Liquidity (capital available for investments) has become very scarce. As a result, stock markets everywhere are collapsing and a global recession is looming. How do you keep up an abundance mindset while world economies are feeling the pinch?

What is an abundance mindset?

An abundance mindset views the universe as an infinite source constantly supplying inspiration to create more life and wellbeing. It is also a belief that there is enough for everyone and that someone else’s gain is not your loss. Life is not a zero sum game.

Why is it crucial for growth?

When you believe that you have everything you need to prosper, you become more generous with your time, knowledge and material resources, instead of hoarding it out of fear of scarcity. Sharing makes a community stronger, smarter and enables it to grow faster. No resources are left latent. www.myggsa.co.za and www.angelmoola.co.za are examples of how resources are circulated online among total strangers.

People with this mindset focus on the potential and creatively moves towards it, rather than focus on their current material resources only. They know it is possible to create something from nothing (especially from very little capital).

When you believe that you will eventually be cared for by a higher power (yes, an abundance mindset requires faith), you tend to be more adventurous and take on more risks – essential for material and spiritual growth.

An abundance mindset combats jealousy, one of life’s most destructive emotions. So what if your friends or colleagues all live in massive houses/go overseas every year/won the lotto? Their good fortune does not take anything away from you. By not wishing them this prosperity, you are wishing life to be smaller, more restricted.

What an abundance mindset is not

Believing that there’s enough for everyone doesn’t mean you can sit back and be lazy, passive or uncompetitive. It means using healthy competition to raise the level of your game and with it the standard in your industry.

Seeing abundance everywhere does not mean you can afford to be wasteful or reckless with the resources you have. Natural resources are the first to jump to mind, but the same applies to capital. Irresponsible lending to borrowers unable to repay the debt from the start of the bond was the root of the international liquidity crisis. It’s a chilling example of how substantial capital resources can be reduced to almost nothing overnight.

How do you cultivate it?

Like any new habit, it takes regular practice and persistence to establish an abundance mindset.

• Practise seeing the abundance around you every day. Even if you live in a desert (maybe especially if you live in a desert) you’ll notice how the whole planet is geared towards growth and more life.
• Focus on growing your earnings by adding significant value to your clients; don’t fixate on cutting costs.
• Practise being generous with yourself. Don’t deny yourself time and material resources – you need them to grow. Also, don’t feel guilty if you want to spend a fortune on a dream holiday and you created more value to your client or employer than the cost of the holiday. As a bonus, your holiday also helps to pay the salaries in the hospitality industry.
• Practise being generous with other people. Give more to people than they expect. You won’t dry up if you are also being good to yourself.
• Don’t spend any time on jealousy – rather count your blessings every night.
• Find a creative outlet. It’s good to have something like a melody, a drawing, a sculpture or some creative writing reminding you that it is possible to create something from nearly nothing.

Acknowledgement: Much of my belief in the magical power of an abundance mindset was inspired by Wallace Wattles. Thanks, Nicky, for introducing me to his thoughts.

If you’re an enthusiastic share investor, you’ve probably wondered about this one before. Should you outsource the stock selection to a portfolio manager or should you do it yourself? A few things to consider:

Do you have the skills to pick shares?

What a fantastic boost to the ego it will be if your share portfolio performance beats Allan Gray or one of the other award-winning unit trust managers. But unless you know how to analyse a company, accurately estimate its future cash flow and evaluate its business strategy, chances are slim you’d keep it up over the long term.

While I find it great fun to trade my own shares, I have no delusions. My share picking skills are not on par with award-winning investment houses with their CFA-qualified and experienced teams.

Do you have the time to manage shares?

Following company news and calculating whether the share price adjusted appropriately is a full-time job. Unit trust managers have whole teams focusing on the shares in a specific sector. They have the time to visit companies, attend shareholders meetings and ask the difficult questions.

How much are you spending on trading costs?

Because share trading costs generally form a larger percentage of the trade with small amounts, and you often pay a minimum amount (e.g. R120 with ABSA), you could end up paying away more than 1% of the trade for transactions smaller than R12 000. Unit trust fund managers, on the other hand, pool your money with other investors and negotiate much lower trading fees with their brokers. However, what you score in trading costs, you could lose in investment management fees, which are automatically deducted from your unit trust investment every year.

