Investing Retirement Funds Wisely

Investing Retirement Funds Wisely

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Both AltX and Satrix are investment vehicles aimed at encouraging the participation of the retail investor as an alternative to unit trusts, but their appropriateness as retirement vehicles requires an understanding of the pros and cons of each.

Like the main board, AltX declined precipitously following the international financial crisis in 2008-09. But unlike the main board (which Satrix tracks) it did not bounce back even a little bit during the recovery. In fact, AltX has just dropped below 1 000 for the first time, a far cry from the 5 000 level it reached in late 2007. On a three-year outlook, AltX is 70% lower than the all-share index. AltX is above all about small cap stocks, and whether on AltX or main board, these have not performed well during the recovery because there is so much value to be had elsewhere – and also because they tend to be unresearched. AltX is prone to that weakness that appears to affect all small cap boards: wild booms and busts.

Pros and Cons of AltX

AltX attracts little interest because investors tend to follow momentum, and that’s currently with the large cap and resources stocks – which you can access via Satrix. The biggest drawback of AltX according to Shawn Stockigt, manager of several Stanlib funds including its Small Cap and Value funds, is that unlike Satrix, AltX does not represent any common theme.

He therefore never looks at AltX as an entity – he looks rather at small caps, construction companies or value shares, irrespective of where they are to be found. “It’s a diverse index, with only three or four larger companies heavily weighting it. Companies also move in and out of the board, making AltX irrelevant as an investment ‘theme’,” he says.

Explaining AltX and Satrix

Unlike Satrix, AltX is not an investment product – but a trading platform on which the investor buys individual shares. AltX aims to attract small and medium sized companies, and is also tailored more to the private investor than the institution, though institutions still account for 30% – 40% of market cap – giving some reassurance to private investors.

Satrix is a range of exchange-traded funds, the most popular being Satrix 40, which gives investors the performance of the FTSE/JSE’s top 40 index. It enables investors to invest in a single security that provides a diversified portfolio of the top 40 companies, measured by their market capitalisation, on the JSE. It provides both the price performance of this index as well as paying out quarterly all the dividends received from the JSE’s top 40 companies. 

But are these retirement vehicles?

Stalwart investment managers such as Armein Tyer, MD of Sanlam Investment Management and Citadel wealth planner Johan Strydom both recommend the JSE’s Satrix series for the private investor, whether for retirement or savings purposes.

EFTs, such as those offered by Satrix, offer strong competition to unit trusts: to keep costs down they tend to be ‘tracker’ funds that in their underlying basket of shares mirror those used by the JSE to calculate the average growth of various sectors. By emulating the average of the sector, they achieve growth that is better than most actively managed funds – in the short-term. While the performance of Satrix tracks that of its index, a look at AltX’s performance shows a massive spike, whereafter it “fell off a cliff, and hasn’t recovered since,” says Stockigt.

Seek opportunities

For retirement purposes, he says “you’d have to say ‘don’t go there’, but by delving a little deeper into individual companies there is certainly value to be found.” However, it takes a great deal of personal research. While there are good companies on the AltX, there are equally good or better companies elsewhere, also at favourable valuations, and you can get a diversified portfolio of such value stocks through Satrix. So much value is to be found elsewhere, not only on the JSE’s main board, but more
particularly in offshore investments.

However, small cap stocks do appeal to the contrarian investor, and identifying the right stock can be rewarding. Stockigt points out that if you’d bought Spur a year ago, you would have increased your capital fivefold, with the dividend alone being more than the initial investment. He bought Spur for R2,15, received a dividend of R3,38 and the share was valued in June 2010 at R10,20. He recommends anyone take a certain proportion of their retirement portfolio not likely to be needed any time soon, and dedicate that portion to more high risk punts. These opportunities exist – and there are others – but it begs the question of whether this is a retirement strategy. It is certainly high risk – not the sort of investment you can buy and forget about.

Risks

The key weakness of small caps is liquidity, and Stockigt lists this as the most important consideration when buying. Yes, there are bargains to be had – but you have to question whether you can sell the stocks when you wish to. Many AltX companies whose share price is languishing are also ripe for buyouts (M&A). These are good companies with great potential and are being ignored. Once the M&A market itself picks up, they may be ignored no longer. For Satrix (or passive) investors looking to invest in an AltX index fund, no such index exists.

Stockigt emphases that index funds generally adopt a theme, whereas the AltX is far too diverse a group to be a ‘theme’. The same applies when making comparisons to either a Satrix index fund or answering the question of whether the AltX would make a suitable investment towards retirement. Investing in AltX is the same as investing in any single stock. Furthermore, the torrid time the AltX has had in recent years would tend to exclude AltX shares from any but the most high-risk portfolio.

Research

Understand Your Investment Options

“Researching AltX companies is no different from researching any company listed on the JSE,” says Shawn Stockigt, manager of Stanlib Funds. More than that, he again recommends investors look at companies (or their products) they have some knowledge of. Two important gauges of a company are corporate governance and liquidity.

“We look for low price:earnings ratios and high dividend yields and if they appear to offer value, we interrogate further. We also look at companies that have fallen particularly hard as to whether there are valid reasons for the fall. We look for the ‘unloved’ companies. For instance, I’d be looking at the construction space right now, because the market may be over-discounting the bad news.” Value fund managers study the JSE daily prices for companies that stand out and then find reasons for the difference.

Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.