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Vestact's 16th Annual Client Message

Dear Vestact clients

This is my 16th annual client message, as Vestact was established in 2003. We are really hoping that 2019 will be a good year, because 2018 was not.

Portfolio returns

Our local JSE model portfolio declined by 21.7% compared to our benchmark Alsi-40 index, which only fell by 11.6%. The main culprits were Naspers, Aspen and Mediclinic which all fell in value (despite remaining solid companies which we advise that you hold).

In New York, our clients fared much better. Our model portfolio there rose by 1.0% compared to the reference S&P 500 which fell by 6.2%. Technology stocks did very well until the end of September 2018, but gave back those gains in the last quarter.

Our long-term returns are still solid. Over the last 10 years our local portfolios are up by 9.6% per annum, which is better than the Alsi 40 at 9.2% per annum. Also over 10 years our New York numbers are very good – up 15.9% per annum compared to the S&P 500 at 10.7% per annum.

Remember that share prices are not cast in stone. They are formed in the market every day, at the midpoint between sellers and buyers. Share prices reflect the prevailing mood about the future earnings of real world companies, and those change over time. We have to buy quality and then be brave, and avoid the noise of the daily news cycle.

Remember too that while it may sound clever to retreat from a volatile market into cash, that is a famously losing strategy. Investors who try to time the market often miss out on the sharp gains that follow down periods. Markets have risen in the first two weeks of 2019.

If 2018 was a year to forget, what is likely to happen in 2019?

The World Bank has forecast that the worldwide economy will expand by 2.9% this year, which is not too shabby. We expect the US economy to continue to perform well. President Donald Trump may spring further surprises on us, but he may equally throw out some of his crazier plans in the face of criticism. We expect the Federal Reserve to stop raising interest rates, because US inflation remains subdued.

US equity valuations are now more attractive as a result of the market decline at the end of 2018. Rallies and corrections will occur but improved earnings will enable equities to move higher in a reasonably benign interest rate environment.

Consider the chart below, which shows that most Wall Street analysts expect the S&P to rise by between 6 and 30%.



China is a mild concern. Its economy is slowing, and its leadership is stuck in its ways. It will no doubt step up infrastructure spending to bolster its economy. Remember though that GDP growth of 6.5% per annum is still very good, given how large that economy is these days.

As March 29 approaches, the UK parliament may well swallow the "sh1t sandwich" and vote to approve the EU27/Theresa May withdrawal agreement, in order to avoid a hard Brexit.

Here in South Africa, we should benefit from an improving view towards emerging markets. Despite weak consumer confidence, the slow and steady expansion of the middle class in this country will provide the thrust for earnings growth. We have a national election to get through in May, and my expectation is for a "surprise free" outcome where the ANC, DA and EFF each get slightly less voter support than they would like.

Investment strategy remains the same

We still like our portfolio positioning in technology, healthcare and select consumer sectors. Growth stocks continue to provide leadership in the US equity market, and these are the companies we want to own. We are not interested in turnaround stories or yesterday's heroes, or volatile earners. We don't like small companies, because they are usually half-baked and risky.

We don't trade share prices, we provide capital to real businesses with bright prospects, and we get paid with dividends and with rising share prices. We try to avoid complacency, and are always on the lookout for new investable themes. Our most recent stock pick in New York was Illumina, which makes the machines that underpin the genetic research industry.

Taking business seriously

We will continue to work hard to be your most-trusted investment partner. Every Vestact client portfolio is customised and personalised. We charge low management fees of 1% of your account value per year, with no performance charges. This is cheap by the standards of our industry. As you may know, costs are the most important determinant of investment returns, so it's just as well that we are not greedy.

Our assets under management are now just under R3,5 billion but Vestact remains a "family office" asset manager. We are not a big institution. We know who you are. We would like to serve you and your family for generations to come.

If you have un-invested funds to commit, do make contact with us. You should use your discretionary allowance to take out R1 million per adult, and invest more with us in New York.

The best investment that you can make is to increase your savings rate. The more you save the greater your confidence will be in later years.

Best wishes

Paul Theron
CEO, Vestact


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