JOHANNESBURG — Biznews Premium subscribers are very familiar with the SA Champions Portfolio. It’s recently changed focus towards SA Inc, and is an investment in South African entrepreneurs, whose companies are listed on the JSE. And as is every month Alec Hogg will take listeners through the performance of this portfolio. This month we also introduce you to the Biznews Exponential Portfolio. It’s an investment into US-listed companies with exponential growth potential. What’s exponential? That means more than single digit figure growth potential. To find out more carry on reading, or you can watch the YouTube video. – Stuart Lowman
It’s the 13th of March, my lucky number – there’s a long story to that as to why 13 is my lucky number but anyway, I hope it’s your lucky number too and certainly, if you’ve been investing in the BizNews Portfolios you’ve got a lot to be excited about. We have restructured the SA Champions Portfolio and we’re reporting this time, today, for the very first time on the US Exponential Portfolio and that has been a rocket. It’s come out of the starting stalls as a flyer, as we say in the racing industry, and I’ll be taking you through that in just a little while. So we’ve got a lot to get through in the next hour.
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Let’s kick-off by giving you the mandate for the BizNews SA Champions Portfolio and that is JSE listed companies, i.e., only companies listed on the SA stock market, driven by the country’s best entrepreneurs. So that’s our mandate and that’s what we have stuck to there.
Just to recap as well. We made some big changes to the portfolio and there’s quite an interesting story behind that one too, but the reason we made those changes was after the Ramaphosa election as the ANC President. Our view was that the economic prospects of SA had changed structurally. There had been a structural change in the long-term basis of the SA economy and international investors felt exactly the same way. I’ve highlighted this from the Wall Street Journal graph. By the way, as a BizNews Premium subscriber you really need to, if you haven’t done it yet, action your Wall Street Journal subscription. You can get into the back-end. They’ve got fantastic graphs, a whole data section quite apart from all the amazing stories that are available. But I think I’m actually going a little fast today, Stuart Lowman, our managing-editor, is in Johannesburg, and Stuart I haven’t even brought you in to make sure that everything is on stream. We’ve got so much ground to cover – I also wanted to get quickly out of the starting stalls.
Thanks Alec, it’s all good. I do know the US portfolio is going to consume a bit of time because it’s new so just quickly. I haven’t had any complaints so I’m guessing everyone can hear me. I see a few hands already so that’s always good to see. If you can see Alec’s graphs and you can hear my voice, just raise your hand – excellent. That’s perfect and we do try to keep it conversational and very interactive. There’s a little question toolbar on the right hand control panel. If you jot your questions in there I’ll pass them onto Alec as soon as they come through and we’ll try and make it conversational and get going. Alec, let me not hold you up because I know there is a bit to get through today.
Indeed so just to confirm again what Stuart says. As you would like to present your questions please do so. So the Rand (ZAR) – on the 5th November it was trading at R14.37 against USD. If you have a look at the graph now it’s comfortably below R12. So that is an improvement of 20% in the ZAR’s value. Why did I use the 5th November? Well that was about the time that we started getting some kind of an inkling that Ramaphosa could win the ANC elective conference. It really was a watershed moment when he scraped in – just 90 people out of 4,700 who voted for him. Had they gone with the other side then we would have had a continuation of the weakening of the ZAR and a poor performance of the SA economy. It does however now mean that into the future there is likely to be a far better performance for SA. We’re already seeing the feedback from the business community. In fact, we’re going to talk about FirstRand’s results in some detail in just a little while because it is a member of our portfolio and they came out with their interims. But in that discussion Johan Burger was very forceful about the impact that Cyril Ramaphosa’s election has for SA.
Let’s look at the old portfolio before we go into the new restructuring. There it is. The old portfolio – had we left it as it is we’d be sitting at R109,240. The new portfolio is R200 lower than that so, not bad, considering that we’ve made all the changes to the portfolio but if we had done nothing, (absolutely nothing) that’s where we’d be sitting. Catching up to the JSE All Share Index. Remember, we were pushed back a little by the holding of Steinhoff, we had 8% of our portfolio in Steinhoff – that was a disaster of note. We also had Brait in the portfolio but thankfully we got out of that before the disaster really hit, and then the other baddie was Mediclinic.
But on the other hand, as you can see, very good performances by Naspers, Discovery, and FirstRand so, all round, we’re in front. The very good news is that the portfolio in fact, was not restructured at the last session, on the 28th February, when we had our last webinar. I gave you the changes to the portfolio. Those have taken a little while to get through the system, at EasyEquities, and what happened was that the changes were all done yesterday. So the portfolios have now been adjusted. The bundles, your bundle, with EasyEquities in this portfolio was done yesterday. Some of the share prices had actually done better than where they were on the 28th February and because this webinar is positioned on exactly what’s happening to your shareholding that’s exactly what we’ve done.
We’ve taken what happened or what prices the shares were changed at yesterday, your portfolio, if you’re like me, you’re invested in the SA Champions Portfolio, all the changes happened yesterday. It’s been rebalanced now. We brought in the Ashburton MidCap, Wilson Bayley, and Long4Life – they’ve come into the portfolio and we’ve sold Mediclinic and MTN shares in their entirety and then lightened the holdings of those three winners to get the portfolio correctly balanced. I hope that all makes sense to you.
