🔒 WEBINAR: Global portfolio maintains 31% annualised return but all eyes on EU, Google

JOHANNESBURG — Emotion and investing are two elements that don’t mix, a lot like oil and water. And it’s on this basis that all investment eyes have turned to the $2.7bn fine imposed on search engine Google by the European Union for abusing product searches. And as much as emotion may question why, the reality is still to be faced, as any good entrepreneur has to operate within the environment they operate. The move has not forced Alec’s hand to dump Google from the portfolio just yet, but it’s top of mind given the ‘new-found environment’ in which the company may operate in. But despite all the noise, the Global Portfolio is still holding on to that 31 percent annualised return, which in any investor’s book, is a good return. Tune in again next month. – Stuart Lowman

It’s quite interesting to reboot, if you like and to go back a little and understand how this portfolio has evolved over the last two and a half years. We began with a third of the portfolio in Vanguard, in the US market, a third of the portfolio spread between Google and Berkshire, to give it stability. Google with a fantastic business model, and Berkshire giving a spread across the US economy, and roughly the other third was put into five individual share picks. As it happens one of those share picks, Amazon, has been a huge performer and it’s come from 8% of the portfolio to 17% of the portfolio. By the same token, Berkshire hasn’t really performed well and what we’ve done is sold half of that stake to invest in Metro Bank, initially, and then we also sold half of the stake in Vanguard and that was reallocated into share picks.
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So, what we have now is have 15% of the portfolio in those, if you like, foundation stocks. That’s the S&P500 Index. That’s an ETF across the American share market and Berkshire Hathaway, so 15% is our ballast if you like, it’s what’s spread across shares. Then we have a big slug in both Amazon and Alphabet, which are approaching 1/5th each, in those two stocks. Apple has been a disappointing performer relatively speaking and that’s now at 13% or about 1/8th of the portfolio. Then we’ve had a superb performance from Tesla, which we had really as a bit of a wildcard that’s nearly grown to 8% of the portfolio, and recently the Metro Bank performance has also been pretty good.

We have last month and this month bought into Tencent and the way the purchases work in the global portfolio, and I strongly recommend that all South African investors follow this process. Is that once we’ve identified a stock and how much we would like to put into it, we buy it over a 3-month period. That way you eliminate to a large degree the turbulence and the volatility in exchange rate and in share prices. So Tencent, which is our most recent acquisition, we have bought another 206 shares in Tencent in this period and that has now taken the Tencent shareholding up to 5%. After the next purchase, it will be around 7% as well. So, what we’ll have there is the ballast in Vanguard and Berkshire, then we’ll have a similar amount in Alphabet and Amazon, and the others are the share picks, with Apple being the biggest of those because it’s offering the best value.

In this period, just to get you up to date then with the change that was made. Going back to that discussion on the purchase of Tencent, we have bought another 1/3rd of the shareholding that we want in this company in this period. The share price is up a little in the last month. It’s gone from HK$276 to HK$283, that’s not necessarily a good thing for us. We would have liked the share price to stay the same or even for, so we could have bought a few more shares but we decided to have exactly the same number of shares that we bought last time round because, as you can see, the cash holdings are quite hefty at $28 thousand.

I have been looking at a couple of other options to invest in but have not got the confidence as of yet to make those purchases. There’s one final little addition to the portfolio in this month and that was a dividend received from the S&P 500 Index – a dividend of $107.00 as you can see there. So, we’re sitting on $28 thousand, of that $7.500 roughly, has been earmarked to be invested in Tencent shares next month in the last of our three phased investments into that counter.

Here’s the portfolio in Rand and this is really where the action really sits up for us because what we’ve done over the period is since December 2014, taken a view that the SA Rand would be weaker as a result of poor economic management. Now at times, and you’ll see in the graph that comes in a moment. (Why don’t we just go there and it will give you an indication.) As you can see that’s when the portfolio began. It was on the 5th December 2014 and the Rand, at that stage, was R11.27/R11.37, it depends on how you want to put it or what time of the day you want to look at but it closed on the 5th December at R11.37. It was in fact, down there at R11.27, as you can see the day before but it was a view then that we were taking that the Rand would be weak and indeed it proved as much and, as you can see that during this period here the Rand actually blew out all the way into early 2016, to over R16.00 to the US Dollar.

Since then, however we’ve had an incredible run in the currency, as you can appreciate by looking at the little arrow that I’ve put in there, and the run in the currency to the current perspective, the current point here of R12.97 has been caused not because of anything good that’s happening in South Africa. Indeed, the economy in South Africa has flatlined as a consequence of very poor economic management and we’ve seen the evidence of corruption as well that has come through. That’s not been good for the economy but what has helped the currency is the carry or interest rates in SA being far higher than in other parts of the world. So, currency traders have been buying emerging market currencies generally, and amongst them the SA Rand helped along by the fact that the interest rates were pretty high during that period.