Does SARS view your trading profits as income?

If you are someone who won’t draw the money in your trade account within three years, but believe in frequently trading shares to benefit from short-term price fluctuations, you may find you’re paying less tax if you outsource the job to a unit trust manager who has the same short-term, opportunistic approach. That is because SARS is likely to view your trading profit as income if you sell your private account shares within 3 years of purchase. If you’re in the top tax bracket, this means you have to pay SARS 40% of the profit.

But unit trusts managers can trade the shares as often as they like – they don’t pay tax on their gains in the portfolio. You pay tax on the growth in the unit trust price from the time you invest until you eventually withdraw your investment. If you keep it for longer than three years, SARS views the growth as a capital gain and not as income – even though the fund managers had the freedom to sell shares whenever they saw opportunities. This means you could pay four times less tax than if you traded the same shares yourself.

How much risk do you want to take on?

Unit trust funds are usually well diversified and invest in portfolio of at least 20 shares. This diversification decreases your investment risk. It’s therefore unlikely that you will lose 80% of your money in one year; it’s also unlikely that you will gain 80%. With your own share portfolio you don’t have the restrictions of the Acts regulating unit trusts and can hold only one share in your portfolio, if that’s what you want.

If you’re either a speculative, high-risk investor or a semi-retired portfolio manager, a share trading account will probably appeal to you more.

The Satrix products seem to be very popular with passive, index-tracking share investors in South Africa; the spacious seminar venues for the launch of the Satrix RAFI 40 were fully booked. But does this fundamental indexation product even belong in the index-tracking family? And is it the most affordable South African product pursuing fundamental indexation goals?

What is fundamental indexation?

One of the criticisms of just tracking an index, is that you by definition buy all shares in the index (e.g. the ALSI 40) indiscriminately. If there is a lot of hype or speculation around certain shares and they start to form a larger portion of the index as they become more expensive, you are buying potentially over-priced shares. Fundamental indexation tries to exclude these over-priced shares from your portfolio by looking at fundamental factors (the figures in the company’s financial statements).

Research Affiliates in the US developed the RAFI® methodology to include only shares that look promising in terms of the following fundamental factors of a company:

• sales
• cash flow
• book value
• dividends

Because it uses fundamental factors, fundamental indexation is closer to active management, and not passive index-tracking. These are the same factors that active managers look at when they construct a portfolio.

But fundamental indexation differs from most actively managed share portfolios in that it is quantitatively managed. This means that a mathematical software package can analyse the fundamental data and build the RAFI® portfolio. There is no or little human involvement.

What are the pros?

1. Cheaper than active management

Because there are no portfolio managers and analysts that analyse data and visit companies daily (and need to get paid), the costs are normally lower than non-quantitative active management.

2. Less likely to buy over-priced shares

The software will not always get it right, but it decreases your chances of buying hyped shares.

3. A chance to out-perform the equity index

You only get an opportunity to out-perform the index when your portfolio differs from the index.

What are the cons?

1. More expensive than index-trackers

There is usually an annual license fee for using the RAFI® technology – a lucrative business model for Research Affiliates. There are also more brokerage costs due to the re-investment of dividends. Therefore a RAFI product will cost the investor more than an index-tracking product.

2. No human judgement

The computer software will not know the story behind a company’s financial statements or the management’s vision and strategy. It only looks at past data and will not understand why the data looks the way it does.

3. The risk of under-performing the equity index

This is the flip-side of the third advantage listed above. You can only under-perform the index when your portfolio differs from the index.

Which South African products offer fundamental indexation?

1. Plexus Rafi® 40 SA Enhanced Strategy Fund

Plexus has exclusive rights to offer the enhanced Rafi® 40 technology in Africa. By ‘enhanced’ they mean that they have taken the plain vanilla methodology and adjusted it for South African circumstances. Sales and cash flow, for example, are more important fundamental factors locally. It selects the 40 most promising shares from the 100 largest companies listed on the JSE and re-balances quarterly. The total expense ratio (TER) on their August fact sheet is 1.15%.