There’s the new portfolio. As mentioned, it’s about R200 behind where it would have been had we not made any changes. So nothing really to get too worried about there. So far, so good with the newbies. In fact, they were only brought into the portfolio yesterday so,you can see that all three of them are slightly lower but a fantastic performance in the portfolio by Discovery, that has been far and away our best performer as you can see, 59% return and we have 20% of the portfolio in that stock.
In the last month there’s been a good uplift by our biggest holding, Naspers. It’s gone from R3,245 a share to R3,557. Discovery was up from R177 to R185, and Investec was up a couple of ZAR, from R102 to R104. On the other hand, the newcomers to the portfolio, well, they’re pretty much where we bought them, as you can see from that net cost. FirstRand has come down after its financial results. It was trading at R74.50 two weeks ago, when we did the last update, it is now at R68.50. That is after the interim results, which we’re going to be spending a little bit of time on in a moment.
Alec, Michael just wants to know, ‘what happened to Mediclinic?’ I know you mentioned it in the last webinar but just what happened and why the sell?
Yes Michael, it’s a good question and we did go into it in some detail in the last webinar but there it is. Mediclinic was 15% of the portfolio, which is a big chunk and it has been a really poor performer. It cost us around 25%. There you can see – we sold it at R97 and we actually bought the Mediclinic shares a R133. So it was a real disappointment to us. Why? Well we have restructured the portfolio on the basis that we’re now looking at SA champions driven by entrepreneurs listed on the JSE. So we no longer… The mandate used to be SA champions operating in the global environment, which kind of restricted your universe quite significantly. Mediclinic is not driven by entrepreneurs. It’s driven by managers. We know that the CEO, Danie Meintjes is on his way out as well. He’s being replaced by another professional manager. Hopefully there’s going to be an improvement there but it’s not an entrepreneurial driven company.
Whereas, if you have a look at this portfolio every one of them is entrepreneurially driven. You might argue that FirstRand is not in that camp but the three entrepreneurs who started FirstRand have engendered that spirit and that culture throughout the organisation, and if you see the new CEO of FirstRand, Alan Pullinger, he’s an innovative person. He used to drive RMB. Then you can see within the organisation as well, Jacques Celliers, at First National Bank is in a similar category, and so on. So we’re quite happy to have FirstRand in the portfolio as an entrepreneurially driven business. But if you look at the others they all speak for themselves.
Mediclinic was a little bit of a sore thumb in that setup. By the way, you’ll see we have Ashburton MidCap ETF – the idea there is to give the portfolio a little bit of ballast with an exchange traded fund, which invested in SA Inc. and we’ll talk about that in more detail but it goes down into the second rank of companies. Many of them as well, are also entrepreneurially driven. Stu?
That’s it, thanks Alec.
Let’s move onto the individual holdings in the SA Champion’s Portfolio – starting off with Naspers. That’s Bob van Dijk, who is also pretty entrepreneurial himself. As you can see, the Naspers share price – this is a one-year graph for Naspers – in the last month it’s done very nicely. It’s come from R3,000 to over R3,500. Now, Naspers remember is directly related to what happens to the ZAR, the exchange rate of the ZAR, and that dip in the Naspers share price was directly a consequence of the strength of the ZAR, and to what happens with Tencent, which is one of the great entrepreneurial stories of China.
Tencent, I watch closely. I’m a huge fan of what Pony Ma is doing, I’m not the only one. It’s now one of the top-10 companies in the world by market-cap and one of the biggest internet companies on earth. It still has lots of upside if you compare it with the American internet companies, and we unfortunately are unable to buy Tencent into our other Portfolio, into our Exponential Portfolio, where we certainly would do it because Tencent doesn’t really have a tradable market in its stock in the USA. It’s only listed in Hong Kong. But when Easy decides to add Hong Kong to its setup we certainly will be adding Tencent to our portfolio as well.
Moving onto the next company and our big winner, Discovery. Discovery is about to launch a bank, I wouldn’t get too excited about that though. It’s going to be a typical Discovery story, where they’ll take time to make money out of it but elsewhere in the world – I was reading a little more about the Ping An story in China and it is really a phenomenal business that Ping An has built and Discovery are their partners. Ping An is a diversified financial services company in China but their real focus is now on healthcare, i.e., the partnership with Discovery. So very exciting developments for Discovery. Already their joint venture with Ping An has got more than 4-million insured lives, and you can just see how large the Chinese market and economy is if you start researching more about that country and its potential to transform your investments and the fact that it is still a frontier market.
I would suggest go onto the Premium Section and into podcasts and go and have a listen to the Rational Perspective podcast with Dawid Krige. He is the fund-manager of the Cederberg Fund, which is in invested only in Greater China. So he’s made the subspecialty for the last few years and last year he generated 75% return, top one percentile on earth, and he’s a SA lad who is living in London. It’s really a worthwhile podcast to go and listen to – the Rational Perspective. It’s easy, go into the Premium section. Have a look at the podcast area and then just listen to the Rational Perspective. You can listen to all of them – I produce a few a week, and you are certainly going back to one of those that were produced in January. You’ll read all about Dawid Krige. So if you read the transcript or listen to the podcast and then think of what Discovery is doing there with Ping An, you’ve just got to get excited about this company.
