WEBINAR: Apple, Berkshire laggards

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, Google, IBM and Novo Nordisk are performing..https://youtu.be/tIz2jUX95Xg.Today is October 8th, 2015 and I'm Alec Hogg and I'm Stuart Lowman. We're in the Biznews studio here at the Johannesburg Stock Exchange to bring you up to date with what's been happening with our portfolio in the last month and a bit. The reason why we're a little bit later than usual is I spent September in the U.K. in London, going around meeting very interesting people. You've lived in London, Stuart..___STEADY_PAYWALL___.Yes. I spent a couple of years there straight out of school. It's an interesting place with lots going on..And exciting as long as it isn't winter..Exactly..Well, there was a lot of sunshine and that was good, coming home to the sunshine here in Johannesburg where we have the best weather in the world. Who could get it wrong? Okay, I see we are ready to start kicking off and getting into our global share portfolio for the past month. This is the September update. We're going to have another update later in the month..This is the one, which we should have done towards to the end of last month. We'll do another one towards the end of October and of course, let you know all about that. Let's go straight into the portfolio..That's what you will see in your Standard Bank Webtrader account. It's exactly the same as this – an account summary. It shows you the money that's currently in the portfolio. We started with $200,000.00. It's now $210,000.00 so you can work that out. It's a five percent increase in our portfolio over the past year. I'm very proud of that because the market as a whole, is down by three percent and as you well know, beating the market is not an easy task at all. We've managed to do it. Then we'll move on to the other account overview, which you will have as well in your Standard Bank Webtrader Portfolio if you have opened an account. If you haven't opened an account, I urge you to do so because it's very, very easy to replicate our Global Share Portfolio..Of course, by tuning in to the webcast every month when we broadcast it or you can even listen to the recorded version a little later on Biznews, you can keep up to date. If you like, you have your own portfolio manager giving you the reasons why we've made these investments and then also, updating how they've performed in the past month. Remember though, this is not a portfolio, which we trade. This is a 'buy and hold for keeps' portfolio. It doesn't mean that the constituents of the portfolio will never change. Indeed, if we do find a couple more good stocks to include (and I've been looking at a few, but I haven't yet found worthy of inclusion – certainly not through my own research) we would then sell some of the Vanguard S&P500 ETF and then invest that into a different stock. We'll give you more information on the individual stocks. How we've structured the portfolio: you can see that Vanguard is around about 30 percent. Let's just go to the next slide..That's a far better way of explaining it. If you look on the far right-hand side, you'll see that there's a target there of Vanguard for 30 percent. There's a name called Alphabet that might have thrown you. Please don't worry about it. It's Google. Google has not changed its name to Alphabet and with 56 shares (I think we go up to 56.15 shares or something), if you had 350 shares, you get 356 shares in future, so we have a tiny little increase in it. I'm worrying about that for our purposes because this really is more of a reflection, but the idea was to have 30 percent in Vanguard, 15 percent each in two stocks that we regarded as our cornerstone stocks – Google (or now, Alphabet Inc. as of last Friday the beginning of October) and Berkshire Hathaway. Those are our two cornerstones. Then the idea was to have another five stocks, which would be stock picks so each of them would have eight percent shareholding..I like Apple so much that after buying the first lot of Apple shares and seeing the share continue to fall, I bought another lot of Apple shares so we now have Apple as one of the cornerstones of the portfolio as well. In fact, as you can see it has target there of 16 percent. It's not because we thought Apple was better than Google or Berkshire but it's because we had the two lots of eight percent in stock picking, which we've put into Apple. The other three shares: Amazon.com, Novo Nordisk and IBM. If you look at this column… Although we do say to you that you should not be worrying too much about the short-term movements in the share price these are stocks, which we've held for keeps – it will show you that the Vanguard S&P500 is down by three percent since we began the portfolio, which was in the beginning of December last year. We're ten months into the portfolio now. That is the overall market. Vanguard is an Exchange Traded Fund, which tracks the S&P500 Index..Then if you look at the other stocks in there – this is in U.S. Dollar terms – it's down three percent. Google's up 20 percent in U.S. Dollar terms. Apple and Berkshire; both down 11 percent in U.S. Dollars and Amazon.com up by 65 percent – clearly, our star performer in the portfolio. Novo Nordisk has done pretty good as well – 18 percent up and IBM is eight percent lower. If you just put it all together…The reason why we encourage the investment of money into