2. Old Mutual Umbono RAFI® 40 Tracker Fund

Old Mutual Umbono applies the plain vanilla Rafi® 40 technology, which rates sales, cash flow, book value and dividends as equally important fundamental factors. It looks at all companies listed on the JSE when it selects the 40 most promising shares and re-balances once a year. The TER on their June fact sheet is 0.93%.

3. Satrix RAFI 40

When it lists on 16 October 2008, this product will use the same plain vanilla technology as Umbono, but it is an exchange traded fund and not a unit trust, like the Plexus, Umbono and Nedgroup Investments funds. Satrix does not expect the fund to have a TER higher than 0.7% per year. In addition, if you buy this product through the Satrix Investment Plan, there is an annual administration fee of 0.8% if you have less than R100 000 invested. For larger amounts, the administration fee decreases according to a sliding scale until it reaches 0.45% per year. Brokerage is 0.1% of all purchase and sale amounts.

4. Nedgroup Investments Quants Core Equity Fund

This fund uses Taquanta Asset Managers’ price-indifferent technology to quantitatively build an equity portfolio. Their way of thinking is similar to Research Affiliates, but they developed their own technology. Interestingly, the fund doesn’t use the FTSE/JSE All Share Index or the ALSI 40 as its benchmark, but rather the average general equity unit trust portfolio. The TER on its August fact sheet is 1.17%.

How does the past performance look?

The South African products do not have long enough track records to reach a meaningful conclusion. Some of the product providers will show you back-tested (simulated) performance graphs. While I want to give them the benefit of the doubt, this is not real performance with real money. The verdict is still out on who has the top-performing fundamental indexation product. Even though there is no human involvement with fundamental indexation fund management, the performance will only be as good as the methodology developed by the people involved.

So, you’ve decided you have enough time to sit through all the ups and downs of the stock market and hope that handsome returns will reward your patience. I bet you’re getting plenty of contradictory advice from other share investors, who seem to be divided into two main camps: the index-trackers versus the believers in active equity management.

What is the difference?

With index-tracking you buy all the shares in the index in the same weightings as that index. If you track the FTSE/JSE All Share Index, for example, your index-tracking fund will invest in all the shares listed on the JSE and if Anglo American makes up 20% of the JSE, your fund will allocate 20% of its capital to Anglo American. In other words, index-tracking funds just replicate an index and their managers don’t have to decide which shares offer value for money. They are therefore also called passive managers.

Active managers, on the other hand, seldom buy all shares in the index and if they think Anglo American is too expensive relative to its anticipated future earnings, they may decide to invest only 5% of the fund in this share, for example. Conversely, if they think a share is cheap, they may buy more of it than its percentage weighting in the index. They have the freedom to actively pick shares in quantities that they think suit the shares’ value-for-money ratings.

To choose active management, what do you have to believe?

1. Shares are not perfectly priced all the time

Active management only makes sense if you believe that the market does not price companies correctly over the short term, which offers opportunities to buy under-priced shares.

2. Managers who consistently out-perform the market exist

Sobering slide 5 in the latest Nedgroup Investments September 2008 Partnerships Roadshow presentation shows that over the past seven years, the average equity unit trust manager returned 22% after fees – the same as the JSE All Share Index. Active management seems less futile when you think that, if about half the managers under-performed, half of them had to out-perform the Index. In other words, out-performing managers exist, but are they consistent?

I don’t expect a fund manager to out-perform every year. In fact, studies show that for a fund manager to out-perform over the long term, he often has to take contrarian views, which could frequently make him one of the worst performers over the short term. Your typical active manager expects the value of his chosen shares to unlock after three to five years only. With ‘consistent out-performance’ I therefore mean out-performance on a rolling 5-year basis.

3. You know who the out-performers will be

You should be able to get hold of the names of the rare few managers who have consistently out-performed on a rolling 5-year basis over the past 20 years. But that is historic performance. Do you believe that they will continue to out-perform?

4. The out-performance will out-weigh the higher costs

When you compare past performance, remember to look at the return after all fees and fund expenses were deducted. Generally, active managers are more expensive than index-trackers due to the time that they spend on researching and valuing companies.

When you choose passive management, what are you settling for?

1. Average stock market performance

While there’s little risk of investing in the worst-performing equity fund, you have no opportunity to out-perform the stock market either.