It looks like the reassessment or the rerating of Discovery is about to begin again. You can see, it’s kind of level-pegged since mid-December. It came down a bit, with the strength of the ZAR there in early February, and with the decline in share prices of stocks around the world, but it’s now picked up from there as well.
There’s Investec’s two new CEOs. Both of them are very entrepreneurial. Fani Titi is the man behind Tiso, which is now well known in the media industry for instance, with Tiso Blackstar, but it’s also got a number of other businesses. He started that, but he’s been very involved with Investec. He’s been the chairman of Investec in the past and he’s now joint-CEO. Then on the right hand side is Hendrik du Toit. Hendrik was the man who started Investec Asset Management singlehandedly. He literally began it with himself and a PA, and a desk and a phone. That’s how Hendrik got it going and today, Investec Asset Management is a massive enterprise. By far the biggest if you take its Pound assets under management and compare that with other SA asset management companies.
It’s hard to believe that those who’ve been around a while and had known that Old Mutual and Sanlam were the two dominant figures for so many years. That Investec has now sailed past them, in terms of assets under management. So to have these two guys running the business into the future, as good as Stephen Koseff and Bernard Kantor have been, they certainly have passed on the mantle to good hands and you can see what the market thinks of this.
Going back to early December, there was a tanking of the share price, it came down from R95 to R85 on the Steinhoff issue. When Investec was able to show that its exposure to Steinhoff was limited. In fact, the big losers on Steinhoff, many South Africans are not really aware of this, are international banks. The big international companies and as we’re seeing the results coming out from JPMorgan and Citibank and others – we’re seeing hundreds of millions of Pounds and Dollars being written off on Steinhoff so Steinhoff is making those announcements for all the wrong reasons I’m afraid, and it’s substantial enough to impact these massive Wall Street firms that lent money to Steinhoff ahead of the collapse.
Anyway, it didn’t last long for the concerns around Steinhoff to dissipate on Investec, and as you can see, since the announcement of the new joint-CEOs, there’s been a sustaining improvement in the share price. Well, if you had bought it in mid-December you’d be very happy today. I still think there is enormous upside in this company. It’s a fabulous operation. They have got some of the best private banking products in the UK market. They’re starting to really catch fire and in SA, of course, when that country improves it is round about half of Investec and then clearly Investec itself will be worth a lot more money. So, people like Investec for two reasons – the new energy that will be brought by the new CEOs, (they like the new CEOs) and also the rebounding in SA.
Moving onto the Ashburton MidCap ETF so this is the ballast, if you like, in our portfolio – 15% of it in this exchange traded fund. It will give us a good feeling on how well the rest of the portfolio is performing, as we go into the future. I just put the top-20 there, which is about two-thirds of the portfolio for this ETF. As you can see the companies there, Foschini, Spar, Truworths, AVI, Life Healthcare, Netcare, Barloworld – these are all SA Inc. type companies. So, if SA improves, as our thesis says, with Ramaphosa coming in and with sensible economic policies being applied then these are the kind of companies that will be back onto a growth path into the future.
The movement in the price of this ETF has, as you can imagine, been… Well, it looks pretty volatile but actually the whole graph is only about 10% from the top to the bottom. So, it has improved since November, when we started getting an inkling that things could be better in SA, from an economy structures perspective, and you can see it’s gone up there but roundabout the price we bought – R7.70 to R7.80. It’s a good, long-term holding.
Onto Wilson Bayley and there’s Mike Wylie the CEO. The financial results came out of Wilson Bayley and they were pretty good. The share price however, came under pressure and that is because even better was anticipated. They had a bit of a tough year last year or the year before, so it was coming off a low-base but still this is a company that if you believe the story of SA Inc. growing you’ve got to believe Wilson Bayley is well positioned or one of the best positioned to benefit from it, and that’s really what it’s about. If an economy expands, especially an economy like SA, which is looking to China to the success models that were achieved in China and to try and replicate them in SA. The success of China was largely built on infrastructural investment and that gave the economy the kickstart that it needed and you’re seeing it here, in Wilson Bayley. It’s starting to lift its head-up after coming back. We bought the shares yesterday, so right on that simple moving average chart.
Onto FirstRand there’s the new CEO-designate Alan Pullinger, and FirstRand’s story is where we pause a little to go into some detail. Before we do that, Stu, is there any more questions?
Nothing this side Alec. It’s a bit quiet in the ‘questions chamber’ today so let’s encourage some participation.
I see the questions, there are a few, but they’re more comments than questions so I suppose the participation is there but I’m running through this. I don’t want to miss anything.
Let me tell you about FirstRand. Today is a big day in FirstRand’s life because the Aldermore acquisition is now completely confirmed and that is the £1.1bn, call it R20bn investment into the UK. Essentially, what’s happening at FirstRand is that they are going to have five-brands now, of which Aldermore will be one. The others being First National Bank, WesBank, RMB, and Ashburton so, those four, FNB is the retail bank – it’s by far the biggest part of the company and generated in the six months to the end of December – 58% of their overall profits. RMB is number two and that generated about a quarter of the overall profits. Then you’ve got WesBank, which was slightly lower in the six months to December, and that’s probably the major reason why the share price dipped, as you can see after the results were released – it was in the mid-70s, and it came down to significantly below 70, around R68 a share.
