WEBINAR: Rand hedge paying dividends

Alec Hogg takes us through the performance and current position of the Biznews.com Global Share Portfolio Webinar, which is proving to be highly successful. If you've just joined in on this journey, not to worry. Hogg provides a comprehensive breakdown of how the shares are doing and how the companies, split between the likes of Apple, Amazon, Berkshire Hathaway, Alphabet, IBM and Novo Nordisk are performing. And despite January being the worst one month history for shares around the world the portfolio is up a staggering 44%. – Stuart Lowman. ___STEADY_PAYWALL___.Alec Hogg: Well, here we are. It's the 29th of January – the Biznews.com Global Share Portfolio. In the studio with me is Stuart Lowman. Stuart Lowman: Thanks Alec good to be back.We're going to be bringing you up to date after a torrid month for shares all around the world, including the U.S. markets. Interestingly enough, it was the worst one month in history for shares around the world..Well, we'll see how our Global Share Portfolio compared. What we've tried to do as well is to be as conservative as possible. After yesterday's decline or rather rise in interest rates, the Rand improved significantly. We've taken that Rand into account so that the Rand number that we're looking at is about as strong as it's been for the whole month, and then we've also had a look at the post market price of Amazon.com. After the market closed, Amazon released its financial results. The post price, in fairly thin trading, went down very sharply by 13 percent and we've added that.We've put the 13 percent lower price, if you like, into our portfolio, which then gives you a much better and a more conservative view. However, overall the portfolio continues to do extremely well. There it is. The price is at the purchasing. Remember we started the portfolio on the 5th December 2014, with $200trn. We have been adding to it. We've had a little bit of dividend income as well but roughly speaking that $200t at the time was worth R2.3m. If you want to look at it in broad South African Rand terms. The portfolio has appreciated by R1m, so if you owned the shares and it followed us all the way through and had taken your money offshore at the time that we did, you would have made R1m on an investment of R2.3m, which anyway you want to look at it. Despite the worst month, we've seen for the markets ever, it has been a pretty, good return..That table that you see there now gives you an overview of the portfolio. Just to break it down very briefly. The idea was to have a third, roughly, of the portfolio in the S&P500 index (that's an exchange-traded fund). The idea there was to try and keep at least a big part of the portfolio that would track the market. Then we went for three big shares, into which the target was to put 45 percent to the portfolio, 15 percent each, and they are Alphabet or the old Google, Apple, and Berkshire Hathaway.As you can see from our breakdown there on that list, Apple has done pretty, poorly and so has Berkshire Hathaway, in Dollar terms. Fortunately, in Rand terms, they didn't do quite as badly and then Alphabet (Google) has done terribly well, and that has offset it. Then we took stock picks on three shares one which has shot the lights out that's Amazon.com. Novo Nordisk has done extremely well, then IBM, which has also been an underperformer, alongside Apple. Now you can look at this in one of two ways. In my head, I'm thinking that both IBM and Apple are extremely good value investments but we'll get into that discussion a little bit later..Let's get onto the second point because as South Africans we will be investing through South African Rands into U.S. Dollars, and then look back at it on the South African Rand price. Now, if you look at this table overall there's been some quite sensational increases, 139 percent gain in the price of Amazon.com. A gain of 95 percent in Alphabet (Google) and 68 percent for Novo Nordisk largely or partly due to the Rand, which has depreciated since we started the portfolio by 43 percent. It's gone down from buying one Dollar for R11.27 on the 5th December 2014, to buying one Dollar for R16.07 this morning, and that is an improvement of about 50 cents in the last couple of days, after that increase in interest rates here in South Africa. The big knock came after the 9th December. It was quite funny actually. We did the last portfolio update, it was on the 9th December, immediately before Jacob Zuma decided to get rid of his Finance Minister, and bring in a new one. There were all kinds of concerns or turbulence that followed that decision.At one point in time the Rand in fact, got as high as (it was only a very thin trade) R17.99 to the U.S. Dollar in Asia but it traded around R17.00 and since the increase in interest rates, it's come back to R16.00. If you want to look at it in a different way, 'Nene-Gate' has cost the country another half a percentage point increase in interest rates and probably a Rand against the Dollar in the exchange rate – not the best day in the life of a South African president..Anyway, moving onto the portfolio generally, and we'll be giving you all the updates and there have been plenty of them because this is a month where we've had quarterly