the international markets, is because towards the end of last year, we took a view here at Biznews that the South African economy was being managed in such a way that the currency/share price of the economy was likely to continue sliding – certainly, in the near future – until such time as economic policies here become more rational..As a consequence of that, together with our sponsor Standard Bank, we decided to launch this portfolio as a guideline for anyone who shares our view and then we suggest that you take Rands and put them into the Webtrader. It's very easy. In South Africa, you can invest in the Dollars through the Webtrader. In fact, you can invest R1m without even having to talk to your bankers on this one. What has happened to date in those ten months is that the U.S. market is down three percent. We're up five percent in U.S. Dollars but the Rand has fallen 20 percent. In essence, our portfolio overall is 24 percent higher in Rand terms and the constituents/the winners have been Amazon, which has added more than $10,000.00 to our portfolio. Google: $6000.00, Novo Nordisk $3000.00 and we've had dividends of $2500.00. If you like, the pluses are $22,000.00. The minuses are $10,000.00 and it's through Apple and Berkshire – just over $3000.00 each..The market as a whole is down about $2000.00 and IBM's down $1,200.00. From the $200,000.00 beginning, it balanced out that way. Amazon, Google, and Novo being the big winners and Apple and Berkshire – the big losers with both Vanguard and IBM just trickling a little bit of money away there..Being a South African, the important part of this portfolio is that it is a Rand hedge and even if we were just tracking the S&P500 Index, given that the Rand has fallen over this period by 20 percent, you'd still be looking at 17 percent gain. All you had to do was follow that decision/view that we took, which was that the South African economy was being managed in an irrational manner. It was not going to assist the exchange rate and you would now have been looking at a far better situation than you would, had you invested the money into a local bank account..Looking through the Rand value, it's quite extreme. At the 20 percent to Amazon.com and you have a 98 percent gain in that share price over the past ten months, 44 percent for Google, 42 percent for Novo Nordisk and even IBM, which was down is up 11 percent. Even the market as a whole is up 16 percent. The only loser in all of this is Apple. Okay, you can maybe call that 'Alec's folly' but I still believe that we are going to have pretty good value from Apple in the medium term, and we'll go into more details in a moment. The annualised return on the portfolio is 29 percent; a figure, which is very satisfying. Do remember that even if it were two percent, we would still be talking the same language because this is a long-term portfolio. We're not talking about trading. Please don't go and sell these shares now because you've made an annualised return of 29 percent..It is something you just invest money in and let it ride. That's what it's about. Warren Buffett from Berkshire Hathaway says the period to hold a share is forever. We agree..Dividend receipts over this period: we actually got in August – the 6th of August – $534.00 from Apple Inc. so it isn't quite as bad as it looks (the decline there in that share price). The other dividends are as they were before, except with the Vanguard S&P. They pay dividends quarterly – 95 U.S. cents, which works out to about $300.00 on our investment there..Let's go into the individual constituents because this is where it becomes interesting..In fact, before I forget… Stuart..Yes, Alec. We're still waiting for some questions. We'll answer whatever's thrown at us..How do we do that? How do we ask questions? It's just on the screen..Tap it in on the right-hand side bar. Send it in. I'll read it out and then we can answer them as they come..We had many questions last time. In fact, I found it a bit difficult to even get through everything I wanted to say in our half-hour last time around. If you have questions, it's a good idea to bring them up as soon as possible so that Stuart can interrupt me, and we can go through it..Okay, this is the S&P500 Index Tracker. The reason we went with this Vanguard stock is that it has a very low cost. In fact, the costs here are five BIPS (or 1/20th of one percent). How do they manage to run a portfolio with such a low cost? What they do is they take the S&P500 Index constituents and invest in weightings in exactly the same way as they are weighted in the S&P500 Index. Since it's such a huge portfolio (the Vanguard Index Tracker), they can also lend out the shares that they own in the portfolio, to those players who want to go short on particular shares. Vanguard earns money in and then offsets that against the cost of trading, and that's how you get to such a terribly low cost. As you can imagine when you look at this here, it's a very close correlation between the two. I was going to say it's just about 100 percent correlation but of course, that's not correct..Since we began, the overall index is down around three percent/2.81 percent and the index tracker is in line with that. The market as a whole took an awful knock as you can see, during the period late August/early September and that has been well documented. We are however, back in more positive territory. An