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Ditch paper, pocket metal
There have been more lamentations in the sector following another round of poor quarterly results from South Africa's gold companies. Wayne McCurrie, deputy MD of fund management company Momentum, says: "Profits have seriously declined in four years, even though the gold price has been going up. You've got to think this is an industry in decline."
In 2003, the rand price of gold was around R3 300/oz or R105 600/kg. It's currently at R5 500/oz. By comparison, profits from SA's gold producers are down an estimated 70%.
"Were gold companies to take capital expenditure as a production cost - and not amortise them - nobody would make money," says McCurrie. The only scenario where the gold industry could improve would be for a 10% to 15%/year increase in the rand value of gold over the next three years. "Then I suppose gold shares would be seriously cheap," says McCurrie.
Against that background, how do investors make hay while the gold price shines? Currently at $814/oz - and headed for $850/oz next year, so the experts predict - there's never been a better time to find gold exposure. But given that gold companies offer such poor returns and are relatively expensive, how is that achieved?
NewGold, SA's gold-backed exchange traded fund, is one route. But investors are still exposed to a security, says Hilton Davies, a former Allan Gray fund manager and now MD of SA Bullion Fund Management (SA Bullion). There's also a spread of about 6% in terms of managing the cost of a share.
The alternative is to buy a Krugerrand, which suits investors who view gold as currency or cash and not as paper wealth. But again, the cost of buying and selling is potentially daunting. Says Davies: "You can pay 10% over the price of gold to buy a Krugerrand and another 10% beneath the price to sell it."
By way of alternative, SA Bullion has launched a scheme whereby investors can buy physical gold without heavy transaction costs. Its fee is 4,5%/year and includes the cost of vaulting the metal, insurance and other important checks and balances, such as an audit of SA Bullion's business by Deloitte and Ernst & Young and a report to the SA Reserve Bank.
Sounds great. But there are drawbacks, which Davies readily acknowledges. "I really wouldn't want to knock the gold ETF off its pedestal, because this really is a case of swings and roundabouts," Davies says. One problem is that investors can't "visit" their gold - which is vaulted at Rand Refinery in Johannesburg - due to security measures at the refinery, which daily ships gold for South African and international clients in considerable volumes. However, investors can leave with their physical gold in it if they decide to exit the scheme.
SA Bullion isn't for the faint-hearted. Its minimum investment is set at around 30 ounces, which at the current gold price is around R170 000. Davies says though smaller amounts won't make a business case for SA Bullion, it might almost certainly limit the amount of private clients who could invest in its product.
It also appears that SA's authorities have an iron grip over SA Bullion. Since gold is viewed as cash, the SA Reserve Bank places a limit on the amount of turnover SA Bullion is allowed - currently R650m - and no more than R20m/month. That changes annually in increments, such that in three years' time SA Bullion will be able to turn over as much as R3,5bn.
However, Davies concedes to frustrations with the current regulatory environment. South Africans still aren't allowed to hold "unwrought gold" - metal that hasn't been fashioned into a jewellery item or a Krugerrand, mainly for fear that relaxing the law will encourage the gold bandit phenomena underground at SA's mines.
However, the proposed Precious Metals Bill suggests that private individuals will be able to hold so-called "minted gold" - a gold bar that bears the Rand Refinery stamp. But once the bars are minted, investors suddenly find they'd have to pay VAT at 14.
Bullion investment manager launched
Private and institutional investors now have the choice of using an
investment manager to invest in physical gold bullion as an alternative to
holding cash denominated in a national currency.
SA Bullion Fund Management, the country's first dedicated gold bullion investment manager, has been established by Cape Town-based Hilton Davies and Germiston-based Rand Refinery, the world's largest refiner of gold.
"The regulatory environment for investing in physical gold in South Africa is highly complex," said Davies, managing director of SA Bullion.
Established in 2005, SA Bullion has spent the last few years ironing out regulatory issues. As gold falls within the area of foreign currency it was necessary for the firm to win the approval of the South African Reserve Bank.
Working with the Exchange Control Department of the Reserve Bank, the South African Mint and Rand Refinery, authorisation was granted in early 2007.