Just to go back to the portfolio itself as you can see there that the profit in the Vanguard holding, the S&P 500 holding, since inception has been 36%. Now, the interesting thing is that the Rand has depreciated over this period by 15%, so our bet was invest offshore because the US markets in particular, but global markets generally, are offering far more options than you would get on the Johannesburg Stock Exchange (JSE). The second thing we felt that the SA economy was being poorly managed and, as a result, the Rand would be weaker. That’s paid off as well but as you can see, from the Vanguard holding, the increase in the share price of American shares has been 36% over there, which compares with a 15% depreciation in the Rand. So, if you had just taken your money and put them into the US market, into the overall Index there, you would be 36% better off by doing that.

As you know, in the last 3-years, for the period that this portfolio has been running, the JSE has flatlined in Rand terms, so you would definitely be able to say that the decision to invest offshore through the Webtrader offering has been a very good one. Certainly, if you’ve been following what we’ve been doing but what has made this portfolio perform so well, in other words the portfolio overall, in Rand terms (as you can see down there), has achieved 77% since inception. That works out to 31% annualised over the 30-months that we’ve been running. It has been the good fortune with a few stock picks.

Now, the first of these and the most obvious of these is Amazon.com, which in Rand terms is up 247% from the time that we bought it. We bought in on the 5th December. We paid $327 a share for it. That share price at the moment, is $990. In fact, it did reach a thousand Dollars a share. We also have done very well out of Amazon and in Rand terms you can see there’s 102% gain there. Again, it was a combination of buying in $534 on that share and it is now $940. There’s a big story there as well, which we’ll talk about in a moment but also because of the Rand value. But the real performer, the real star performer recently, and we only bought it on the 25th October, is Tesla. We bought it over 3-months and our average purchase price came at just under $200 a share and as you can see there, (that’s since October last year when we started), it’s now $371 and that’s a return in ZAR of 76%.

So, what happens in his portfolio is if you have good fortune in making some stock selections that will lift your overall return, as has happened here, then you do outperform the market and that’s been our very good fortune in this respect. So, everybody who has been following us, even if you’ve only been in the portfolio in the last year, then you would have had at least one big winner, which is Tesla Motors. There’s a lot behind that as well and the recent run in that share price we’ll talk about in just a moment.

Let’s get a little bit further into the presentation and there’s the Rand’s performance. We do keep quite a close watch on the Rand. There’s not a lot one can do about it, excepting if your view is that the Rand is going to be a weak currency long-term then you would be investing in Rand hedge stocks, and that’s exactly what we’re doing. These are the purest of the pure Rand hedge stocks obviously, because we’re investing offshore.

Moving onto the individual performance of the shares, and there you can see it quite clearly. That the stock picks have done very well, Amazon, Alphabet, and Tesla, so we have 3 big winners and on the other end, the others have actually underperformed this stock market generally. The stock market performance is reflected by Vanguard, (we’re talking about the US market). Facebook – give it time because we haven’t been in there very long. Metro Bank is a UK stock and the UK market has done well but the British Pound not so good, and as a consequence Metro Bank did a bit of a reverse in the last month, which is not concerning. It’s probably just an opportunity to buy more shares, and then Tencent, which is far too new to make any assessment of.

There, in a graphical form is the Rand/Dollar, so there it is down the bottom. You can see the way that the Rand/Dollar has performed, so if you had just taken your money and put it into US$ that’s what your performance would be, 15% over the last 2.5 years. But by investing it into even the US stock market, which is the Vanguard Index over there, you’d be (down that side) doing a lot better and of course we’ve had that really good fortune of the other shares that have done really well for us.

There we have the dividend receipts. We keep a close track of this as well, of course. You’ll see in there that there are 3 companies that do no longer appear in the portfolio, IBM, Novo Nordisk, and Barclays. We sold out of Novo Nordisk when it appeared as though there was a scandal brewing. We were very fortunate to get out at the time that we did. Up until that point though we did reap some dividends from it, and similarly with Barclays, well a 1p dividend, not exactly going to change too many bank accounts or addresses but what it did do was sharpen our minds when Barclays was shown to have done something that tinged it with scandal. It’s not a good idea to be invested in any company where there is scandal related to it, so we got out of Barclays pretty quickly and interestingly enough I see the shares have fallen even further since we sold our stock, on yet another scandal. It’s almost like that saying that Warren Buffett has that there is never just one cockroach in the kitchen.

