• Stonewood AM


It is very fashionable to have your very own share portfolio. It has been for a very long time. These days you have an array of retail share portfolio options. You can go directly through most banks or through a broad array of “discount brokers.” There is something very fulfilling about owning a little piece of a few companies which you like. It is even more satisfying when the companies you have purchased some shares in turn out to be good investments and you watch your money grow. Who needs professional investors when your own share portfolio track record is giving your retirement portfolio a hiding?

Apart from the ability to brag on the golf course about how clever you were to purchase Naspers or Brait, I think it is important that I share some insights into this pursuit. The average share portfolio is akin to gambling on the expired opinion of the crowds. Expired? Well the commentary that most of these investors rely on to make their purchasing decision in the first place is from an investment magazine, TV show or something along those lines. These comments are based on news or research that was done prior to the dissemination of this information. It is certainly not proprietary news by the time it lands on your lap as the average share portfolio investor. To top this, if you believe that the markets are efficient the share price for the most part already has taken this view or news into consideration and is therefore priced accordingly.

If that is the case you certainly have no advantage against your investing peers. In fact you have a distinct disadvantage because you are trading on information that has already been digested. You may retort that you have done well and the scoreboard speaks for itself, to which I cannot disagree, but the truth is the success of many of those positions was due to news and surprises that are very likely unrelated to your investment decision making thesis. The other factors to consider are that for the most part you are momentum investing, because most of the commentary revolves around stocks that have recently performed well. This leads to investing in stocks that have already rallied assuming that more investors will jump on board and push the price even higher. This might be true but it is simply a crowd-following mentality which tends to be incredibly dangerous. The same crowd that you think makes your stock attractive can destroy your share overnight.

Concentration and home bias are other factors to consider when assessing a share portfolio. The South African stock market is incredibly concentrated with only the top 40 stocks being really tradable on a liquidity basis. This means that all investors both large institutions and retail investors are trading the same small universe of stocks. and again this implies that it is highly likely that your retirement portfolios and share portfolio are likely to hold the EXACT same stocks. This implies that your overall wealth is directly exposed to the well being of a few stocks only. It is very easy to consider how a few stocks can have a catastrophic trajectory at the same time, especially if they are all listed on the same exchange. To add to that, it is likely that this push your total equity exposure in your overall holistic portfolio above what is necessary to achieve your investment goals, which means taking on far more risk than necessary.

Home bias refers to the fact that despite the ability to buy a share of any listed company in the world, most South African investors will only purchase shares that they know. These will tend to be South African companies that trade on the JSE. That is an incredibly limited investment universe. The reality is that you cannot identify with companies in other countries and therefore they don’t even cross the radar screen. If you landed on earth would you invest all your assets in companies in a country that make up roughly 0.44% of global GDP. I think not. Again the risk you expose yourself to is far greater than you in fact imagine.

Finally I want to point out that most share portfolios are taxed at the marginal tax rates of the investor whose portfolio it is. This is certainly tax optimization by any means. The other point to consider is that if you are trading these shares frequently it is likely that the vast majority of the taxes you will be paying on this type of portfolio is Income Tax at the marginal tax rate of the investor as opposed to the more favourable Capital Gains Tax. This increases your tax liability in a manner which is certainly not favourable and will erode a large portion of the long term returns you think you are generating.

Local Market

South African markets ended the week lower on the news of renewed European economic stimulus. This is despite the intended boost this should have for growth assets. The ALSI ended the week 0.88% weaker. The current account deficit came in worse than expected, with exports disappointing coupled with rising import demand, this points to another potential interest rate increase when the SARB meets this week. The Top 40 lost 1.00%, while Financials and Industrial lost 0.89% and 0.36% respectively. Old Mutual confirmed its split into four separate business units, to unlock value for its investors and reduce costs. Resources slipped 3.71% last week; it’s still however the second most attractive segment of our market YTD.

Global Market

The ECB expanded its quantitative easing programme, announcing a move to push rates further negative and increase its monthly stimulus by 20 billion Euro, this is a continuation of Draghi’s “whatever it takes” policy. European markets were expecting the move, with the DAX moving 0.07% higher and the EUROSTOXX ending the week 1.20% higher. The UK market closed the week 0.96% lower. These markets are still very weak YTD.

The S&P closed 1.11% higher while the Dow and NASDAQ were 1.59% and 0.60% higher respectively, continuing last week’s rally as bearishness on the markets recedes. Oil prices at heightened levels also improved the energy sectors performance as those stocks found some respite.

Asian markets traded relatively flat for the week. Data coming out of China saw retail sales and industrial production rising lower than what the markets expected. The Nikkei ended the week 0.45% lower while the Hang Seng ended 0.11% higher. Both of these markets remain very weak YTD with little in the form of positive news.

Economic News

Mining Production in South Africa dropped 4.5% however production of Gold rose an impressive 27% on the back of Gold prices rising 17.81% YTD, Gold lost 0.71% for the week. Oil continued its rally, ending the week 4.01% higher as people are beginning to see supply slow relative to demand, although much of this may be temporary.. The Rand strengthened to end the week at R15.23/$.

The focus of the week turns to the Reserve Bank and the decision that will come from its MPC meeting. Inflation rose rapidly and surprised on the upside but the strengthening currency should deter an interest rate hike offering a temporary reprieve for SA consumers in this rising interest rate cycle. The European Central Banks decision to increase QE and lower rates will also have an impact on markets for the next while and monetary policy remains incredibly divergent which is not good for global volatility.

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