Investors can take full ownership
"What we sought to do is to create an investment vehicle where investors can take full ownership of bullion and do so at low administrative cost with complete security. As such, investors are not investing in a gold derivative, commonly known as paper gold, where there is credit risk related to the issuer; similarly there is no stock market risk involved," he explained.
Davies advised that gold should be viewed as a form of cash, and that its investment merit is as a currency on the ascendancy while senior currencies are depreciating due to excessive money supply growth.
SA Bullion's investment mandate makes use of the Krugerrand. The gold one-ounce coin is recognised as legal tender and as such, the South African Reserve Bank stands as guaranteed buyer.
But unlike other forms of gold, the coin does not attract Value Added Tax.
Elimination of costs of shipping
The usual costs associated with investing in Krugerrands also have been
largely eliminated by the wholesale pricing being passed on to the investor,
as well as the elimination of the costs of shipping and retailing.
The outcome is a portfolio that is investing into ounces of gold secured at Rand Refinery for which the client pays a low service charge, says SA Bullion.
"As SA Bullion's strategic partner we are delighted to bring the mainstream of investors into the gold market, particularly as we hold an extremely bullish view on gold," said Johan Botha, global markets executive of Rand Refinery.
Major exponents of the case for investing in gold include leading global economists such as Marc Faber and Richard Russell, who have been extolling the investment case for gold for several years.
Bottom of the down-cycle
Gold experienced a 20-year bear market from its peak in 1980 with the
bottom of the down-cycle at around the turn of the century.
In the last three years gold has returned 22.1 percent per annum in dollars and 24.8 percent per annum in rand.
SA Bullion said by comparison, cash in rands has returned approximately 6.5 percent per annum before tax.
Gold bullion investment firm a first for SA
In the midst of the gold price reaching its highest levels in nearly
three decades, Germiston-based Rand Refinery and Cape Town-based Hilton
Davies said in a statement on Friday that they had launched South Africa’s
first specialist gold bullion investment manager.
The new firm, SA Bullion Fund Management, would focus on providing physical gold bullion investment products to private and institutional investors as an alternative to holding cash denominated in a national currency.
“What we sought to do was to create an investment vehicle where investors can take full ownership of bullion and do so at low administrative cost with complete security,” MD Hilton Davies said.
“As such, investors are not investing in a gold derivative, commonly known as paper gold, where there is credit risk related to the issuer; similarly there is no stock market risk involved.”
The portfolio allowed people to invest in ounces of gold secured at Rand Refinery, for which the client paid a low service charge, SA Bullion said.
Matthew Hill in www.miningweekly.co.za
Golden Opportunity to Safely Invest in Bullion
If you are a gold bull itching to get your hands on the real thing –
without having to fear theft or high storage costs – there’s an investment
manager just for you.
The world’s largest refiner of gold, Rand Refinery, has teamed up with Cape Town-based Hilton Davies to launch SA Bullion Fund Management. It is SA’s first investment manager specializing in bullion and offering physical gold investment products.
Licensed by the Financial Services Board as a Discretionary Financial Services Provider, the company will focus on providing physical gold bullion investment products to private and institutional investors as an alternative to holding cash denominated in a national currency.
Prospective investors in physical gold are faced with difficulties of security and storage. Recently developed investment products such as Exchange Traded Funds (ETFs) allowed investment in gold without these issues, giving these products a strategic advantage compared with bullion coins.
The creation of a new entity – SA Bullion Fund Management – is poised to resolve this difficulty. Founded by Cape Town-based Hilton Davies and scheduled for launching once final Financial Services Board (FSB) approval is granted, the firm will act as a specialist investment manager in physical gold: investors who purchase Krugerrands will have direct ownership of their bullion coins, but will enjoy the benefit of absolute security, as Rand Refinery will be responsible for storing the coins.
In ‘Latest Developments’ on www.randrefinery.co.za
“Allan Gray's press release of November 3 1999 said, 'The fund is ideally suited to those investors who are long term in their approach and those who do not wish to be fully exposed to stock market volatility'. Allan Gray Unit Trust GM at the time, Hilton Davies, remarked: 'An investment is considered attractive when its price is well below the manager's assessment of its intrinsic value, normally the price an astute businessman would pay for the business. It follows that given this approach, investments are often only found to be attractive when the market has sold them off and when they are subject to the most pessimism'."
