House News:
We bid a fond farewell to Rowan Allpass who has been with us for three years. We wish him all the best for the future and express our sincere thanks for the contribution he has made to Finlaw and the well-being of our clients while he journeyed with us. I have personally assumed responsibility for our clients who he assisted over the years, ably assisted by Stacey Lancaster [CFP].
Stacey joined our team in September 2010. After completing her BCom Law degree through Unisa, Stacey enrolled for the Postgraduate Diploma in Financial Planning through the University of the Free State. She completed this diploma at the end of 2012 and has qualified as a Certified Financial Planner [CFP] through the Financial Planning Institute [FPI] of which she is a member. She has also recently completed her Representative Exam with distinction. Stacey gained valuable accounting experience while working for Sanjay Harrilall Consulting from 2008 to 2010.
She has been a member of the Senior Ladies Country Districts Hockey Team since 2007.
The construction of client investment portfolios to fit their needs and tolerance for risk is a highly technical exercise requiring a solid understanding of the products in the market and their suitability for inclusion. The challenge is to balance anticipated returns [both income and capital growth] with the level of risk inherent in the asset classes and products available. There are variances in style and bias between one asset management team and the next which must also be taken into account in arriving at the right blend of products for a particular client. Stacey specialises in this field and is rapidly becoming an expert in this critical aspect of the services we provide to our clients. We work as a team combining experience with technical know-how in developing each portfolio.
The markets in the last quarter:
The three months ended August 2013 have been extremely volatile for equities [shares], bonds [whether government or corporate] and particularly for listed property holdings [REITs– or Real Estate Investment Trusts]. The graph below shows you what has happened in the past 3 months in 
our local share market as well as in the USA, UK, European and Japanese markets. The returns are all in their base currencies – ZAR, US$, EUR, GBP and JP-Yen. Take a look at the Nikkei for an excellent example of volatility – huge swings – down by almost 10%, then back up by almost 8% to settle -2,80% down for the three months. Look at what happened to that market in a single day – 22 July 2013.
It may, at first blush, seem that the place to be was in South African shares. However, the wisdom of including offshore exposure in your portfolio is amply demonstrated by taking that same graph and rendering the returns in ZAR across each of the markets. In the graph below – the RSA All Share index goes from top performer to the bottom with the UK stock market giving the best ZAR returns for the quarter-end at +2,34%]. 
From a South African investor’s perspective it is gratifying to have positive returns on the equity component of their portfolios, given that this segment is most often the largest allocation in their strategy. This despite threats of USA military strikes against Syria in the Middle East in punishment for chemical weapons being allegedly deployed by the Syrian Government against its civilians. Of course that tragedy has not yet played itself out – so more volatility can be expected in the months ahead.
Listed Property shares [REITs] have been solid performers in recent years, yielding both income and capital growth. Our local REITs attracted a lot of attention from foreign investors keen to secure income returns given the poor returns on cash in their own markets. In the period up to the middle of May this year they invested heavily in these shares and in our local Bond market [there is a strong correlation between the two asset classes – bonds and property]. This drove up prices to unprecedented levels and dropped the income yields to their lowest in many years.
The thin red line in the graph to the right shows just how badly the sell-off in Emerging Market REITs affected this sector. The chart compares two share indices [FTSE-UK and S&P-US] with the two listed property indices [MSCI World REITs and MSCI Emerging Market REITs]. See also the vertical red bands which highlight how these two asset classes move in opposite directions from time to time [not unlike Bonds and Shares]. In many ways the quarter has ably demonstrated how important it is to have an appropriate spread of the different asset classes.
Periods of global uncertainty such as we have had through-out the quarter will always induce strong swings in sentiment, confidence and expectations, driving up volatility levels beyond the long-term norm and making attempts to time the markets fruitless. A well balanced investment strategy will weather these storms as long as investors stick to them with no more than tactical balancing when required [more about that later].
Currencies:
Emerging market currencies have taken something of a pounding during 2013, with the ZAR leading the pack by declining almost 18% so far this year and by nearly 37.33% since the 1 March 2012 when it was priced at R7,46 to the US Dollar! 
It has fared little better against the Euro and the Pound Sterling. South Africa is in a triple deficit position. It has a trade deficit [meaning the country imports more than it exports – i.e. buys more than it sells] and so is indebted to the rest of the world to the tune of R14.21 Billion at the end of July 2013. The capital account is in deficit [meaning more money flows out of the country than in to it] and it has a budget deficit [meaning the Government spends more money than it earns through taxes and investments]. These combine to keep the Rand relatively week – a position which is likely to hold for some time.
Conclusion:
An increasing number of local asset managers are expressing concern about our local share market and many are moving to more defensive positions through careful stock selection. Investors are advised to consider their own exposure to local equities and to make tactical adjustments where the level of risk is above their tolerance levels. Tactical balancing does not mean trying to time the markets – it simply means that where the asset allocation has grown out of ranges required by your particular investment strategy, it is good practice to re-align them.
As always please don’t hesitate to contact us for assistance.
John Wallace – end August 2013.