Wednesday, 02 March 2016 - 20:00
Charts
Seed Weekly - Diversification - How is it a Free Lunch?
Diversification is a term in investments that is often bandied about, but typically not much thought goes into what it actually means. Phrases such as the ones below are often thrown around:
“Make sure you don’t have all your eggs in one basket.”
“Diversification is the only free lunch in investing.”
“Don’t worry I have a diversified portfolio!”
“Is your portfolio diversified or diworsified?”
Diversification is a very important concept and, when used correctly, is a powerful way to build robust portfolios. Essentially, diversification is the process of investing across a range of asset classes/investment styles/strategies that produce returns that aren’t 100% correlated with each other. In a perfect world they will have negative correlations with each other, but practically the lower the correlation the better. A consistent correlation profile is also a highly sought after trait.
To unpack the above statement I’ll more fully explain the concept of correlation and give some practical examples. Correlation ranges from -100% to 100%, where -100% is when assets move perfectly inversely to each other and 100% where they move perfectly in line with each other. The chart below shows the monthly returns of 3 hypothetical assets. As can be seen, Asset A and Asset B move broadly in line with each other and have a correlation of 66%, while it is obvious that the monthly returns of Asset A and Asset C don’t move in line with each other – here the correlation is -68%.
Over this period all 3 assets have generated a return slightly in excess of 5% with a volatility of around 9.5%. While blending Asset A and Asset B together enhances an investor’s return and reduces the risk (volatility used as a proxy for risk in this case), blending Asset A and Asset C further enhances the return and dramatically reduces the portfolio’s risk – this is shown in the chart below.
Consistent relationships are also highly sought after. In times of market stress correlations tend to rise (i.e. move closer to 100%) which puts the portfolio at risk. The last thing an investor wants when one portion of their portfolio is under stress, is for the rest of the portfolio to follow suit. It is in these times of stress that a robust portfolio (i.e. one built with assets that are truly uncorrelated) show its true colours.
You may be saying that this is all good and well when discussing theoretical concepts, but at the same time be asking whether this can be practically implemented? The chart below shows the actual return and volatility of the Seed Stable Fund as well as the return and volatility of each of the Fund’s underlying strategies (in mid-2014 – when there was a very low correlation between strategies). If all of the strategies were perfectly correlated with one another then the Fund’s volatility would have been 6%, but by carefully constructing a portfolio of uncorrelated strategies the Fund’s actual volatility was less than 3%. By diversifying properly, the Fund was therefore able to deliver to investors a “free lunch” of a 50% reduction in volatility.
Investors that seek to diversify their investments will undoubtably leave some upside potential on the table. Investors that combine a range of assets in the hope that they are diversified will find out (typically in times of market stress) that all they’ve done is ‘diworsify’ their portfolio. What investors who properly diversify will achieve, however, is robust portfolios that can stand the test of time and deliver consistent risk adjusted returns.
Take care,
Mike Browne
Tel +27 21 914 4966
Fax +27 21 914 4912
Email info@seedinvestments.co.za
Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.
www.seedinvestments.co.za
Wed, 02 Mar 2016
Top News
Local markets
On Wednesday, the JSE ended 1.30% higher after gains in industrial and resource shares offset 4.98% losses in gold miners. Full story
South African short-term insurer Santam's full-year earnings beat expectations by rising 28 percent jump largely due to fewer claims, sending its shares seven percent higher.