Leon Kok in www.fin24.co.za
“… Foord Unit Trusts MD Hilton Davies says: ‘We are very bullish on equity.’ The market, he says, is not discounting the positive impact the economy’s strength and low inflation will have on earnings growth “over the next few years”. “Though in broad agreement with Davies, Allan Gray CIO Stephen Mildenhall cautions: ‘We still view equity as the best asset class, but the 60% rise in the Alsi since early 2003 calls for a greater degree of caution.’
“Foord’s impressive long-term record is becoming evident in its fledgling Foord Balanced Fund. CEO Hilton Davies says: ‘We are independent thinkers not influenced by our competitors and often make investments in under-researched shares and unpopular sectors. It is here that the greatest value is often to be had’.”
Undisclosed on www.fundsdata.co.za
“’We are old fashioned in our view that asset allocation, combined with bottom up stock picking plays a huge role in delivering performance,’ said Managing Director of Foord Unit Trusts, Hilton Davies.” “Asset Allocation requires fund managers to read the investment environment accurately, selling equities at high points, moving into cash during times of volatility. However, it has proved difficult to manage assets in this way, and many fund managers opt for the safer option of investing in equities, cash and bonds in the same fixed proportions, regardless of the investing environment. ‘In our view the interest rate cycle is fundamental to the business cycle as well as the pricing of investment assets. We therefore emphasise interest rate cycle forecasting,’ said Davies. ‘We believe superior performance comes from buying unusual value and that markets may become overvalued and undervalued for long periods of time and that research effort is rewarded with superior results,’ he said.”
“We provide a high quality service to a highly discerning and select client base,’ said Davies. ‘We aim to be in the top 20 to 25 percent of the performance league tables, and deliver solid, consistent performance. In our view, aiming for the top slots requires taking undue risk on behalf of our clients, which we are not prepared to do,’ he said. This philosophy has born fruit and earned recognition over the years. Recently the firm has had the top rankings over five and ten years in the Absa Consulting Actuaries Survey and has achieved this performance with lower volatility than any other manager.”
“Foord Unit Trusts MD Hilton Davies says that the company’s thinking is that its focus is on direct investors, not brokers. ‘So we’re not beholden to the sales force and pass all benefits we can to the direct clients who make their own investment decisions’.”
“Choosing an investment strategy is a demanding enough task in itself for trustees. Choosing an investment professional to team up with is perhaps a hard call.” “Hilton Davies, MD of AMB Foord Asset Management, says that wider choice is positive for the investment industry. ‘I don’t believe it’s overtraded’. What he would like to see is a wider spread of assets throughout the industry. He adds: ‘There’s too much concentration of assets in the hands of eight big players.’ “Davies cautions against the danger of excessive control. ‘Investment consultants have already taken away a large amount of decision-making power from fund managers.’ There’s a danger that upcoming legislation will remove even more of their discretion, to the potential detriment of long-term fund performance. The more the industry is regulated and investment strategy placed in the hands of non-investment people the more chance there is of this occurring, says Davies. ‘I have a particular problem with the growing influence of actuaries on investment strategy.’ Actuaries, he says, are more likely to view equities as the most risky of all asset classes. ‘We face the possibility that portfolio equity exposures could be cut’.”
“Foord has strong long-term performance, but its notoriously poor marketing has limited inflows. AMB Foord MD Hilton Davies, who ran Allan Gray’s unit trust company aims to change this.”
“Hilton Davies (BSc, B Com (Hons)) is managing director of AMB Foord Asset Management (FAM). He has 10 years investment experience. Prior to assisting in the formation of AMB Foord in 2001, he was employed as an executive of Allan Gray Limited for a period of five years where he was executive director responsible for Allan Gray Unit Trusts. Prior to that Hilton was employed at Ginsburg Malan and Carsons Consultants and Actuaries where he attained the position of Investment Services Manager.