So, there you have the dividend from S&P – we got $107 as mentioned earlier. Confirm that you can see that picture. So, there’s the Vanguard Group. Incidentally they have recently launched in SA, so you are able to plug straight into them. A fantastic operation started by John Bogle (that’s his real name), they call him Jack Bogle, who is the father of Index Investing and at the Berkshire Hathaway Annual General Meeting this year, before Warren Buffett started proceedings, he asked Mr Bogle to stand up so that he could acknowledge the man who had saved billions of Dollars for American investors, (not just American investors).

We do like Exchange Traded Funds. They are a wonderful way for those who are not focussed on the day-to-day of their individual shares to grow wealth in the stock markets, and the Vanguard S&P 500 Index still a little bit of a ballast, if you like, or providing some ballast to this portfolio. But our intention always was that we would reduce our holding in the Index when we found a really good share pick, like we did with Tesla.

If you have a look at this it gives you a very good indication of what’s happened to the US market in the last year. The Vanguard Index being an Exchange Traded Fund, follows or is weighted against the S&P 500, so the top 500 companies listed on the American stock market and, as you can see, the market has priced from $190 to $223 in the last year. A reasonably good performance helped primarily, by what happened here in November, with the election on the 8th November of Donald Trump who brought what was called the Trump Rally or the Trump Play and that was all his promises that he would be good for business and there was a strong run in all the American shares, or on the imbalance by American shares between his election and it’s started petering out in March 2017. Since then it’s bounced up and down and since March, where it hit $220 (the S&P Index) it’s now sitting at just over $223.

So, the Trump Rally is out the picture and we’re back to the old story in the American market where you have the growth stocks or the exponential stocks that have been making a lot of the running and the value stocks that are under some pressure. There had been indications from some analysts that this might be reversing. There’s quite a lot of speculation in that regard. The feeling is that the value stocks or old economy stocks are now too cheap and that growth stocks, which we favoured in our portfolio, are too expensive. I really don’t know how to interpret that excepting to say that when one follows the graphics and the technical, you really are getting yourself painted into a short-term picture. For me, when you have a look at the fundamentals of the company that is where the essence of investing lies. You want to buy into something where you can leverage the human potential and if you can find an exponential company, in other words, one that grows at an extremely rapid rate, is so much the better and that’s what we’ve been trying to do in this portfolio.

Here’s a stock that has been one of our core holdings from the beginning but is one that is now suddenly pretty worrisome. Alphabet Inc. in the last week was taken to task by the findings from the European Union, it’s not a new thing but the European Union has been attacking Google on the basis that it is a monopoly and it has come to the conclusion that it used a very small, little part of the Google operation, which is the Comparison Shopping. It said that Google was promoting its own Comparison Shopping options ahead of those of competitors and as a consequence it was abusing its monopoly.

Now, those of you who read the Daily Insider will know what I feel about this personally, but it doesn’t really matter what I feel about it personally. What does matter is what is it going to do to the company’s ability to perform? The concern that you have to have as a consequence of that is that now that the European Union has labelled Alphabet or, more specifically its subsidiary, Google, as a monopoly. It opens the door to all kinds of other bits of nonsense. You can get people attacking it legally, on anti-trust issues in Europe, on a wide range of spheres, and it does concern me that this is going to put some kind of a cap of the growth rate of Alphabet. Not bad enough yet for us to dump the share. It’s done very well for us over the period that we’ve held it (for the last 2.5 years), but I am worried that it is now moving into a different phase of its existence.

There are two ways, we’d like to see how Alphabet reacts. If it decides to take this on appeal and to fight it through the courts, which is very possible. It will go on for a long time. It’s a similar strategy to the one that was adopted by Intel, which has been at it now for the last 8-years, so these kind of issues, you can tie up the regulators for a long time and perhaps Alphabet will take that view and say they’ve got lots going on in their business. Europe is an important market for them but not the most important. Maybe they just sterilise those businesses there, tie up the Regulators in court and just carry on focussing on elsewhere in the world – that’s a possibility. On the other one, they might go ahead and pay the fine of €2.4-billion and if that were a decision it would presumably open up the company if it doesn’t work out a really good settlement to other potential predators from the Regulatory area.

There’s a lot of uncertainty around Alphabet at the moment. It’s been a fabulous performer for us. It’s an incredible company but this new factor that’s come to play means we need to pay a lot of attention. If you risk averse you’re probably going to do better at the moment by, certainly not taking too big a gamble on Alphabet – let’s just wait to see what happens. You can also, in the illustration it’s quite clear there, see that the share price of Alphabet has come under pressure as a consequence of the EU decision, so it’s something to pay very close attention to.