results. You can see there that if you take the individual stock performances, comfortably in front there's still Amazon.com. The Rand value has gone up by R250trn from the time that we bought in. An even bigger performance though was from Alphabet, which has given us R320trn because we had a bigger slug of the portfolio into Alphabet. Novo Nordisk has appreciated by R125trn. The U.S. market, generally, because we have a third of the portfolio there. Although it is down eight percent in the period, and all of that was recorded in January of this year (this past month). We are still up R210trn on the investment, into the U.S. market because of the depreciation of the South African currency.Just to put this all into perspective, when we started the global share portfolio, the incentive to us was that we believe the economic policies that are being followed were and still are being followed in South Africa – were of a nature that were going to affect the share price of the country, in other words the exchange rate. Our view was that we needed to get the money into assets outside of the country and the decision was to go into the U.S. Stock Market because it is the most flexible market in the world and we still believe, the strongest economy and the best placed economy to benefit from the mega shifts that are happening in economic structures around the world. We made these investments in the United States based on that premise. It was very much a bet against the South African Rand. In favour of the U.S. Dollar and it has served us very well and we were extremely fortunate in some of the share selections.Indeed last year the S&P500 on the U.S. Stock Market, if you exclude four stocks, what they call the FANGs. The S&P500 would have been down by almost its worst year since 1996. With those FANGs in there, that was Facebook, Amazon, Netflix, and Google, they pulled up the whole of the stock market to a two-and-a-half percent gain. Now, we had the good fortune of having two of those stocks, Amazon and Google, in our portfolio, hence the excellent performance. I wish I could tell you that it was all because of great stock selection but in a case like that, if you're picking four out of 500 you really just have to get very lucky and I sincerely hope that you followed us on all of those.That's a lovely graph that you can look at there, which really puts things into perspective very nicely. As you can see Amazon, Alphabet, and Novo Nordisk outperformed the depreciation of the Rand and added to our portfolio's performance. Whereas Vanguard, which is the S&P500 tracker, Berkshire Hathaway, IBM, and Apple underperformed the depreciation of the Rand, so that went backwards. The Rand helped though for all, barring Apple to give us the depreciation for the portfolio, generally..Very nice when you can look back on this kind of performance and, as you can see, we also received some dividends during this period. There are a few more dividends that are likely to be coming soon. Vanguard pays a dividend every quarter. We are looking forward to dividends from IBM, Novo Nordisk, which is another big dividend just around the corner, Apple and again, the quarterly pay-out that comes from the S&P500..The 'tell' of this quarter though is the individual stocks and the depreciation in the market generally..If you have a look there, the S&P500 index entered the year with about a two-and-a-half percent improvement, as you can pick it up on the graph there, just before the beginning of January. It is now sitting at five percent lower, so we've had seven-and-a-half percent decline in the S&P500 index in a month. It's never done as badly as this in history. One hopes that the rebound will be similar to the one that we saw last year, after the smack that the market took in August last year. As you can see, it came from about seven percent down to, at one point, five percent up in about three months, so 12 percent rebound. One can never forecast these things accurately. Only the good Lord knows what the future holds but at least, in this case, the balance of probability would suggest that if you are going into the market for the very first time, you could be buying into the S&P500 index now.My advice always has been stagger your investments. Never jump in 100 percent and a month ago, things looked, well it's nearly two months ago, because we spoke at the beginning of December (given the holiday period we tried to time it that way). If you look then the suggestion was very much try and stagger your investments. We don't know how the market will perform in the next three months but if you put in one-third in this month, one-third next month, and one-third in the third month you will be able to take out or eliminate the impact of market timing. Those who are looking to get into the market for the first time today that would also be the advice, try and do one-third, one-third, and one-third of whatever portfolio you are going to make the investment in..Let's start off with Berkshire Hathaway..They haven't had their quarterly results released yet but as you can see, Berkshire in the past year has underperformed in the market. The S&P500 index, on a 12-month basis, the beginning of January to where we are now, is down by five percent. The Berkshire Hathaway