“I first met Hilton Davies when he had the tough task of house-training the Allan Gray investment team to become more media-friendly. I think I had the first on-the-record interview with the Allan Gray team back in October 1998, in their old offices in St George’s Mall, Cape Town.” “Davies has another training duty to perform in his new role as MD of AMB Foord. This is a joint venture between African Merchant Bank and what is now called Foord Asset Management. It used to be called Foord & Meintjes…” “The big danger, of course, is that Foord’s outperformance might have ended and that it will start falling to the bottom of the tables again, where it was in 1997. But if Davies is good at training fund managers for the outside world, he is equally good at explaining to clients the value of taking a long-term approach to investment.”
Allan Gray Unit Trusts Management Company Commentary
It is pleasing to report that all the Allan Gray Unit Trust funds have continued to exceed their respective benchmarks. The Allan Gray Equity Fund reached its second anniversary with a return of 193% since inception (71% p.a.). This compares with the second placed fund over the period at 77% (335 p.a.) and the All Share Index at 71% (31% p.a.). Having commenced one year after the Equity Fund, the Allan Gray Balanced Fund reached its one-year milestone on 30 September. The Balanced Fund also occupies first place in its category. The return achieved was 35% versus 30% for the second placed fund while the average prudential fund returned 20%. Allan Gray’s approach is to invest in assets that represent sound fundamental value and as such it is expected that Allan Gray portfolios represent lower than average risk of loss. A simple study reveals that during consecutive quarters of considerable stockmarket weakness in 2000, the performance of the Equity Fund was only marginally negative thus it strongly outperformed the All Share Index. The Balanced Fund did not post any negative quarterly returns. While we would caution investors to view our past two years performance as exceptional, in looking ahead we are confident that our investment process will continue to deliver returns that surpass the respective benchmarks of our funds.
“Allan Gray was the last of the top 10 institutional managers to open a unit trust management company. The Allan Gray Equity Fund was launched in October 1998 and the Balanced Fund exactly a year later. GM Hilton Davies is determined to make up for lost time.” “Davies says Allan Gray had been reluctant to launch unit trusts before October 1998 because it did not want to take on client’s money when the equity market was overvalued. By the time the equity fund was launched, however, the JSE was struggling after the August 1998 slump.” “Sadly, few people have enjoyed the full benefit of Allan Gray’s strong performance.” “This has allowed Davies to focus his efforts on the front office and build up a Rolls-Royce service for unit holders.” “Clients are given the opportunity to visit Allan Gray’s premises where Davies has an open door.” “…but Davies is adamant that it (advertising) will not be based on recent short-term performance. ‘Short-termism is not aligned to what we stand for.’ He adds that there is a role for asset class funds and intends to complement its equity and balanced funds with a money-market and a bond fund. It would also like to offer global equity as an asset class, which would feed into the sister Orbis fund.” “With the two balanced funds and four asset class funds Allan Gray would have a full suite. Davies is confident that it can grow to the size of unit trust companies with 18 or 20 funds. If past performance determines inflows, rather than slick, expensive and aggressive marketing, he could achieve this goal.”
“However, the best-performer - and it gets double kudos as it is a general equity fund - is the Allan Gray Equity fund, which gave a 116.2% return. Hilton Davies, general manager of Allan Gray Unit Trusts, puts it down to expert share selection. The manager, he says, focused on value shares and benefited from exposure to consumer stocks and commodities. “
“Allan Gray Equity Fund’s current portfolio is also anything but conventional. Swimming against the market tide, the clamour for resource stocks is seen as a time to take profits. ‘Commodity stocks have seen their best’, says Investment GM Hilton Davies. Domestic cyclicals, he feels, now offer the best prospects.”
“Allan Gray Unit Trusts GM Hilton Davies says the house invests to catch investment waves, and will often hold a share for five to 10 years to get the full benefit of this. But he insists that this is quite different from being married to a share or a sector.”
Stephen Cranston in Financial Mail p.78
”Only one general equity fund, Allan Gray Equity Fund, streaked ahead to find a place among the top ten funds for the quarter, with a return of 26%. Fund manager Hilton Davies says the fund excelled because it has been biased towards commodity and cyclical shares since the beginning of the year, instead of buying up expensive IT and financial shares, as most general equity funds did.”