That’s primarily because of WesBank and now Ashburton is the asset management side, which is still finding its feet, if you like, from a profitability perspective. Then the big one in the UK is the Aldermore, which was acquired. It was a listed company. It is going to delist on Thursday, and then it completely merged with MotoNovo, which is the first step that FirstRand made into the UK market. Financing effectively second-hand cars, using what it understood from WesBank, applying that into the UK market and it makes R500m a year in profit so, a significant operation by putting it together with Aldermore you’re going to have a strong base, have cheaper funding for MotoNovo for the second-hand financing business. On top of that you avoid the problems that South African banks are having funding because of the sub-investment grade or the junk rating of SA.
What many people don’t understand is what we look at with the junk rating is the problem that comes in for the country as a whole. The country will pay more in interest but we pay more as consumers as well because the banks have to pay more for their funding. They get a lot of their funding from the international markets and with a sub-investment grade that is where the banks ratings are based on where the Sovereign is. In other words, SA goes down, as a whole, and then all the banks, which have to borrow in the market place to fund their businesses they also go down as a rating so, they pay more for their borrowings. That’s essentially the way that it all works out. Now, if you’ve got Aldermore based in the UK it has got no impact. The SA sub-investment grade rating has no impact, which means you get the funding cheaper for both Aldermore itself, which it’s always had it, but also, specifically for MotoNovo, which is your substantial second-hand car financing business.
As far as the results were concerned, they were solid. FirstRand produced 7% improvement in earnings. It raised the dividend by 9%, this is for the six months at the end of December. The share price however, was down 4% on that move. Why so? I think it’s to do… It can’t be to do with the underlying performance. Return on assets were slightly down from 2% to 1.99% return on equity – with 22.5%. Every area of the book is looking good. In fact, they have been moving into unsecured lending, which is where Capitec plays. If you actually just dwell on that for a minute. The reason why Capitec is so profitable is evident in the FirstRand numbers where mortgage make about half of the lending in the retail market for FirstRand. So, roughly half of the money that it’s lent out goes into houses that FirstRand has lent out to individuals so, the retail market they call it, goes into home loans.
The margin there, the profit margin there is 1.9%, call it 2%. The profit margin on unsecured lending, where they now have about an eighth of their lending, FirstRand, is 12%. So, as you can see the unsecured lending market is a lot more profitable than the traditional home loan market, and the big banks, like FirstRand and others, have been going into unsecured lending in a very measured way, ensuring that it doesn’t get too big as part of their market but it’s a bit like a sweetener to their profits, if you can imagine. Then you look at Capitec and Capitec is there, full-on so, its margins will be much higher, as you can see from that six times higher than traditional banking business. That might help a little bit to understand the Capitec story.
Of course, Capitec will have a higher bad debt ratio because you make a bigger return on riskier business and Capitec has been attacked on all kinds of nefarious reasons. Again, go and listen to my podcast on that one. I had an interview with Gerrie Fourie from Capitec over the weekend and that Rational Perspective podcast is up on BizNews Premium today so, you can go and listen to it and you’ll get a very good understanding from that how Capitec handled this attack from Viceroy and why I think that Viceroy are not really fully understanding the Capitec story. They’re looking a Capitec as you would a legacy bank rather than a bank that was started fairly recently and is based on technology and very strong tech systems. Anyway, that’s my view. There are lots of people who are much smarter and think differently but that’s the way I read that one.
Alec just on Capitec. You speak quite highly of Capitec. It’s not in the portfolio. Just a question as to why?
Too expensive – it’s just a simple reason of price. The Capitec price to book is around 6. FirstRand is 3.5, and that’s really… I do like Capitec. It’s a good business and I’ve done enough – I went to visit them 3 to 4 years ago, in fact it was Riaan Stassen, the CEO final day. The founding CEO – it was his last day at Capitec and I had been quite critical of them and I went in there, asked the right questions, I think anyway, and I got to see an extraordinary operation. They are based in Stellenbosch. Their offices are very modest and humble. The CEO and the financial-director have offices next to each other, which I think are smaller than any mid-ranking bank manager in one of the big-4 banks for instance. It’s a phenomenal business but is it worth price to book that is virtually double that of FirstRand? I don’t think so.
I think that it’s just too expensive but remember when you’re investing in something you’ve got to make sure that you buy it at the right price. For me if Capitec were to come back much more than it would start getting. If it came back to the same level as FirstRand for instance, it would start getting very attractive. Part of the reason for that is, as you can see, the market they’re operating in, and the runway is almost infinite, unsecured lending – as long as you get it right. As long as you don’t lend unsecured to the wrong people and as long as your systems are all correct. Your margins are going to be higher than traditional banking for a long time. So, I like the business but I don’t think that the rating is warranted.
Excellent, thanks Alec.
Just to close off then with FirstRand on this side. The other reason why the market had a look at them a little negatively after really pushing up those shares ahead of the results. I think it’s got something to do with the caution that the FirstRand team gave back. You will remember and you can see it very clearly there. In mid-December you’ll see the share price was in the mid-50s. It surged on the ‘Ramaphoria’ effect, if you like, when Ramaphosa was elected as ANC President and then not long afterwards to become the country’s President, for reasons that we also fully agree with. It definitely is a change in the country’s prospects. But is it enough?