share price is down by 12.5 percent. It's underperformed but also, in many ways in the last month, while we saw some of the other big stocks tanking. This one at least held its ground for the most part. It is of course, down in the last month but only by about two or three percent. Now, Berkshire has stated in the past that it will be buying back its shares when the shares come within the level that Warren Buffett, the chairman and 50-year long driver of the business regards as good value. It must be getting very close to that level now, which would give you a good underpin to the Berkshire share price. They've got lots of cash remember. This is the month where Berkshire will finalise its $37bn acquisition of Precision Castparts, the biggest acquisition Buffett has ever made. It is the kind of elephant that he has been going out looking for and is likely to add to the portfolio in the years ahead..Google or Alphabet, as it now has been renamed, had a wonderful run from October, when it was announced that the company would be splitting into more focussed units. The old Google is by the far the biggest part of this business, but the other units are starting to get increased attention, including the autonomous vehicles or the self-drive cars..In this past month, Google has settled with the U.K. Government on a tax yield that had been overhanging the stock. There were concerns that there would be significant pay-outs required. They settled on £130m and if you look at the way British media reacted to the settlement, in other words, most disappointed and they felt that Google had got away with murder. Then as a shareholder, you should be quite comfortable that Google certainly did not negotiate poorly in this regard. We will be looking more closely at Google in the next month and give you some more insights but it has been a wonderful performer in the last year. As you can see against its benchmark, which is at NASDAQ, Google has outperformed by about 30 percent. That is not the kind of outperformance to sneeze at..Onto Amazon.com, which has been our star performer for most of the past year, its financial results were released yesterday, after the market closed..The revenue was slightly below expectations, even though it is still growing at 22 percent a year, in a virtual zero inflation economy. That's an incredible achievement. The big story for Amazon was a year-on-year. Their workforce is up 50 percent and they've bought 30 thousand robots, so they're very much in line with this Fourth Industrial Age Economy, moving towards artificial intelligence. The share price though, on this graph, shows you where the official price closed last night. It was very interesting that the punters took a view that Amazon was going to come out with really good results. Pushed the price up by nine percent last night, bringing its 12 month improvement to 79 percent and then after the results were out, they were very disappointed and knocked the share back by 13 percent, so that's a swing if you like, in one day, of over 20 percent – going up nine, down by 13 percent.The interesting thing about all of this is that the punters were expecting that Jeff Bezos of Amazon.com was going to start turning on the profit taps, as he had done in the previous quarter. That didn't happen. Amazon is still reinvesting heavily in its business, reminiscent of what happened at Apple during the time of Steve Jobs, where the profits were kept under control or held back, as there were massive reinvestments in the business, you think about acquiring 30 thousand robots, and what that will cost you. The profit margin though for Amazon is its highest in many years, well it hasn't really being showing much profit but the operating profit margin was at three-point-one percent. That was up nicely. I got excited about that. The other thing that excited me was Amazon Web Services is up 69 percent year-on-year in its revenues, and its generating a margin of 29 percent. None of which seemed to make any difference to the traders, who were hoping to see that profits overall, would be much higher than the previous quarter. They weren't. As a consequence, they knocked the shares back.Is Amazon a stock worth buying now? Well, it's one of those that you buy and hold indefinitely. We've now come back to a level of where it's up about 60 percent on the year, just over 60 percent year-on-year, and at these levels you've got to start thinking about buying Amazon if you missed the first wave. Remember, the best way to do it is buy one-third now, one-third next month, and one-third the month thereafter. I was quite happy with the Amazon results, as a long-term investor, as you heard the punters – not so..IBM is now becoming extremely good value..For those who understand the company and believe in its story, as you can see from the share price, over the past year – down by 20 percent, continued to fall in January, a significant decline of about ten percent in the value of the stock. That will take Warren Buffett's losses on IBM to approaching $2.2bn. It's not too often that you can get into a company that Buffett has bought into at a discount to the price he paid. The underperformance of this share, against the S&P500 index is now moved over 25 percent.What is interesting in the