5 months ago

Blue Chip Issue 86

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Blue Chip Journal is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry. Visit Blue Chip Digital:


BLUE CHIP INVESTMENT | Cryptocurrency CRYPTOCURRENCIES as an investment Cryptocurrencies are sweeping the world in terms of news headlines, but the question remains in terms of the suitability of the asset class other than pure speculation. There are two key questions that investors face to determine the suitability of including crypto assets in an investment portfolio: 1. What are the requirements in terms of credit intermediation, regulation and infrastructure as well as cost? 2. More importantly, what should the role be of crypto assets within a portfolio? These questions are addressed by looking at a couple of specific investment factors, risks and market dynamics. INVESTMENT CASE The investment case can simplistically be broken down into relevance and risks on the one side and then return expectations and diversification on the other. Rates of return are measured by an increase in the asset price and the interest paid or the dividend stream on a specific investment. The only source of return for a crypto asset is to increase in price. Given the nature of the change in price over time, driven by pure supply and demand and perhaps other speculative views, crypto assets do have the ability to behave very differently to traditional asset classes and perhaps provide a hedge against the volatility of global monetary systems and therefore a source of diversification. Although cryptocurrencies are permitted in most of the world’s major economies, there are still a range of risks, in addition to volatile market price movements, that should raise concerns for inclusion in an investment portfolio. These risks include security risks, valuation risk and uncertainty around the regulatory future. Besides these risks, there needs to be an internationally trusted marketplace for institutional-only cryptocurrency trading. However, the most interesting development in cryptocurrencies is in the world of investment fund management. Specialist cryptocurrency funds have been created which seek to buy and sell in the same way one might with equities or other securities. The expectation for this market is to grow quickly as people seek noncorrelated alternative investments. There are several possibilities to explore over time as risks subside and more visibility around regulations transpires: • Direct investments: these can be risky, however, especially when investing in larger amounts, given storage and execution risks. • Futures: available if one has the expertise to trade them. • Passive crypto funds: through exchange-traded products, for example. These offer capacity but are a blunt instrument. They have concentration risk (because of the dominance, for the time being, of Bitcoin). • Active hedge funds: exploitation of the inefficiencies presented by the market. • Venture capital funds: these can offer purer forms of Digital Ledger Technology (DLT) exposure, but often have long lockups. Cryptocurrency as an investment option would greatly increase fiduciary risk and liability. Traditional valuation methods for determining what a stock is worth do not necessarily work when evaluating crypto assets. Crypto volatility requires investors to be patient over the long term and during significant up and down swings, which could result in poor investment outcomes if you were to exit the sector too quickly. An improved infrastructure is needed to accommodate investments and encourage more widespread acceptance of cryptocurrency. Besides that, potential regulatory and legal hurdles create market hesitation to use cryptocurrency. Until a properly regulated and accountable fund exists, based in a respectable financial territory and with strong custodianship arrangements in place, we must tread with caution. At Momentum Investments, we relentlessly pursue and interrogate ideas and opportunities to best deliver on our outcome-based investing philosophy. With us, investing is personal, and we seek those investment ideas and opportunities that will allow our portfolios to meet clients’ long-term expectations and objectives as prudently and robustly as possible. While the simple yet profound wisdom of Warren Buffett – “If you don’t understand it, don’t invest in it” – provides the answer, some investors may still feel compelled. It is important to remember that the crypto space can be highly volatile. Even though cryptocurrencies have been declared as a financial product under the Financial Advisory and Intermediary Services Act of 2002 there is still a lot of uncertainty regarding the regulation of these instruments and therefore makes investing in them a risky proposition. Eugene Botha, Deputy Chief Investment Officer, Momentum Investments Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).

INVESTMENT | Collectables BLUE CHIP Why do people invest? Why do they save? Many people invest to fulfill their wants and desires. Every single person on the planet, no matter their background, race or circumstances, has dreams. And a dream is often molded by the tangible (somewhat materialistic) items money can buy. Consumerism is a term that came about in the early 1900s and today it is defined as the protection or promotion of the interests of consumers. I would change this definition and rather say, it is people that buy products and services that are created for people. And today we live in a world dominated by consumerism. The largest companies in the world like Apple, Amazon and Tesla all provide products to consumers like you and me. And if their size is anything to go by it tells us that the dominant theme is that people like us are buying items that fulfill our desires. It’s no longer just an iPhone but a watch and an iPad in one. It’s no longer just a car but one that drives itself and is focused on the sustainability of our planet. This is the essence of consumerism today. The next logical question is: can some companies be perceived as more desirable than others? The simple answer is, yes. Take the wonderful world of luxury watches. Recently Swatch partnered with Omega for a collaboration that celebrated Omega’s Speedmaster. Swatch has always been recognised as a hip and happening brand. Through a smart marketing brand-play it had people queuing for hours trying to get their hands on this piece. On the resale market, some of them were even going for quadruple the original sales price. This is a prime example of our world of consumerism. People save for months and years to buy an IWC or Jaeger- LeCoultre (both super-luxurious watch brands) and luxury sportscars like Ferrari or Lamborghini. These individuals have an acute understanding of how to get there to realise the dream. The recipe for success begins with having a financial plan and then finding a place to invest or save. For clients to realise their dreams, the gap to earning capacity and the price of the item is often too wide to save the cash under the mattress and hope for the best. There are two very important contributors to investing. Firstly, the return earned on a fund and secondly, having these returns reinvested month after month to build on the money already invested. This is how investors can make the eighth wonder of the world – compound growth – work for them. So how does the magic of compounding work? Using a simple example: if your client put R100 000 under their mattress five years ago they would still have the same amount today, but thanks to inflation that money is worth less. But if they invested in an established equity fund five years ago and this fund delivered a yearly return of 7% then the client would have R141 477.82 or just over 41% growth based on quarterly compounding. If you chose not to reinvest and take your growth out every year your client would have received R35 000 – the magic of compounding allowed the investment to grow by an extra R6 477.82. Thanks to compounding, you get an 6.48% growth on your investment and bringing those dreams a little closer. With us, investing is personal. We understand that individuals are unique and have different needs (and dreams) and why it is important to partner with the right people to achieve your investment goals. For more information go to Kapil Joshi, Head of Momentum Collective Investments The calculation above is intended only as guideline, always speak to a financial advisor for financial advice. Momentum Collective Investments (RF) (Pty) Ltd (the “Manager”), registration number 1987/004287/07, is authorised in terms of the Collective Investment Schemes Control Act, No 45 of 2002 to administer Collective Investment Schemes (CIS) in Securities. The Manager is the manager of the Momentum Collective Investments Scheme. Standard Bank of South Africa Limited, registration number 1962/000738/06, is the trustee of the scheme. CISs are generally medium to longterm investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. The terms and conditions, a schedule of fees, charges and maximum commissions as well as additional risks are available on the minimum disclosure document (MDD) and quarterly investor report (QIR) for each portfolio which is available on www. All performance figures are net of fees and represents the A class in each portfolio. 33

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