In Ayn Rand's book, The Fountainhead, an avid supporter comforts the controversial architect, Howard Roarke, before the latter begins the battle to convince his board of directors to award him a commission. He simply tells the architect that the big advantage he has over the other board members is that they do not know what they want. My early wish for 2007 is that more investors figure out what it is that they want.
The rand has recovered nicely (at least against the United States dollar) and market watchers seem to have made peace with their inflation fears both here and abroad. The oil price is now 20 percent lower than in August. Earlier this week, our stock market reached a new high.
International and local bonds have rallied, with yields some 0.75 percent and 0.5 percent lower than a few months ago, here and in the US, respectively. Americans with mortgages linked to the US long bonds are looking forward to some relief on their monthly payments. So we should all feel a lot more comfortable, right?
Not if you were one of the investors who sold out during the dip in May. If you were, then you missed participating in a 25-percent recovery in local share prices.
You're also not exactly celebrating along with the headlines if you need to invest for income. Dividend yields are lower and so are long-term interest rates.
The latest market rally means that it costs more to fund a future income stream with shares and long-dated bonds than it did in August.
One can understand that there is the fear of losing money when the market becomes volatile, as it did earlier this year, but surely the lower prices also mean opportunity - unless you had put your entire investment into the market at its peak in May.
If you are clear about what you want, you react more logically during market jitters and the course of action you choose can be much more constructive.
Mother's investment
My 72-year-old mother has a small share portfolioand she supplements her income with the dividends earned. Having made the investment a few years ago, capital growth has been good, but there are no more contributions to the investment.
Looking after this for her has deepened my understanding of investments and markets more than any conference proceeding has ever done.
Market conditions have been favourable, but the key here has been that the objectives have been clear from the start. Basically, my mother needs a growing stream of income, does not want to lose money, and does not want to touch the capital unless really necessary.
More importantly, her fund is not in any survey, nor does it feature in dinner-party brag sessions (well she may not be guilty of this but I do confess to the odd lapse), it is not trying to win any industry awards and I do not give her detailed monthly feedback. Actually, there are seldom trades to report on every month. She just lets me get on with the job.
Fees are levied in the form of the odd babysitting session or a shared bottle of wine. (Do I hear sighs from unit trust and retirement fund portfolio managers?)
Key factors
Interest rates are such a key factor in investments that sudden changes (either in the actual interest rate or investors' expectation of the interest rate in future) have a widespread impact.
This week, I want to focus on two areas of the market where the volatility earlier this year provided income seekers with opportunities, namely in listed property and retail shares.
During the May dip (which I would like to coin as "sell in May but don't go away because you need to buy back"), property shares such as Grayprop dipped by 30 percent, offering a yield of 7.8 percent before bouncing up 20 percent.
Let's take a look at a spread of retailers. Pick 'n Pay mainly deals in basic foodstuffs - in other words, necessities. Edgars and JD Group deal with more discretionary spending in non-food areas, and Woolworths spans both areas but at the higher end of the market.
The price behaviour of the shares (peak to trough during the past six months) has actually shown some logic.
Pick 'n Pay was the most resilient, declining by only 23 percent. After all, people have to eat and some Woolies customers may increase the size of their Pick 'n Pay basket if they feel the pinch.
Woolies declined by nearly 30 percent, which also makes sense due to the higher mark-up on its food, and the fact that it also sells clothing and homeware.
But the hardest hit were Edgars and JD Group, with investors figuring that their product ranges are likely to show the quickest drop in demand when the interest rates start impacting on consumers.
Now look at what happened to their dividend yields. Pick 'n Pay's yield moved from three percent to just over four percent. You could buy Woolies on a five-percent yield in September, and both JD Group and Edgars offered a yield of over six percent in August, up from below four percent.
Clearly the sellers were concerned that the dividends would be cut in future, which is why they were prepared to accept these lower share prices. However, at the time, the All Share dividend yield was still around 2.3 percent.
A dividend yield of six percent implied that Edgars and JD Group could cut their dividend by more than half and still give you what the market is giving you.
That was what you really had to assess - the likelihood of that happening. Subsequently, these shares have rebounded by between 20 percent and 25 percent (Edgars being the exception, with a 40-percent rise helped along by potential corporate activity). Their dividend yields are back to around four percent in most cases.
The next time the market gets into a flurry, concentrate on what you need and choose to assess the opportunity rather than to panic.
- Anet Ahern is the chief executive of Sanlam Multi Manager International.