Santam said diluted headline earnings per share rose to 1,844 cents in the year to end-December from 1,446 Full story |
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Donald Trump consolidated his lead in the 2016 Republican presidential race with Super Tuesday victories but failed to eclipse his rivals or draw reluctant party leaders into his corner. Full storyChina sent several ships to a disputed atoll in the South China Sea, preventing Filipino fishermen from accessing traditional fishing grounds and raising tensions in the volatile region, Philippine officials said on Wednesday. Full storyA massive quake struck on Wednesday off the Indonesian island of Sumatra, a region devastated by the 2004 Indian Ocean quake and tsunami, but initial fears of another region-wide disaster faded as tsunami warnings were cancelled. Full story |
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SA Business | South Africa's rand fell by more than one percent to the dollar on Wednesday as global risk appetite faded following the. . . Full story | | South Africa's Association of Mineworkers and Construction Union (AMCU) said on Wednesday fewer jobs would be lost at platinum producer Lonmin. . . Full story | | A deal struck between South Africa's government, companies and unions has prevented the immediate loss of 16,000 jobs in an industry. . . Full story | | South Africa's rand steadied against the dollar in early trade on Wednesday as risk appetite returned after gains in oil prices. . . Full story |
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| South Africa has allowed
American chicken, pork and beef products to go on sale
throughout the country, meeting benchmarks for resolving a trade
dispute. . . Full story | | The United States will not suspend duty-free benefits for South Africa as threatened after Pretoria met the requirements of a trade. . . Full story | | South Africa's finance minister will miss a Wednesday deadline set by police to answer questions on his role in the setting. . . Full story | | South Africa's finance
minister will miss a Wednesday deadline set by police to answer
questions on his role in the setting up of. . . Full story |
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| South Africa's Police
Minister Nkosinathi Nhleko said on Wednesday that questions put
to Finance Minister Pravin Gordhan by an elite police unit do
not. . . Full story | | South Africa's fourth-largest lender Nedbank forecast slower profit growth this year as it feels the effects of weak consumption and. . . Full story | | The South
African government's forecast of a 7.2-million-tonne maize
harvest this year is "optimistic" and will almost certainly be
revised down, the country's largest. . . Full story | | South Africa's Clover Industries will no longer invest in Nigeria due to a financial crisis there, the dairy products company said. . . Full story |
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Company News | Shareholders are referred to BidvestĘs unaudited results for the half-year ended December 31 2015 released on SENS on 29 February 2016.. . . Full story | | Holders of Astrapak preference shares are advised that the salient dates for the nineteenth dividend declaration in respect of the non-. . . Full story | | Bondholders of the Shoprite Investments Convertible Bond are hereby advised that the SHPCB convertible bond will commence trading ex-interest, with respect. . . Full story | | Bondholders are advised that interim results of Eqstra Holdings Limited for the period ended 31 December 2015 are available for inspection. . . Full story |