Is that enough to have justified a surge in the share price to the degree that it was? When the FirstRand team, Johan Burger, the outgoing CEO, did his presentation. He explained that it’s in their view it’s going to take quite a while for the practical impact of Cyril Ramaphosa to start working through the economy and his different approach to things. In fact, they said, ‘do not expect more I the second-half of the financial year than we delivered to you in the first-half.’ They only delivered a 7% growth in earnings in the first-half so, they’re saying for the 6 months, to the end of June it’s not going to be terribly exciting either. Hopefully thereafter we can start getting upbeat once more but after that, a sense of realism came back into the investor thinking and the reality of the SA situation became more apparent. Hence, the FirstRand share price going back.
I hope that kind of sums it up well. We like it as a long-term holding. We think that relatively speaking it is still very much more highly rated than the other banks, except for Capitec. Standard Bank, for instance, is at about two-thirds of the rating that FirstRand is at so, I still like Standard Bank, your Nedbank and Absa as well in there, are not as well rated as FirstRand so, there’s a lot of expectation that is built into this company. But on the other hand, they have delivered. They’ve got top management and will they deliver into the future? Certainly, everything we’ve seen from them suggests so.
Alec, just quickly on FirstRand. Shirley wants to know, ‘would you buy it at its current price?’
Yes, Shirley, I would certainly be doing that. In fact, that’s what we do. Every month with the EasyEquities bundle, with the BizNews SA Champions Bundle if you put in R250 a month, which I think is the minimum that is required, you’re buying the whole bundle. So, you would be buying 8% of that R250. What would that be? Say R16 or R20 will be going into some percentage of a FirstRand share. Yes, all of the stocks in this portfolio I would be buying at their current levels, and in fact, we are because as you’re allocating every month you’re buying – your Rand cost averaging, as they say, but you would be buying a few of the shares. As the share price goes up, you buy relatively fewer. As the share price goes down you buy relatively more and that’s what gives you this beautiful thing called ‘Rand Cost Averaging’ which is one of the benefits of Easy have put together with their bundles. It’s actually incredible that imagine you go to another stock broker and you say, “I want to buy R20’s worth of FirstRand shares.” They’d charge you R150 to buy your R20 shares. Whereas, with Easy it’s in that bundle so you get your percentages.
Thanks Alec.
Moving onto another great entrepreneur, Brian Joffe, he needs little introduction. Long4Life is a stock that we are very happy to be holding. It’s round about the level R5.62. Unfortunately, we were wanting to buy this one some time ago, certainly when it got below R5 a share it was screaming out at us because at that level… Brian Joffe, himself, put R100m of his own money into Long4Life at R4 a share, and he’s running the business. His backers or supporters, from the beginning, put their money in at R5 a share. So, when it was trading, as you can see earlier this year, at below R5 – it really was a screaming buy. But we only did the purchase yesterday, although we did say that anybody who bought Steinhoff, when we dropped Steinhoff out of the portfolio on the 9th December, you might recall what happened.
On the 7th December the news came out that the auditors refused to sign the accounts. That all the stories Steinhoff had been telling us were actually wrong. That the CEO had resigned and it took only two days. The first day, I tried to find out what was going on. The second day I had found out enough to say let’s do the Buffett deal here and drop Steinhoff in its entirety – we did. But there’s still people who put in money every month, into the BizNews SA Champions Portfolio into the Bundle so, for those people we said, the money would be going into Long4Life instead of Steinhoff. So, if you’re doing the monthly deposit or the monthly investment you would have a few Long4Life’s there at a pretty good share price. But even so, a R5.60 it’s a good price as well – I’m very happy with this one.
Alec you just touched on Steinhoff. Willem wants to know, ‘what do you expect the effects of Steinhoff to be on the annual returns of the portfolio?’
Well, it’s gone, Willem, it’s out. We don’t have Steinhoff in the portfolio anymore. We sold out in its entirety on the 9th December. I think we got R6 a share or something, which doesn’t really matter. It meant our 8% that we had invested in Steinhoff was wiped out, it was gone. We took a 92% knock on that but fortunately it was only 8%, and actually also, fortunately because the rest of the portfolio had performed so well, I think I had come down to something like 6% by the time or ahead of the collapse of the stock. So, it’s out and the portfolio as you see, with a 9% return since launching in January 2017, is what you get. That’s what you get. I look at my return through the Easy Portfolio and it shows what we’ve made since that period of time. So, Steinhoff is out and there’s no more exposure to it.
Thanks Alec.
Okay, and there it is actually. Willem, I should have put this up there. As you can see, that’s our portfolio. There’s no Steinhoff in your account, if you have the bundle. It’s gone and you can see that the bundle is now already in just a month since we made a few changes. In fact, you can see that Naspers is at 26% rather than 25%. A big rebound in the last month and Discovery being our best performer there and the three newbies that have come in, Ashburton, Wilson Bayley, and Long4Life. The total return of this portfolio – just to put it differently. The R100k that we started with on the 23rd January 2017 is now worth R109K, and that’s after selling out of Steinhoff, and Brait and Mediclinic. So, our three baddies or laggards or disappointments have gone, and the real money if you liquidate your portfolio today, you’ll get R109k back for R100k. So, it’s a little below the All Share Index, which is at R111k so, if you had invested just in the All Share Index you would be sitting at R111k. So, put it differently, we’re at R109k but I’m confident that we’re well positioned now to outperform into the future. Makes a lot of sense, Stu, do you get it?