There’s no such problems at the moment anyway for Amazon, who knows in years to come. They’re becoming extremely dominant in many areas but the big news from Amazon in the past month, it was on eh 16th June, Youth Day in SA, that the announcement was made that Amazon is going to buy Whole Foods. Whole Foods is a fresh food operation. I actually had the privilege of meeting John Mackey, the CEO, back in an Entrepreneur of the Year Award in Omaha. I think that was back in 2006/2007 and Mackey did not win that year. He was up against Brian Joffe, who also did not win from Bidvest. The winner came from a different part of the world but Mackey was quite outspoken. An entrepreneur who, indeed did say that at one point, Amazon’s move into groceries was going to be the death of the company. Well, he’s now saying it was love at first sight. It just shows and depends on which side of the boardroom table one sits, I guess.

Anyway, the deal has been done. Amazon has bought Whole Foods for $13.7 billion. The Mackey, the Texan, can retire quite happily with never being able to spend all of that money but what will Amazon do next? There’s lots of speculation that it’s going to have to make further acquisitions if it’s really going to get involved in the grocery market. We do know here, in the UK, that Amazon Fresh is starting to gain some momentum. The competitors in the UK are pretty strong. There’s one called Ocado, which is separately listed but again, it’s not the kind of company that you would ever bet against and we’re very happy to be betting with Amazon.

The other bit of news on Amazon, to watch out for, is that on the 11th July, it’s 100’s of 1000’s of prime customers, which is a subscription service that you pay, in this country just under £100 a year for, and it gives you all kinds of benefits. It’s called Prime Day and they’re running it for the third time on the 11th July. It’s in 13 countries around the world and it usually has a huge boost for Amazon’s turnover on that day. They manage to get their suppliers to offer special deals. It’s a bit like ‘Black Monday’ that we see in the retail industry generally, so it will be an interesting development to watch, (11th July – the 3rd time round). All round though, the Amazon’s story in this month was very focussed on that acquisition of Whole Foods and what happens next. So, the share price, as you can see from the graph, briefly broke through $1 thousand a share and it has come back from there in the last few days, and it bounced back again at $990.

It was impacted, as were all the tech stocks and all the stocks in our portfolio in the last couple of weeks by this perceived swing away from growth companies back into deep value companies. It’s not something that we need to worry ourselves or concern ourselves about very much. We’re quite happy to stick with Amazon. In fact, in a personal capacity I bought some Amazon shares in the last week, on the weakness of the stock.

Berkshire has got more than 80 subsidiaries spread across the US economy. It has a huge portfolio of shares. Concentrated in 6 stocks, 2 of those are banks, Wells Fargo, and Bank of America. It has been selling out of IBM, which was one of the reasons why we also sold out of IBM. If you want more on that story it’s well worth going and listening to the Annual General Meeting of Berkshire Hathaway where Warren Buffett gave, on the one hand huge applaud to Jeff Bezos and on the other hand he said he wasn’t happy about IBM and he explained some of the reasons why he was selling. On top of that, by the way, he also felt that Apple offered great value and it sounds like, although they’ve put $20-billion into Apple already at Berkshire, he might be topping up his shares with the price of Apple having eased back in recent times. But there’s the Berkshire share price. Berkshire didn’t really do a whole lot in this period, as far as the news flow is concerned but you can be sure that with $10’s of billions in cash, sitting on the balance sheet – Mr Buffett is looking for elephants, as he calls them.

Thanks, Alec. The questions are back up. I’ve got something from Derek Jordaan. He asks, do you agree that the large volumes of money going into asset trackers, such as the Vanguard S&P 500, is pushing the market beyond its true value?

Derek, the value of the market is a function, on the one hand of interest rates, and on the other hand of economic growth. It really is as simple as that, if you want to break it down to the basics. When interest rates are high then they offer an alternative, a risk-free alternative, to equities which remember always do carry risk, and for as long as interest rates are low the option of going into equities is going to be better. Money going into Index Trackers is a reflection of this. Lots of people in the Northern Hemisphere are looking at interest rates of 0.5% from a bank and saying, ‘well, I’ll take my chances with equities,’ even though the equities, by historic standards, some of them are expensive. In the markets at the moment what you do have is almost 2 markets in one, and we’ve seen this in SA, where for years or decades actually, we’ve had the resources stocks which could be on one direction and the rest of the stock market, banks and retailers and property shares, etcetera, going in another direction. As a consequence, when you buy the Aussie 40, or the JSE or share Index you really are buying 2 stock markets in one.