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Company Results | Revenue for the year decreased by 19.2% to R3 044.7 billion (2014: R3 767.5 billion). Gross loss came in at R39.8. . . Full story | | Revenue for the year increased by 14% to R4.510 billion (2014: R3.968 billion). Gross profit rose by 13% to R1.067 billion. . . Full story | | Revenue from continuing operations for the period increased to R4.113 billion (2014: R4.004 billion). Operating profit rose to R436 million (2014:. . . Full story | | Interest and similar income climbed to R61.0 billion (2014: R54.8 billion). Profit attributable to ordinary equity holders increased to R9.7 billion. . . Full story |
World Markets (Spot Prices)
Name | Time | RP | Move | % Move | JSE Overall | 17:00 | 50966.93 | 651.84 | 1.30% | JSE Top 40 | 17:00 | 45266.30 | 645.77 | 1.45% | JSE Gold | 17:00 | 1977.74 | -103.70 | -4.98% | JSE Financial | 17:00 | 40281.95 | 423.83 | 1.06% | JSE Industrial | 17:00 | 77280.10 | 970.93 | 1.27% | JSE Indust 25 | 17:00 | 69932.46 | 835.35 | 1.21% | JSE Resource | 17:00 | 28537.82 | 560.87 | 2.00% | DJ Futures | 19:52 | 16800.00 | -49.00 | -0.29% | DJ Ind | 20:00 | 16849.95 | -15.13 | -0.09% | SP 500 | 20:00 | 1976.77 | -1.58 | -0.08% | Nasdaq | 20:00 | 4676.33 | -13.27 | -0.28% | FTSE 100 | 17:00 | 6114.31 | -38.57 | -0.63% | DAX | 19:08 | 9776.62 | 59.46 | 0.61% | CAC40 | 19:08 | 4424.89 | 18.05 | 0.41% | Nikkei | 08:28 | 16746.55 | 661.04 | 4.11% | Shanghai | 09:28 | 2849.68 | 116.51 | 4.26% | Hang-Seng | 10:28 | 20003.49 | 596.03 | 3.07% | All Ords | 07:44 | 5083.50 | 93.90 | 1.88% | NZSE 50 | 07:30 | 6313.07 | 32.17 | 0.51% |
| | Name | Time | RP | Move | % Move | Gold $ | 19:59 | 1240.21 | 9.33 | 0.76% | Gold R | 20:00 | 19353.48 | 177.21 | 0.92% | Gold R/kg | 20:00 | 622214 | -1428 | -0.23% | Silver $ | 19:59 | 14.9850 | 0.1860 | 1.26% | Platinum $ | 19:59 | 934.41 | -2.30 | -0.25% | Palladium $ | 19:59 | 514.28 | 1.28 | 0.25% | R186 | 16:54 | 9.35 | 0.00 | 0.00% | R204 | 16:54 | 8.67 | 0.01 | 0.12% | R207 | 16:54 | 8.89 | -0.01 | -0.06% | Brent Crude | 19:48 | 36.70 | 0.73 | 2.03% | USD / ZAR | 19:59 | 15.6050 | 0.0347 | 0.22% | GBP / ZAR | 19:55 | 21.9333 | 0.2160 | 0.99% | EUR/ ZAR | 19:55 | 16.9419 | 0.0008 | 0.00% | NZD/ ZAR | 19:59 | 10.3543 | 0.0132 | 0.13% | AUD / ZAR | 19:55 | 11.3628 | 0.1633 | 1.46% | USD / JPY | 19:59 | 113.7590 | -0.3020 | -0.26% | EUR / USD | 19:59 | 1.0852 | -0.0014 | -0.13% | GBP / USD | 19:59 | 1.4064 | 0.0116 | 0.83% |
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Click here for the Sharenet Spot Price page
The JSE Today
Trading Statistics
Date | Adv. | Decl. | Unch. | Actives | Volume | Value | Trades | Orders |
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02/03/2016 | 229 | 153 | 50 | 432 | 404,977,446 | R28,532,015,974 | 312500 | 82745 | 01/03/2016 | 259 | 120 | 52 | 431 | 330,420,559 | R19,770,469,345 | 263697 | 51459 | 29/02/2016 | 171 | 220 | 64 | 455 | 465,258,808 | R30,021,613,425 | 282911 | 2254100 | 26/02/2016 | 221 | 135 | 78 | 434 | 302,602,639 | R17,667,840,644 | 226585 | 1915554 | 25/02/2016 | 228 | 142 | 69 | 439 | 318,073,546 | R22,272,272,268 | 254341 | 512842 |
* Includes all listed instruments on the JSE
Index Summary Index Name | RP | Move | % Move | Top 40 | 45,266.30 | 645.77 | 1.45% | Industrial | 77,280.10 | 970.93 | 1.27% | Mid Cap | 69,841.01 | 338.89 | 0.49% | Small Cap | 55,597.92 | 414.13 | 0.75% | Resource 20 | 28,537.82 | 560.87 | 2.00% | Industrial 25 | 69,932.46 | 835.35 | 1.21% | Financial 15 | 14,833.65 | 133.43 | 0.91% | Financial & Ind. 30 | 72,744.26 | 830.29 | 1.15% | All Share | 50,966.93 | 651.84 | 1.30% | Oil & Gas | 7,195.69 | .00 | 0.00% | Mining | 19,359.18 | 232.13 | 1.21% | Gold Mining | 1,977.74 | -103.70 | -4.98% | Platinum Mining | 20.24 | .79 | 4.06% | GENERAL MINING | 4,808.43 | 156.48 | 3.36% | Oil & Gas Producers | 38,689.88 | .00 | 0.00% | Basic Materials | 20,120.53 | 329.54 | 1.67% | Chemicals | 22,605.11 | 709.28 | 3.24% | Forestry & Paper | 50,027.26 | 749.51 | 1.52% | Industrial Metals | 5,559.42 | -381.72 | -6.43% | Industrials | 41,732.24 | 72.84 | 0.17% | General Industrials | 157.72 | -.31 | -0.20% | Consumer Goods | 79,566.69 | 566.90 | 0.72% | Automobiles & Parts | 5,185.61 | 280.79 | 5.72% | Household Goods | 602.21 | 20 | 3.45% | Health Care | 9,051.49 | 200.48 | 2.27% | Beverages | 313.95 | 1.24 | 0.40% |
| | Index Name | RP | Move | % Move | Food Producers | 8,026.42 | 159.43 | 2.03% | Personal Goods | 1,017.64 | .80 | 0.08% | Consumer Services | 16,737.07 | 465.45 | 2.86% | General Retailers | 7,129.24 | 60.17 | 0.85% | Travel & Leisure | 5,116.02 | 131.90 | 2.65% | Media | 435.34 | 15.03 | 3.58% | Support Services | 1,876.56 | -.07 | -0.00% | Telecommunications | 7,291.34 | -83.91 | -1.14% | Financials | 40,281.95 | 423.83 | 1.06% | Banks | 6,373.94 | 143.82 | 2.31% | Non-life Insurance | 53,989.68 | 3710.93 | 7.38% | Life Insurance | 36,731.89 | 224.19 | 0.61% | General Financial | 4,453.72 | 9.28 | 0.21% | Technology | 53,920.20 | 2498.71 | 4.86% | SHARIAH TOP40 | 2,902.90 | 61 | 2.16% | FTSE/JSE SHARIAH ALL | 3,190.03 | 52 | 1.65% | COAL MINING | 8,997.14 | -262 | -2.83% | FTSE JSE Fledgling | 6,422.54 | 47 | 0.73% | FTSE/JSE Alt X | 1,496.93 | 14 | 0.97% | SA LISTED PROPERTY | 619.64 | | 1.02% | CAPPED PROPERTY | 549.43 | | 0.81% | RESOURCE | 16,054.14 | 263 | 1.67% | DIVIDEND PLUS | 195.76 | 2 | 1.19% | FTSE/JSE RAFI 40 | 8,997.63 | 75 | 0.84% | Capped Top 40 | 24,049.49 | 333 | 1.40% | Capped All Share | 25,957.41 | 321 | 1.25% | JSE TABACO | 11,120.78 | 19 | 0.17% |
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Click here for the Sharenet Index Summary page
Latest Consensus Changes** Code | Company Name | Status | Updated | CFR | COMPAGNIE FIN RICHEMONT | BUY | 01/03/2016 | BVT | THE BIDVEST GROUP LIMITED | BUY | 01/03/2016 | SNH | STEINHOFF INT HLDGS N.V | BUY | 01/03/2016 | SGL | SIBANYE GOLD LIMITED | BUY | 29/02/2016 | DSY | DISCOVERY HOLDINGS LIMITE... | SELL | 29/02/2016 |
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Results Expected** Expected | Company Name | Fin. Date | 03/03/2016 | ASPEN | December 2015 (Interim) | 03/03/2016 | ASPENPREF | December 2015 (Interim) | 03/03/2016 | EXXARO | December 2015 (Final) | 03/03/2016 | MTN GROUP | December 2015 (Final) | 03/03/2016 | NEDBANK | December 2015 (Final) |
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Recent Dividends** Share Name | Dec-Date | LDT | Pay-Date | Amount | B-AFRICA | 01/03/16 | 01/04/16 | 11/04/16 | ZAR 5.5000 | ABSABANK-P | 01/03/16 | 01/04/16 | 11/04/16 | ZAR 33.9548 | CASHBIL | 01/03/16 | 16/03/16 | 29/03/16 | ZAR 5.1300 | METROFILE | 29/02/16 | 01/04/16 | 11/04/16 | ZAR 0.1100 | CAPITEC-P | 29/02/16 | 16/03/16 | 29/03/16 | ZAR 4.0421 |
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Ex Div** Share Name | Dec-Date | LDT | Pay-Date | Amount | HUDACO | 29/01/16 | 26/02/16 | 07/03/16 | ZAR 3.4500 | RESILIENT | 03/02/16 | 26/02/16 | 07/03/16 | ZAR 2.3246 | WOOLIES | 11/02/16 | 26/02/16 | 07/03/16 | ZAR 1.3300 | INDLU | 10/02/16 | 26/02/16 | 07/03/16 | ZAR 0.2293 | ITLTILE | 11/02/16 | 26/02/16 | 07/03/16 | ZAR 0.1400 |
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Upcoming AGMs** Code | Company Name | Date | Status | TCP | Transaction Capital Ltd. | 03/03/2016 | Confirmed | TLM | TeleMasters Holdings Ltd. | 04/03/2016 | Confirmed | HDC | Hudaco Industries Ltd. | 09/03/2016 | Confirmed |
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