All good – it’s time for the US stuff.
You’re also a shareholder in that portfolio but let’s look at the really exciting one and that’s the Exponential Portfolio. Well, we are expanding as BizNews into the global environment because we’ve realised that there is and a part of our philosophy is to inform SA investors primarily about what’s going on the rest of the world, and the rest of the world about what’s going on in SA. So that’s why we’re expanding here and when EasyEquities launched its US offering, i.e., the opportunity for the SA investors to buy into American shares, and that was in November last year, we got together and we said, ‘let’s put together another bundle.’ That bundle is called the BizNews Exponential Portfolio and you can buy it in the same way as you buy the SA Champions Portfolio.
The mandate here is US listed companies with exponential growth potential. What’s exponential? That means more than single digit figure growth potential. Those companies that can really surge into the future and that is the portfolio as it is. You’ll see there that we have put again a little bit of ballast and our ballast here is the Vanguard S&P 500 Portfolio.
There we started off with 25% of the portfolio in that, as well as 25% of the portfolio in Amazon. You can see both of those, if you go across to the cost in USD, $24 600 went into Amazon and $24 790 went into the S&P 500 Index, and Amazon has been just the best share. I love this share and it continues to give us such a wonderful return.
I know the story. I’ve followed them for a long time. I am a huge an and remain a fan. We bought in, in November, in this portfolio at just over $1k a share. It’s now nearly $1 600, and that’s only in 4 months. That’s the primary reason why, if you go and look down at the bottom, this portfolio has gone from $100k to $122k in just 4 months so, clearly outperforming the other portfolio by quite a margin. But remember, this is in the exponential area. It’s in US stocks only and it is basically a USD return. The ZAR has appreciated against the USD so, if you’ve invested in ZAR you’ve got to moderate that return a little but it still has been a fantastic investment.
Every member of this portfolio has improved. We decide to drop Tesla. Now, there’s a story for you. We did this change yesterday. I’m really worried about Tesla. Tesla, although it’s run by a South African and we’ve got this affinity for Elon Musk and everything that he does. His predictions and his forecasts are making the short-sellers even more bullish about how they’re going to knock this company on its backside. Short-selling is the way that you take a position anticipating that the share price of the company involved is going to fall, and there are more… There’s a bigger short position in Tesla than any other company listed on the NY Stock Exchange or NASDAQ. So, of all American companies the most negative by those people who are betting against them is Tesla. Tesla isn’t doing much to help its own case in this regard.
The Model 3, which is the model on which Tesla will be judged into the future. This is the $35k electric car that is supposed to be a mass market opportunity for Tesla. They’re supposed to, by this stage, and we’re 5 months into the production cycle, should be producing 5 000 of them every week. The number was down at 700, and they’ve actually suspended production for a few days to try and presumably find out what’s going on. Every time Elon Musk appears in public though, he gives people confidence. He is a most impressive character with a wonderful story and the share price seems to recover again. I see it was up at $340 last night, just after we sold at $327. We made a small profit on this of 6%. But I’m really worried that there is a potential here for a bitter fallout if he doesn’t deliver the goods when the next set of quarterly results come out and the Americans are extremely harsh when it comes to the inability to deliver what you promise.
Elon Musk has been promising and promising, and if he does deliver in March well, then the share price would be perhaps sustainable or it would be justifiable but there’s a huge short position here and if he doesn’t deliver I would be like the predators jumping in. We bought in our other portfolio with Standard Bank. We bought into Tesla at $200 a share and even there I’m nervous about it now and thinking that it’s perhaps time to just allow discretion be the better side of valour because you can’t continue to not meet your targets or not meet your promises and expect that there won’t be any impact.
On the other hand, I’ve been looking for an excuse to by Alibaba and here it is. We’ve bought them into this portfolio. We’ve taken the Tesla investment and we switched it into Alibaba. What is Alibaba? It’s a wonderful internet company in China, one of the big-3 there, Baidu, Tencent, and Alibaba are the big-3. It’s run by Jack Ma and Jack Ma is the richest man in China, or it depends on Pony Ma. The same surname. In fact, Ma seems to be a very good surname to have if you’re in business in China because the man who runs and founded PingAn, which I told you about earlier with Discovery, his surname is also Ma. So, you’ve got these three Ma’s – unrelated all of them, who are incredible business entrepreneurs. Jack Ma is the man who drives Alibaba. It’s the one that is listed on the NY Stock Exchange, and compared with the US businesses, it is still a very good value. So we bought into Alibaba. We got out of Tesla and we’ll have a look at the result in time.