awful knock in this case, was about ten percent. We're not concerned about the U.S. market. We would have been terribly concerned if we were invested in China, but we haven't invested in China. If you consider that the fallout in China and the way the reverberations came across the world, the impact on our portfolio has been fairly minimal..Quite often, the questions in these webinars come up requesting whether you can go into the portfolio now and replicate it again. I do feel that some of the shares have run really hard and it's quite obvious, when you look at them, which those are. On the other hand, there's also a great opportunity on some of the shares that have lagged and Berkshire is one of these. In the past month, Warren Buffett reiterated a view that he expressed at the Annual General Meeting in May where he started getting some concern about reinsurers. Berkshire Hathaway is a big investor in reinsurers around the world. In fact, he's the biggest investor in Munich Re. They cut their holding in the past month, from 12 percent to just under ten percent. Berkshire's still the biggest shareholder and still has $41bn invested in Munich Re but in May, Buffett said he was a little concerned about the way that the reinsurance market was pricing..He believes that the industry in the next ten years is going to be a poorer performer than it was in the last ten. Consequently, he's moving out of reinsurance and that's really, the only bit of news that came out of Berkshire Hathaway in this period. You'll see that it also fell, as did the U.S. stock market when you had the fallout from China and it's just like the U.S. stock market – continuing now to stabilise. It's down by around 11 percent from when we bought in, which is an underperformance of eight percent on the market overall and it has had a little drag on our portfolio, but we're very happy to have Berkshire as a longer term bet..Onto our next stock, which still has the logo of Google but actually, it's called Alphabet – not Google anymore, so we'll update that Graph next time around..As you can see, it's been a superb performer..A bit like Berkshire Hathaway, it underperformed for much of the past year and then, the transformation came just ahead of our previous webinar. I went into a lot of detail about what happened there. Just to summarise for you, the market really enjoyed the quarterly results that were out. As you can see, the share price shot up from being an underperformer to around 25 percent in a very short period of time, and it stabilised at that level. It's now up 20 percent (in Dollar terms, remember) over the past ten months and we're very comfortable in holding our position there..Alphabet could unleash a lot of energy within the Google organisation. What they've done is split up the business into the main search engine and then other subsidiaries that are being built in a way that they're hoping will one day, even surpass the size of the search engine. A big bet is being made on driverless cars and in this past month, Google hired the former head of Hyundai in the United States (who had been very successful in building that business). He's now the head of driverless cars at Google. Interesting to note that Google and Apple are the two making most of the headway in driverless cars. We know all about Google because they were very open. We know nothing about what Apple's doing because they've kept it extremely secretive. On the other hand, we're now also seeing the major motor manufacturers coming into this market as well..It has massive implications into the future, when you have motor vehicles that don't need you to drive them. Can you imagine what it does to insurance rates, fatalities, and general living standards? It would reduce an enormous amount of wastage as at the moment cars stand idle. Most cars stand idle for most of their lives. Driverless cars would be a little bit like Uber – coming in and disrupting the current industry. These are the disruptors: Alphabet (or Google) and Apple. The other bit of news that came from Google in this past month/six weeks since our last webinar was that it's now moving aggressively into the news front. It already has Google news but there's a boxing match with Facebook and Apple, or between Google, Facebook, Apple and (if you like) Amazon.com, which is now heating up. They're fighting each other in various areas..These gorillas are leaving very little ground available for other players and between the four of them; you're seeing the markets developing quite rapidly. They compete in certain areas and they leave each other alone in others. One of the areas where they're competing a lot is in the news field. Google has introduced something called Accelerated Mobile Pages in the last 48 hours, bringing in publishers like the BBC, the Guardian, the Financial Times of London, Twitter, and LinkedIn and in that way, wanting to speed up this whole news service on mobile phones. It's an interesting development on that side. The other place where they are boxing is against Apple on the mobile phone area. Google have also recently launched their upgrade of a mobile phone and they have also announced that they will be working with Huawei of China who's also one of the companies they don't like too much (or hadn't in the past)..They're going to be collaborating on a new mobile phone to take on Apple's iPhone 6S, which in fact, was