past month for me is that the IBM board has appointed the chief executive of Ford Motor Corporation, Mark Fields, onto its top governance structures. What's good about this one is Fields was the man behind a hugely successful transformation of Ford Motor Company, taken them away from the old way of thinking into new areas. It also shows how Ford and IBM are going to be working more closely together in things like autonomous vehicles or driverless cars. Ford has also pioneered some very innovative alternatives like the old way it used to happen is if you bought a motor vehicle you would buy it outright for yourself. What Ford is trying to do is put together a merging ownership. In the future, it's very unlikely that people will each own their own car. You would perhaps hire a self-drive car. If you needed a car maybe co-own it, almost timeshare the vehicle and a lot of these initiatives have been done by Ford. You can imagine that he's the right kind of person to be helping with IBM. A man who's done considerable transformation, which is something that IBM, is going through as well. I was quite excited to see that Mr Mark Fields has been appointed to the board of IBM but IBM, generally is now really starting to look extremely cheap..Moving onto the next one, and a very good performer for us, has been Novo Nordisk..Their earnings have not yet been released but as you can see, steady as she goes, it's up 22 percent on the year, 27 out performance of the S&P500 index. That's in U.S. Dollar terms. Novo's earnings are likely to come out, (this is for the first quarter), at lower than what the market is anticipating. That could give a knock to the share price, so if you haven't bought into Novo Nordisk yet hold off I think, for a little bit. Let's see how the earnings come out. Many of the companies that are reporting quarterly results are undershooting the earnings expectations and it's likely that Novo will do that as well. Stuart, any questions?No, nothing yet Alec, I think there's some post-holiday blues as they say.Yes, I was kind of looking at this and thinking 'my goodness, what's happened' even to this portfolio but it's still doing over 40 percent in annualise? I don't think we can worry too much about that. If you'd like to ask questions, specific questions, please go on there. How do you do it Stuart?Alec, just on the right hand toolbar there. There's a little questions tab that you click and it drops down, then you just write as you go.Okay, so even I can see it on my side. I guess I can't ask us a question but if you'd like to do that, if you've got any specific questions please click on it, as Stuart says, and send them through and we'll answer them directly..Onto the next of the portfolio constituents and that is Apple Inc., now here's a stock that many people have looked at and askance, wondering what is going on with the house that Steve Jobs built.. Well, the financial results that came out from Apple revealed two things that are really critical. The one, and this is the quarterly results at the end of December, was that Apple sales of iPhones, which were launched in 2007, are going to drop for the first time in the March quarter. That was the forecast from the CEO, Tim Cook. I suppose at some point in time, even the most successful product has to reach its period where it can't grow anymore. Well the punters didn't like that at all. The other bit of good news although it was misinterpreted by investors, was that its services businesses at Apple (i.e. Apple's equivalent of Amazon Web Services), generated $6bn in revenue in December. It's the first time Apple has split this out. Now, put this into perspective, Amazon Web Services, which has been one of the major reasons why that share price has run over the past six months. Now, it generates two-point-four billion in a quarter, and against that, you've got six billion from Apple (Apple's Web Services), which is a big opportunity. As I mentioned earlier, Amazon makes 29 percent operating margin from it. It's one of those digital businesses that cost you nothing to do extra but it drops straight to the bottom line. Apple is in a much stronger situation then Amazon and, indeed, than IBM, who are also moving into that area, so it should have been good news. The market though felt that the release of this information for the first time was just trying to distract the investors from the bad news, as it was perceived on iPhone sales.Still nice to know or interesting to know that iPhones still generate, even next quarter, will generate about $50bn in sales. That's a lot of money that you're adding, and of course, that's at a margin of 39 percent that goes straight to the bottom line. Although it might be starting to slide a little and when you do your analysis, if you bought the Buffett book that is now in the bookstores, and you have a look at the way that he does fair value. I've done mine on Apple and I come out at a share price of about $150 a share. It's sitting now at, well nearly or just over $90 a share. It makes me very excited to see this kind of a margin of safety available. Mr Market though is not as excited, as you can see from the performance of the share price. It's now down 19 percent, year-on-year, and underperformed in the market by about 