What’s happening now in the world, with the Fourth Industrial Revolution, is you’re buying 2 stock markets in one in America as well. So, you’ve got the exponential companies, you’ve got the Silicon Valley giants on the one hand, and then you’ve got the old American companies on the other. One needs to be very specific about what it is that you want to achieve. Now, by investing in the S&P 500 Index and the money that is going into Index Trackers, small investors, well large ones too are saying ‘I don’t know who’s going to win. I don’t know where the valuations are going but all I know is that I want to have a slug of this.’

What we do in our portfolio is we try to pick the winners and our view is very much based on the whole exponential story, the story that the Fourth Industrial Revolution is seeing a shift in resources from old technology to new ones. A shift from inanimate objects to brainpower. A shift in disruption of entire industries like the move from internal combustion engines to electric cars. The move from coal-based power stations to renewables, etcetera. These all offer huge opportunities if you get it right and sometimes you can actually be buying at the wrong time because as the rest of the world catches on or as other investors catch onto the same story. You can end up overpaying and our view on this one is to use that 3-month basis, so you’ll make your investments over 3-months and then you buy to hold, so the only reason for us to sell the stock would be if its scandal related or if something fundamental happens in the business. That’s why I spent quite a bit of time talking about Alphabet. I’m concerned that there could be a fundamental change in Alphabet’s operations into the future. We need to really, carefully assess how it reacts to the EU fine, which is now defining it as a monopoly. I hope that helps.

Thanks Alec, I’ve got a few questions on how people invest, how do they go about investing in the portfolio itself? There was an interesting comment off the back of that from Keith. He asks if you’re looking to buy into the Scottish Mortgage Investment Trust, off the piece Jackie did for Premium the other day?

Keith, it’s a very similar portfolio to the one that we have here, which means that if you were to buy into it. Well, for us to buy into it we would be duplicating many of our existing holdings but to buy it directly as an investment trust, it would make a lot of sense. If you have money offshore or you could use the Webtrader, so there’s both of those options. Webtrader is an innovative product that Standard Bank started in mid-2014. When we were talking with them about our view on international markets it became quite obvious that we were aligned in a thought that we should be encouraging South Africans to invest abroad, given our view at Biznews that the SA Economic Policy, under Jacob Zuma, was not going to produce anything but dismal results for the economy. We’ve seen that this year with two successive quarters of contraction and in fact, SA is the only country in the world that has achieved that dubious honour this year. So, not great news as far as the economy is concerned.

Webtrader is available to anybody who hasn’t used their maximum of their R1-million a year that you are allowed to invest offshore by exchange controls. So, it’s really that simple. You can put your money into a Webtrader account and you can use it, transfer it into US Dollars, Pounds, or Euros, if you prefer, and use that to make your investments in the same way as you would use an online trading system to make investments into a stock on the JSE. It really is that easy. My suggestion would be that you take whatever money you’re putting in there, allocate it or spread it in the same proportion as we’ve got it in our portfolio and then I’ll be almost your eyes and ears on the market and be able to give you updates every month without you having to trade the shares because the most expensive thing for any investor, the biggest cost is trading and when one gives the funds to a portfolio manager, who is trying to gain short-term advantage by their trading they would actually sometimes cost you money. So, you want to keep the trading costs to a minimum. You want to make your investments sensible, over long-term, and you don’t want to, unless in exceptional circumstances, sell or get out of those shares. In the 2.5 years of this portfolio’s life we’ve literally only disposed of 3 holdings. Obviously, you can’t get everyone right and where we do make a mistake, we will move as actively as we can, when the fundamentals of a company change. I hope that helps.

All right, let’s have a look at Apple and there, the share price has come under a bit of pressure lately. It had a really good run in the last year, it was in the early 90’s, and it’s now at $145 a share. In fact, it got to nearly $160 a share, as you can see from this graph. Part of the reason here is the support of Warren Buffett who’s invested, as I mentioned earlier, $20bn into Apple stock. It’s also partly because there’s an anticipation that the Apple8 is going to be a fabulous product, so a lot is riding on Apple8 and there’s lots of rumours around it. Why Apple8 is so important is Apple6 was a big difference, and that did give iPhones a big kick-up. By the way, iPhones account for something around 60% of total Apple revenues, so it’s a very important part of this company’s business at the moment.

When Apple 8 comes out it is expected that it will be a quantum jump from the Apple7, 6 and 7 are very similar, similar in looks. You can’t really tell them apart when you see them in somebody’s hands. The anticipation is that Apple 8 is going to be something very different and, as a consequence of that, the Apple Team is hoping that they can recapture a share of the Chinese market. Very briefly, in China the Apple if you like of China, or the dominant player, the ecosystem of mobile phones in China is owned by Tencent. That’s why we love Tencent. If you were to have an Apple phone you have a very low, and live in the USA or in SA, there is quite a strong moat around it because you use the Apple Apps, you use IOS, the Apple operating system.