the biggest development of the whole portfolio in this past month. I'll get into that in a moment. We're very happy with Google. We'll stick with it..Amazon.com, which is our best performer by quite some distance, has continued to attract a lot of interest and attention from investors. As you can see, it's really had a wonderful run and it's almost like every time there's a set of quarterly results (you can see that at the end of January, in April, and again towards the end of July) there has been a big move in the share price. Amazon did come down during this period, knocked by the global market decline, but its bounced right back and in fact, it's getting close to all-time highs again – up 66 percent since we bought it. Just to remind you; we are open for questions so if you have anything and you need a little bit of elaboration on any of the issues, please do type that in. Stuart will pick it up and stop me and then we can attend to your question immediately. That's the story of Amazon. In this period, it started moving more and more aggressively into the 'Internet of things'..What that is, is appliances – just normal, day-to-day stuff that is connected through the Internet. They've put together a deal with a number of manufacturers where these appliances are now also becoming so smart that they reorder what they need. For instance, washing machines – General Electric washing machines. When they washing powder or the softener starts falling to a level where it needs replenishment automatically (in the United States), it will send an order – if you want it to – to Amazon who will then deliver washing powder and softener to you, which will then be put into the washing machine. It's incredible. You almost have to open your mind. It's mind-blowing in many ways, what the 'Internet of things' means but if anybody is well positioned, given that it has these links into manufacturing and it has the delivery capability to benefit from the 'Internet of things', its Amazon..Another area where Amazon is also way ahead of the field is in the Cloud. It got involved in Amazon Web Services many years ago. Everybody else was a little bit slow to react and today, Amazon has a huge advantage in that field, and continues to make great strides in dominating a very important area for the future. You might remember in the last webinar, we spoke about Amazon exceeding Walmart for the first time in terms of its market cap. Well, the enterprise value, which is a more important determinant for most investment managers, has also now exceeded the market cap of Walmart. It isn't just up there as an 'airy fairy' thing. The enterprise value of Amazon.com, which basically discounts the cash that they have on the balance sheet and included the debt that they might have in both companies' cases, is now exceeding Walmart's. It's sitting at about $250bn..An extraordinary success story and one that we've had a wonderful run from. Remember, this is a portfolio where you hold on for keeps, so we are not in the business of selling and don't be tempted if you followed us into it..Moving onto the next one: Big Blue (IBM)..Its performance against the S&P500 has lagged a little – not too badly. It's at about four percent worse than the All Share Index and it's not a bad thing, if you listen to what Warren Buffett is saying. He's the biggest shareholder now in IBM and continues to buy the stock. IBM itself is buying its own shares. If you can buy your own shares back at a lower level (in other words, apply your cash to buy your own shares cheaper than if the share price had run) then surely, for the business it's a good thing. Maybe for the investors who are trying to make a quick turn, they would criticise it but for the business as a whole and the long-term benefit of the business, it is a very good thing and IBM continues to do that. We're very happy with this as a value play..Onto Novo Nordisk: it is beating other pharmaceutical companies in the rush back into Iran. You might recall that Iran had a nuclear program, which the Americans didn't like at all. Consequently, they had sanctions against Iran. This was something, which didn't bother the South African company MTN too much. MTN went into Iran and in fact, has a very strong position there although it did bring all kinds of accusations that the management had bribed people to get the license in the first place. That seems to have been quietened down in MTN's case. Novo Nordisk, which is the world's biggest supplier of insulin, had to wait until things got better. They do have a manufacturing capability in partnership with a local Iranian company and in fact, they supply insulin for 700,000 diabetics in Iran as it is but they have announced in the past month that they're going to be spending €70m to build a new factory in that country..The first western pharmaceuticals company to say that it's going ahead; so good news for the Iranians that at least they are seeing some dividends coming out of their decision to change/open up their nuclear program. Good news for Novo Nordisk's shareholders as well, that they have the first mover advantage into another, very big market..Onto Apple, because this is going to dominate the rest of our conversation..It was the month of the launch of the next big thing for Apple. Apple iPhones are the major part of the company. Fifty-six percent of sales come from iPhones. Last year, they sold 