligible short term setback which will soon be erased by counter measures adopted by the Fund Management Companies affected. Nevertheless it serves as a valuable lesson to all the Asset Management companies to remain vigilant about risk in their pursuit of sustainable returns for their investors.
Global events:
Just as the ABIL “saga” has had little real impact on our local markets – so too has the Ukrainian debacle had minimal impact on global markets. Not wishing to detract from the human tragedy of the Ukraine, including the senseless loss of life in the shooting down of a passenger airplane, the 
fact is that Ukraine is an insignificant component of the global markets. It needs huge bailouts from Europe and its economy is already in tatters. Early signs of a ceasefire and withdrawal of Russian armed forces augur well for a political settlement which is the only sensible way to resolve the conflict.The markets seem to recognise that it is highly improbable that a full scale armed invasion of the territory will take place. The West is now faced with a relatively new threat termed “Ambiguous Warfare” perpetrated by Russia with its mass disinformation campaigns, cyber warfare, economic coercion and intimidating shows of force. NATO is grappling with the tools required to counter it.
While all this goes on, America continues to power ahead economically, albeit with a lighter application of the throttle than we saw in 2013. The political and monetary dysfunction of the Eurozone continues to curtail economic recovery across this region of disparate countries. Europe is more adversely affected by the Ukraine crisis because of its reliance on Russian oil and gas. The Economist estimates that 50% of all gas that flows to Europe passes through the Ukraine. The “United Kingdom” may well be a little less “united” when Scotland goes to the polls in its referendum in September. This will likely impact the British currency more than it does its economy which is showing solid signs of growth.
Local Fund Managers remain cautious about our local equity market and continue to focus on value available to them overseas, even at current exchange rates. There seems to be broad consensus that our currency will remain weak with greater downside risk than upside.
Conclusion:
Diversification remains the key to successful long-term investing. A strategic spread across risk levels, geographic regions, asset classes and fund management companies is the best way to build consistent returns in an ever changing world. If you have not recently reviewed your portfolio with us – now is a good time to do so. Please don’t hesitate to contact us for guidance – we are here to help you and do enjoy interacting with you.
Kind regards
John Wallace – end August 2014.
Finlaw Consulting