For you to move to a Samsung phone is quite a jump. However, if you live in China the chances are that 900-million people in China use the – they might have Apple phones, or Huawei phones or Samsung or whatever phones that they do have but that doesn’t matter. They use the Tencent ‘We Chat’ App. So, that’s their operating system and that’s what gives Tencent this enormous advantage. They don’t have to rely on, as Apple does, producing new products or selling people onto the hardware. They’ve got it all there, so it doesn’t matter what the hardware is, they actually own the software. They own the eyeballs, whereas Apple needs to bring out something really special later this year or early next year, when they bring out the Apple 8 iPhone. You’ll see the share price will bounce around, depending on the rumours of how good the Apple8 is going to be. We’re quite happy though that it is offering excellent value. The price to earnings ratio here is in low double digits for a company that hasn’t even started tapping into its ecosystem and the huge potential that that offers. It’s pretty good value in our opinion.

Facebook – well, good news coming out for Facebook followers is that the share price is managing to beat this rotation, going back into, away from growth stocks into value stocks and Facebook itself is moving, as is Apple, into a new area, as is of course Google as well. That is, they want to eat the lunch now of the movie companies. Amazon is already in there, in a big way. Netflix of course is already putting a lot of pressure on movie houses with its own productions like House of Cards, for those of you have watched that political drama, and many others.

Facebook has signed up a couple of heavyweights. They’ve bought the two producers from Sony TV on the intention of creating their own TV programs and they’re prepared to spend $3-million an episode on them, so that whole area is becoming very active, and it’s interesting to see these big tech companies that have now got lots of cashflow coming into them. Operating at very high margins because they’ve done all the investment and taken all the losses in years gone by. They have the audiences and now they’re moving into new areas.

Tencent is a similar story in China. What it has done there is it’s now moving into producing its own games. In the past, it used to buy games from those game makers and then gave them away to just keep its ecosystem growing and getting it bigger and bigger. Now, it’s starting to leverage that 900-million customer based. Facebook, of course, has got an even bigger customer base potentially, that it can sell into. So, it’s so interesting to see the way that the Fourth Industrial Revolution is concentrating the benefits to a handful of companies on which consumers rely, initially, with Google’s case, for search engines. With Apples’ case with their cell phone. In Facebooks’ case with social media but once you’re in their ecosystem they can start adding new things.

Amazon has done it in the retail space, so Amazon also the biggest beneficiary of all of this because it has Amazon web services and Amazon web services was way ahead of its time in the cloud computing. So, it’s almost like these companies in their core businesses are mushrooming all the time. They can plug-in very profitable options, they can experiment, they’ve got lots of cash to do it with. Incredibly hard if you are a competitor to these businesses and when Amazon did its acquisition of Wholefoods there was billions of Dollars wiped off the values of Wholefoods’ previous competitors because with Amazon coming in there the anticipation of the investment markets was ‘life was going to be very tough for them.’ It will be very tough for movie makers in the traditional movie maker industry with Facebook as well, coming into a market where some of the other big gorillas of the world are playing. We like Facebook.

You mention Tencent. Someone wants to know Naspers or Tencent, I mean obviously they’re different locations, but what are your thoughts on them as an investment?

South Africans have been very fortunate in getting a slug of Tencent. If investors were to build a statue to anyone they’d be building a statue today to Koos Bekker because Naspers makes up about 20% of the free-float Index on the JSE, the SWIX Index, and that means that it’s in pretty much every retirement portfolio. It’s investment in Tencent, which was made in the year 2000, was part of a strategy that Koos Bekker and the late Antonie Roux had of investing or spreading investments in emerging in emerging market companies in internet companies. They found Tencent when it was about 30 people and bought half of the company. Now since that period of time the shareholding of Naspers has dropped to about 34% but it still is the biggest single shareholder and Tencent has been the biggest wealth creator for South African Pension Fund members in history, as that has rocketed, Naspers’ share price has risen as well.

The problem with Naspers is that today Tencent is so big that it accounts for 130% roughly, of the Naspers share price. What does that mean? That means that if Naspers were to sell its shares in Tencent today – for every R100 you have invested there, you would be getting back R130 plus you’d have all the other Naspers assets, the various newspapers, although they aren’t really great assets anymore, but some of the significant assets that Naspers does have in places like Russia, Brazil, and Eastern Europe, just to mention a few, of course there’s also Multi-Choice on top of that but it’s a double-edged sword. If you’re buying into Naspers you’re getting those Tencent shares cheaper. However, investment trusts like that, when you are an investment trust usually you continue to trade at a discount to the underlying value. So, there’s no guarantee, in fact it’s most unlikely that Naspers would sell its Tencent share, so that value trap (if you like), that difference between the value of Naspers’ assets and it’s holding in Tencent is not going to disappear overnight. In fact, it’s unlikely to disappear any time soon.