Just to go through the different companies very quickly for you. Here’s Amazon – the improvement in this share price just continues. In the other portfolio with Standard Bank, which was launched in December 2014, we bought Amazon at around $350 a share, and you can see that was 3 years ago and it’s now sitting at $1 600 a share so, will it go to $3k a share? Who knows… All I can tell you is that Amazon’s business model is irresistible and every time that Amazon moves into a new market it seems to be able to dominate it. What does it do? It puts the customer at the centre of its business and it keeps its profit margins low. So, it produces a disruptive force, which is wiping out entire companies in other areas. We saw, for instance, well it started off in books, it sold books. Then it moved into retailing generally and I wasn’t long before Amazon started cutting back the market value of Walmart. Warren Buffett saw this coming and he sold Walmart a few years ago. It was one of his top holdings 5-years ago. He doesn’t own any Amazon shares because he’s unable to predict where Amazon will go in 5-years’ time but he certainly has been effusive in his praise of Jeff Bezos and his company. Amazon’s latest trick is moving into healthcare. It’s a slow business. This is the first time that Warren Buffett has done a deal with Amazon. They’re partnering together with JPMorgan and the idea on healthcare is that they will produce for those three companies a healthcare system, which they will then later on role out to the rest of the world. It’s interesting that Apple, which is also in our portfolio, has done something similar – more of that in a moment.
Here’s the second holding in this portfolio, the other one where we put 25% in each from start-up. This is the S&P 500 Index. So, it gives you a good idea of how the portfolio is performing relative to the overall stock market, and there’s the overall stock market in the USA. We had what they call the ‘Trump Rally’ which began well over a year ago now. Then you had that sell-off in early February, which was quite significant but the overall market in the USA is picking up from that level.
Google was badly hit by that selloff. We’ve still got this in our portfolio, it’s one of our 10% – so, what we have is 25%, 25% – the two big stocks, the exchange traded fund, the S&P 500, and Amazon are our big stocks. Then we have 10% in each of the other five stock picks and one of those is Google, which as you can see is moving up in the right direction. Google has got a portfolio of bets. Clearly, at the moment, it makes all of its money from online advertising, where it is the dominant player. That advertising is built off Its search functions, where it’s the dominant player as well. So, that’s where it’s cash cow is, but it’s taken that money and put it into things like autonomous cars, (driverless cars) and so on.
Then there’s Apple, and what Apple has done is very similar to what Amazon did. It has now launched its own healthcare business. It calls it a ‘Wellness Program’ and it’s doing it just for Apples’ own staff. So, it’s a technology based healthcare and I wonder if there isn’t a deal somewhere over here between Discovery and Apple – a deal to be had, because if you consider that Discovery is the biggest purchaser worldwide of Apple watches, which it then sells or passes on to its, and we’re talking about Discovery through PingAn in China through John Hancock in the USA, and its wholly owned subsidiary, Vitality in the UK, and of course, Discovery in SA.
So, through all of that what it says to its customers is you make yourself better, this is what Discovery does, and we will share with you the savings that you have, if you didn’t get yourself better and one of the ways of making yourself better is by buying an Apple watch but we won’t charge you for the Apple watch as long as you exercise. So, if you exercise we bet that you’re going to be doing so much. Your mortality rate is going to fall so much and your health is going to improve so much that you’re actually going to be making back the cost of that Apple watch. Apple, itself, is now of course going to be using its own Apple watch for its wellness program, for its own staff – and you’ve got to wonder, is there a deal somewhere along the line between Discovery and Apple? Who knows? These are just speculations on my side but stranger things have happened. You can see there, Apple is moving $380 a share to an all-time high.
There’s Facebook – this is one I’m scratching my head about.
Sorry Alec I think the broadband is getting a bit jumpy on our side. There’s a question from John. I’m not sure if you want to answer it or just run through quickly and we try and pick it up afterwards and see if the broadband holds up?
I’m happy to do that Stu.
Let’s go through the stocks and we’ll pick up after?
Let’s do that. We’ve got 10 more minutes to go with the webinar so, I’ll go through the stocks very quickly and then we can pick up the questions at the end. This is one that’s bothering me a little bit. I’m still a big fan of the social network and the factor that it has but Facebook has hit a little bit of wind in its face. There’s also other social media options and we know the Russian fake news story for Facebook so, as you can see, the share price didn’t really recover as strongly as it might have after the February decline.
Here’s one that is just going gangbusters. I’m very happy to have Microsoft in our portfolio. It’s up more than 20% since November, as you can see there. A very strong performance by this company and the story that we bought into here was the change in the whole billing system. With Microsoft in the past, when you wanted Microsoft Office or any of those products, or even Windows indeed, you would buy it from a retailer and then install it in your machine. You might buy it online as well, and then you needed to update it and upgrade it, etc. Microsoft has shifted that whole business model to an automate income so, you pay per month or you pay per annum and then you update as the software is updated – that means you’re in forever. It’s a fantastic business model and it’s also a very good one for the consumers too.
Microsoft has just declared a dividend of 42 US cents per share. It was actually declared last night, and it will be payable on the 14th June. You have to be registered I think by the 17th May. That puts it on a fore yield of just under 2%, which in a USA where you are getting only that much on treasury bonds – is a pretty appealing investment for most.
Then closing off with Alibaba. As you can see, since November, whereas some of the other stocks – our overall portfolio is up, as you know, by 23%. Alibaba has done very little so, it’s the time to move out. We’ve made a small profit on Tesla at 6%, that’s not the reason we’re selling it. We’re selling it because of the concerns that it’s not delivering on its promises. Whereas Alibaba is one of those stocks that just keeps on delivering on its promises. So, that Stuart, is the Exponential Portfolio. As you can see, a return of 23% in 4 months. I don’t even want to go there on annualised growth because that’s sets expectations that can be pretty scary to try and fulfil. But if we could make 10% a year in USD – then we’re doing really well. We’re at $23 at the moment, after just 4 months so, we’re in a nice place.