169-million units and the concern with Apple (and you can see the drop in the share price over the past three months) has been that the iPhone 6S would not live up to expectations. If that doesn't do well – investors worry that more than half of Apple's sales are riding on the back of its iPhones – it would then have an implication on the share price overall. This stock is only trading at a price to earnings ratio of around 12. It's sitting with about one-third of its market cap in cash and it has a wonderful brand as you well know. What happened to the iPhone 6? It went on sale on the 25th of September and during that weekend; they sold 13-million of the new iPhone 6S phones..That beats any other pre-launch weekend by 30 percent. The best (prior to this) was the ten-million of the iPhone 6, which was one year ago. The iPhone 6S, since then, appears to have gone well. We've heard nothing more from the company, which is to be understood because you have quarterly results coming out. Remember, the September quarter is now behind so they'll be putting their figures together and wouldn't want to let anybody have any insiders taking advantage of this. I have a feeling that when their numbers come out at the end of this month, Apple will show that the company continues to flourish. Indeed, when we get to the next quarterly results, they will include (for the most part) the sales of the iPhone 6S. It went on sale this month in India, Russia, Saudi, Turkey, and markets like that. You can buy them now in South Africa. When you look at the 6S and you compare it with the 6, how big an upgrade is it?.According to the techies, it's significant. It's much faster but the techies say that's not really, what you need to look at. Rather, it's to consider; will people upgrade from the Apple iPhone 5 to the 6S? Apparently, there's a huge jump. The Apple 5 came out three years ago and you can imagine; with a company that's spending enormous amounts (as Apple does) on research and development, that when it comes to producing a new product and such an important new product like this, it would make sure that all of those bells and whistles would be included. Last year, incidentally, they spent $6bn on R&D. That's about three percent of Apple's sales. That should be sufficient to encourage those of us who have Apple iPhone 5's (and I'm in that group) to upgrade to a 6S – if not when your contract expires with the service provider, then perhaps even go in there before..The 6S Plus, which is the big screen, has been sold out and you cannot get stock anywhere in the world for several weeks into the future. Has Apple defied its's critics? Chief Executive Tim Cook reckons it has. He says that they've done far better than the analysts were projecting but we will only see whether the market reacts to that, when the quarterly results come out and as I said, that will be within the next few weeks. Stick with the Apple shares. We have. We've continued with that bet and we're very happy that we're getting in at a level – now -, which is going to look pretty cheap into the future..Just to close off with, here is the look at the portfolio today as against where we began on the 5th of December when we took that view that it was time to take money offshore. As you can see, the Rand/Dollar then was R11.27. It's now R13.51 – just sitting still. If you'd taken your money offshore and put it into an account over there, you would be 20 percent up. Incredible. As far as our portfolio is concerned, we've outperformed the market by eight percent in U.S. Dollar terms. The market as a whole is down three. We're up five at this stage and that has given this portfolio an annualised return of 29 percent and an overall return of 25 percent. The star performers there are Amazon, Google, and Novo Nordisk. This is in Rand terms – wonderful returns that we've enjoyed in this past year. Vanguard, which is the overall index as you can see, is down just around three percent when you round these things off..The Rand losing 20 percent and the Vanguard's still 16 percent up in Rand terms. Even IBM and Berkshire, which have been under performers on the U.S. market, are better off. Apple: our sole loser at this point. That's incredible actually, because when you're buying into a portfolio you have to expect that with some of the shares, you're going to be able to accumulate at a price at which, you simply can't time these things perfectly..That's our seminar for today. Stuart, no questions?.No. It's a bit dry on the question front. You can't blame the heatwave in Johannesburg but it could be a factor..Well, there are about 55 people listening. If you do have questions and you have something wrong with your computer and haven't been able to send them through, or if there was something wrong with our technology on this side, (which is always possible) we would ask you to perhaps just email them to alec@biznews.com and I'll be able to respond to that as well. That's our story for this week. We look forward to being with you at the end of the month. I'll give you a little bit more notice on that one. I'll put it through the newsletter, etcetera and hopefully, you'll join us then. I hope you are enjoying the performance of this portfolio..Thanks, Alec..All right. That's it. We look forward to seeing you then at the end of October. Cheerio for now..Cheers.

WEBINAR: Apple, Berkshire laggards

Related Stories