My feeling on this is that if you want to get the full upside from Tencent go directly into the company but if you have Rand’s that cannot be invested offshore then put them into Naspers. So, Naspers should be a constituent of every South African portfolio, it already is through the Pension Funds but it gives you a wonderful, discounted investment into Tencent. But if you’ve got money offshore you wouldn’t want to duplicate your Naspers’ holding, if you put it straight into Tencent. You can see, I’ve done my homework on this company. I think Tencent is an absolutely, incredible business. As you would understand for any business that has 900-million people who use it every day and of course the opportunities are going to be global for this company.

China is roughly, one in five people on earth are Chinese, so it’s a huge market and it’s growing at 67% GDP per annum. It’s lots on Tencent’s plate but when one day it runs out of road in its home market it will be a very strong competitor when it goes into the global arena and that’s something to look forward to as well. So, on both of those scores, I hope that gives you a little bit of guidance.

Thanks Alec.

Here’s Elon Musk, a boy from Pretoria, rated as the greatest entrepreneur next to Jeff Bezos, in the United States, and his company, Tesla Motors has given us great reason to smile. We’re delighted at the performance of this company in our portfolio. We bought in just under $200 a share. You can see there between September, October, November – the average price was just under $200 a share and the stock has, well it was almost just when we had finished our purchasing that it decided to take off. The reason why it was offered at that relatively low price was this was a period when Tesla was doing an acquisition, well they called it a merger but actually it was an acquisition of a company that is owned or was run by Elon Musk’s cousins, the Reeve brothers, a company called Solar City, and Wall Street didn’t like the corporate Governance around it, and as a consequence they were down-rating Tesla. It didn’t really matter because Tesla was 93% of the merged entity and it really wanted the company to be part of Tesla, so that they could coordinate their investments into batteries, which is going to be a huge area clearly, if you are making electric cars.

Tesla’s recent run, from around the $300 to nearly $400 level has come on the back of rumours, which were subsequently confirmed that it is now looking to start manufacturing in China. China, as you are well aware has got huge problems with its pollution and it is aggressively pursuing opportunities in electric cars. It also has the benefit of a political system, where if the Government makes a decision, things tend to happen. There isn’t sufficient resistance that one finds in a democracy to slow down, once those decisions are made. You might look at that [inaudible 0:45:59.2] being a person who has a democratic perspective but from an investment perspective what it means is that there’s a whole, new area that’s opening up for Tesla and Tesla has been discussing opening a factory in Shanghai with the Shanghai Government, so the local Governors there are very excited about bringing Tesla to China.

The benefit for Tesla is not only that it will have a partner well plugged into that huge market but also that it would eliminate a 25% import duty that is currently being charged on Tesla cars that are being sold into China and they’re selling a lot of them – 15% of Tesla’s turnover last year came from its sales into China. So, you can see why the market is getting excited about this. Next month, July, Tesla will kick-off its most ambitious program yet. Last year they produced 84 thousand vehicles. Next year, 2018, they’re expecting to produce 500 thousand Tesla vehicles. The reason for this is that they’re launching a new product, the Model3, which will be selling at $35.000 or about a third of what it costs you to buy a Tesla car today. Clearly, the $35.000 model is going to be also very appealing in China as well.

So, lots of things happening for Tesla at the moment. When Elon Musk initially said that he would be ramping up production from under 100 thousand to over 500 thousand in just two years, there were lots of people who were sceptical. Those sceptics have now gone into the background and certainly, Wall Street loves him again. The next big story to have a look at Tesla is, well outside of the producing of those 500 thousand cars, which kicks into gear in July, is the massive battery factory. The biggest battery factory in the world that’s being built in the Nevada Desert. You need those lithium batteries to be able to power these cars and the inputs into those batteries are the products cobalt, nickel, and copper that supply is dominated by Glencore, another South African related company. So, there’s a lot of stories or opportunities going around this massive swing from internal combustion engines to electric cars but the purest investment that you can make in this regard is Tesla and we’re very happy to have our stake in there.

Metro Bank is, if you like, the British equivalent of Capitec. It’s a company that has, when you talk to people in the UK, increasingly you’ll hear of them. The more progressive amongst them going into Metro Bank. The share price has done okay since we invested in it. It’s had a bit of a bumpy ride recently and that’s primarily because of the uncertainty in the UK, which has affected the Pound, which has affected pretty much everything on the stock markets here. If you were investing in ZAR you’re almost level pegging but the Pound has been under pressure against other currencies particularly after Theresa May made yet another mistake in her election, calling a Snap Election, which left her without the majority that the Conservatives had before. But Metro Bank is a disrupter in the Capitec mould and it is a company that we’re very happy to have in our portfolio.