As you can see, the Vanguard the S&P 500 Index is up 9%. Am I worried that it’s gone too far too fast? No not at this point. I’m quite comfortable that this is the side of the market that we’re invested in with the exponential companies that are disrupting the rest of the business environment around the world, certainly in the USA, and it’s the place to have your money.
Excellent Alec. I’ve just got a couple of questions. John wants to know, ‘if one is already invested in the global portfolio would there be any reason to also invest in the BizNews Exponential Portfolio?’
Yes John. I think the Global Portfolio has been a phenomenal performer. This portfolio with EasyEquities is more for the person who just wants to put their money in and just let it… Not have the hassle about deciding to rebalance themselves. Remember, with the Global Portfolio with Standard Bank – that is one that is aimed at people with WebTrader accounts and if you like for the more sophisticated investor or for the person who has got a little bit more time. So, it also includes stocks that are outside of the US. Whereas, the EasyEquities Portfolio is only in the US. For instance, in the Global Portfolio we’ve got Metro Bank, which is starting to move quite nicely recently, and we’ve got Tencent, which has been a great performer. We don’t have those two in the Exponential Portfolio because neither of them is listed in America. However, the appeal of the EasyEquities Portfolio is for the, I won’t say the first-time investor but the less sophisticated investor, the person who just wants to put their R200, R500, R5k or R10k whatever it is every month – and then to get that spread automatically by EasyEquities into the stocks. So, yes, I hope that explains it.
Thanks Alec, Marcel wants to know, ‘can we invest in Rands?’
Yes, what happens with the Exponential Portfolio is that up to R1m you can invest and convert it now into Dollars – no questions asked. If you talk to the guys at EasyEquities and you say, ‘I want to put R10k into the Exponential Portfolio.’ They will guide you through – it’s really that easy. In the past, because of exchange control it was a problem where you had to physically apply for permission to move from ZAR to USD, but as long as you do that now, within that limit of R1m, and that’s what you’re given per annum. So, it makes it very easy. In fact, the whole thing of EasyEquities is really easy when it comes to investing, both locally and internationally, cause those two bundles that we’ve spoken about now, the SA Champions and the Exponential, are even for people with very modest means. If you’ve got R250 that you can afford to put into it – you can play, you can get involved. It’s that easy. I think they really deserve all the accolades they’ve got for the innovation and for bringing investing to the ordinary man.
Excellent, it looks like the final question Alec. It’s from Dirk. He says, ‘I have an equal amount in the Vanguard ETF with WebTrader and in CoreShares S&P 500 with EasyEquities. I’m considering selling my Vanguard ETF and making an additional investment in Amazon. Your thoughts on Amazon outperforming the S&P 500 in the medium to long-term.’
An interesting question. If you already have both of them. First of all, Vanguard is a very efficient vehicle. The reason I like it is because it’s total costs are 4 100ths of 1% and the reason it’s costs are so low is because it’s so big. So, what Vanguard does is it reweights on the 500, and obviously there’s some costs in that when you’re buying and selling shares, and allocating them, but it makes up those costs by lending out stocks to short-sellers. So, if you want to sell short, i.e., you believe you can make money by selling Tesla today, but you don’t own any stock because you think the share price is going to go down. What you do is you go to someone like Vanguard and you borrow Tesla shares from them, you then sell those on the market but with the understanding that you would have to give back the Tesla shares to Vanguard at some point in time, and Vanguard will charge you for that privilege. That’s how Vanguard makes so much money, and then that money goes straight back into offsetting costs so, the total cost for Vanguard is 4 100ths. In other words, 0.04%. I think it’s a fantastic vehicle to buy the market and that’s why it tracks the US market all the way.
The real question you ask though is, should you be going from the market overall into Amazon.com? Given I guess, the fact that Amazon is at 56% already, in the last 4 months – is it not too expensive now? From my perspective I would be very happy having, if there was one share that I owned in the whole world I would be happy having it in Amazon. Maybe the way to look at this is to look at the Amazon business model, which is something I absolutely believe in and I is an irresistible model. It’s a model of scale. It’s a model of putting consumers at the middle of your market. It’s a model of momentum, and as you grow, as Amazon Prime grows, you get the network effect, you get the scale effect. You get all of these benefits. Is that a business model and the average business model of American stocks – I would say, unquestionably, yes. So, if you were to bet on the two, if I was forced to, I would say that Amazon is the one that is going to give you the better performance. Vanguard will give you more stability perhaps.
Excellent Alec. That’s a very nice place to leave things for today.
Indeed, it is, and we’re exactly at 13h30 in SA, and we’ve been precisely an hour. Thank you for joining us. It’s good to see so many people participating today and the attentiveness being so high. It’s been fun and I look forward to updating you again on both of the portfolios. We’re going to do that in the future. Mid-month we’ll be talking about the two EasyEquities portfolios and then at the end of the month we’ll talk about the Global Portfolio. I don’t think it’s going to take a genius to work out that the changes I was proposing or suggesting that would be made in the Global Portfolio at the end of this month are likely to happen, as we’ve dropped Tesla here and brought in Alibaba – I’ll give you more update on Alibaba then.
Thanks for being with us and from me, cheerio, Stu.
Thanks, Alec. We’ll chat in two weeks time.