17 percent..Okay, onto the next one, which is our price at opening versus the prices today – at the opening, the Rand/Dollar was R11.27. It's now R16.07 and there you see the profit, 43 percent just by putting your money into U.S. Dollars, from South Africa. The three stocks there again, Amazon.com, Alphabet, and Novo Nordisk have outperformed the depreciation of the Rand. If you had put all of your money just into the S&P500 index, you would have been showing a profit of 31 or a gain of 31 percent as against our portfolio's gain of about 44 percent, so you wouldn't have been doing as well. What that means, generally, is that we've outperformed. Our portfolio has outperformed the U.S. market by 11 percent, in U.S. Dollar terms, which is primarily due to the fact that we got really lucky by having both Alphabet and Amazon in our portfolio. Two of those four FANGs that made all the difference last year.Down on the list even though Berkshire Hathaway has underperformed in the U.S. market. In our terms, it still added R70trn to the R2m that we started – just over R2m we started with – IBM is still R13trn to the good in Rand terms. Apple is the one, the only one that even in Rand terms is now losing money but the loss there is only R7000.00. The big tip, I guess that you could take from that is that if you haven't bought into Apple yet that's the one to be buying into because you can buy it cheaper than we've bought it, into our portfolio, even in Rand terms and that's really saying quite something.Well it looks like we've answered everybody's questions. You've got post-holiday blues. The market is under pressure. People are scratching their heads but perhaps I can give you my philosophy on these things. You really want to buy shares when they're cheap. You don't want to buy them when the market is running.Alec, I see we've got some questions. Jonathan has a U.S. portfolio. It's around three to six months old, with FANG included, which has taken a bit of a knock. He says he's pretty confident but for two stocks. He's hoping to get your opinion on Goldman Sachs and Boeing, also is it beneficial to hold a good bond ETF like Total Bond to balance out the rough ride?I'm no expert in either of those two stocks and I'm sorry, I can't help you. I would still think that if you are looking to ride out the rough patch, and it is a rough patch, it may even be over, who knows. I would be very comfortable putting it now into those stocks that I know are offering excellent margins of safety or if you aren't a fan of Apple, IBM, or Berkshire, then certainly into the Vanguard S&P500 index tracker.Are you not over investing in IBM?No, we only put eight percent of our portfolio into IBM. It is now down to seven percent. What we did from the beginning was we took a view that we put a third into that index tracker, 15 percent each into three stocks that we thought were absolute winners. As it happens, Apple hasn't been a winner but I still think it's a fantastic company. In the long term, remember our average holding period in this portfolio is forever, so forever is a long time and Apple is a stock, I'm still confident, will be around with us forever because of the way it's structured – because of the ecosystem that is structured around it. In fact, a similar ecosystem to what Amazon is building. Then we took three other stocks that we had eight percent each in. Those were, if you like the more, if you're perhaps more speculative than our three core holdings, and of those three Novo Nordisk has performed extremely well. Amazon has shot the lights out and IBM is our value stock in there. It's dropped from an eight percent holding to about seven.I think that's it from this side Alec, no more questions that I can see.Well, thank you for joining us. We are ending for a change exactly on time today. Just to get back to the overall view on the portfolio. If you are going to replicate the portfolio, do so over a period of three months. We don't know or we can't predict volatility. We can tell you that the markets had their worst month ever in January and, as a consequence of that either they're going to continue falling but if they are going to continue falling your margin of safety has improved quite a lot. If the market is down by ten percent then what you're buying in today, even if it's got another 20 percent to go, as you're clearly, buying in cheaper than you would have been a month ago. That's on the one side, I'm quite confident with that. Secondly, I'm not yet convinced that the Rand is ready for a big bounce. We'll have to see big changes in the economic outlook and in the economic philosophies of the ANC Government in South Africa for that kind of a reversal to come through. Don't rule it out indefinitely but it is something that at the moment is still… I'm very comfortable to have our portfolio 100 percent offshore. Thirdly, there are three stocks now that once again, are looking very appealing, Apple, IBM, and Berkshire Hathaway and if you've got a little bit extra and you're looking to perhaps hedge your risk a little bit then certainly the one that I would be most confident in investing in is Apple.I look forward to being back with you this time next month. Until then…

WEBINAR: Rand hedge paying dividends

Related Stories