Just on the back of Metro Bank. Francois wants to know if Lloyds, he said we mentioned Lloyd’s Bank a little while back, if it’s still under consideration?

Yes, indeed we did look at it and we were thinking very long and hard about it. There’s also quite a lot of money that’s flowing into Lloyds Bank by UK Value Investors. But the more that I’ve been looking into the while Fin Tech market, the more I get worried that even though Lloyds Bank is a really good bank and offering great value based on traditional means. How it’s going to manage or how the big banks are going to manage against FinTech players – I still don’t have any certainty there. It’s almost like it’s the best address but it’s in a neighbourhood that’s going down and I just can’t get myself to say this is a company that we can buy in for the long term because we will unlock value in it. It comes back to that overriding theme of the moment which is massive disruption of traditional companies. Although Lloyds is, and I would far rather have Lloyds in our portfolio than Barclays and it is cheaper. It’s gone down since we were looking at it from the early 70’s and it’s now in the mid-60’s in Pounds. I still don’t, I just can’t buy that. It’s almost like would you be buying the best or the blue chip buggie maker at a time that motor vehicles were being invented, and that’s the danger that one looks at. There’s so many wonderful opportunities elsewhere that Lloyds bank is not one. Remember, our view is that whatever we buy we’ve got to buy forever and I can’t see that with all the headwinds coming at Lloyds Bank, despite the obvious appeal that we’re seeing. I can’t see that forever is going to be a period that Lloyds Bank will flourish in.

Thanks Alec.

Then to just close off with, the last stock in the portfolio, which is Tencent Holdings. It has bounced around in the last month, which is fine. That’s what we want it to do. We don’t want it to take off please, until we have concluded our purchases. It’s gone up HK$8 a share, so we’re paying a little more for this month’s chunk and as far as the Rand is concerned, the very little change between the Rand and the HK$ in the last month, so those are the… I’ve spoken a lot about Tencent, so we really don’t have to go into any detail now, and that is the portfolio generally.

Just to close off with. There’s the annualised return of this portfolio at 31%, is way beyond any expectations we had at the time that we bought in, in December 2014. If you can achieve a return, which exceeds the inflation rate in SA, so in other words, if you are able to beat 6% a year then you’re already in front and clearly, we’re at 31%. It is a result of some share picks, which have come to the party. I think they are largely due to the over-riding strategy which says go for exponential companies rather than the value stocks or the old economy stocks. What I’ve just said about Lloyds Bank still holds true for many shares that are on many of the stock markets. You can find real cheap ones but what does the future look like, for instance if you’re in retaining and along comes Amazon or if you’re in telephony and along comes WhatsApp? So, these are big stories and big trends that one needs to be aware of and you want to be on those horses that have got the inside rail, on these big developments of ours, so the exponential companies – those are the ones I want to look out for and I’m very happy now with the structure of his portfolio.

We do still have a little bit of ammunition, if you like, available for finding new options. That R28.000 in cash, you could add to that the value that is sitting in both Berkshire Hathaway, which is another R168.000 plus the Vanguard portfolio, R240.000, so we’ve got nearly R420.000 in cash that we can allocate to some more of these big winners but if you look at that by comparison, that’s as much as we’ve got in Apple, at R395.000, so there are big options and big opportunities available but we’ll have to have a look at how things develop from here. I hope you’ve enjoyed this update of the portfolio and I look forward to being back with you in a month’s time. Of course, over the next month we’ll also have our local portfolio and we’ll also be delivering investment ideas, no doubt, through the Biznews Premium on a daily basis.

Just to close off with though, investing primarily is to try and avoid the losers. It’s to always invert what can go wrong? How can I protect my money? What is it that, for instance Lloyds Bank – if I tie money up in Lloyds Bank and FinTech or the FinTech revolution continues, how is it going to affect that company? These are the issues you need to look at, and the one I highlighted for us today was on Alphabet and that fine that has been levied by the European Union. I think it’s a terrible thing to have been done but the EU doesn’t care what I think. In fact, they don’t care what the rest of us think and what they do though is impact the value of our investments. We have to, almost like a good entrepreneur that doesn’t kick against the system. A good entrepreneur has a look at what is in the system, what the parameters are and then operates within those parameters. As an investor, you’ve got to take emotion out of it. You’ve got to operate within that parameter, so the big thing for us in the next month is going to be seeing what comes out of this whole Google fight with the European Union.