2. No way to detect and avoid market hype

It is a mistake to think that index investing is less volatile than active investing. When the stock market or one specific sector (e.g. IT) moves into ‘bubble’ territory, you automatically buy those over-priced stocks as part of the index. And experience the subsequent price correction.

How do you access active management?

1. Unit trusts

There are almost as many actively managed unit trusts as there are shares listed on our JSE. You can familiarise yourself with the managers by reading about their process and philosophy and studying their fund fact sheets. Equinox provides an on-line list of most South African unit trust portfolios.

2. Your employer’s fund

Maybe your employer’s pension or provident fund offers member choice. In other words the fund trustees allow you to pick the underlying portfolio from a shortlist. I would expect at least one of the options to be an actively managed fund, but its equity exposure will probably be limited to 75%.

3. A retirement annuity

Many modern, flexible retirement annuities allow you to choose your own underlying investment portfolio and an actively managed fund should be one of the options. As far as I know, Allan Gray is currently the only company that allows you to choose a 100% equity portfolio if you invest in their retirement annuity.

4. Your own share trading account

If you have the time and skill to analyse companies yourself, you could also build your own equity portfolio with an online share trading account. Just keep in mind that the tax treatment of trading profit is not always as favourable as with a unit trust portfolio or retirement annuity.

How do you access passive management?

1. Satrix

Satrix has created exchange traded funds (EFTs) which invest in the main South African equity indices. The Satrix 40 fund has a total expense ratio of 0.37% – a good selling point. But if you invest through the Satrix investment plan, the annual administration fee is 1.0% of the market value of your investment! In addition, your brokerage fee on any purchase or sale is 0.1% per transaction. For large investment amounts, it may be cheaper to use a stock broker rather than the Satrix plan. Also, your dividends don’t automatically get re-invested when you invest in the Satrix 40, but are paid to you after costs. This means your capital grows slower than if dividends were re-invested.

2. Unit trusts

There are a few unit trust portfolios that track the JSE All Share or the ALSI 40. Currently, Gryphon’s All Share Tracker Fund seems to offer index-tracking at the lowest cost: a total expense ratio of 0.69% and no initial fees.

3. Your employer’s fund

If your employer’s retirement fund offers member choice, I’d expect them to also offer a low-cost index-tracking option as one of the options.

In the next post we’ll have a look at the new investment methodology that tries to keep over-priced stocks out of your portfolio: fundamental or risk-adjusted indexation.

Before I became self-employed, I used to drive down Kloof Street early in the morning on my way to the office, staring longingly at the inviting coffee shop counters, stacks of glossy magazines and steaming cups of cappuchino – all symbolising to me an abundance of time. To think, meet, read, invent and dream. Or just watch the clouds paint, then change their minds and re-paint Table Mountain again.

When I started my own business, I initially frequented these coffee shops to live out my fantasy, but very soon the passion for my new business and the desire for focus kept me at home, where I am most productive. Except for Thursdays. Thursday mornings my cleaner kicks me out of my city pad and I become a coffee shop exile. Over the past few months, this is how I have experienced a few of Cape Town’s coffee shops – when you actually want to get some work done:

Beleza, Kloof-nek Road

Not exactly a sanctuary of silence, but they cater for laptop workers with plug points and the staff is generally friendly and helpful. On top of it, they probably have the best value-for-money breakfast in town and excellent coffee as well. (I think they source from Origin.) With a Bloody Mary as the first item on the breakfast menu, Beleza is perhaps not suitable for meetings with more sober clients. Unfortunately, they don’t cater for early birds either and open after 9am only.

Deli 55, Kloof Street

This church-run deli takes me back to my small-town years when bazaar tannies spoke to me in diminutives and every cupboard seemed choc-a-block with home-made preserves. They’ve really made an effort to create a peaceful, water-featured patio protected from street noise. Inside, there’s only one plug point which is a bit clumsy, and your laptop cable could easily trip someone heading for the preserves shelf. But they’ve got great food, if you like fresh, healthy produce. And I keep on going back for my favourite coffee brand, Limu – of which they also sell the roasted beans.

Melissa’s Food Shop, Kloof Street

Melissa’s remains a firm favourite. Their service can be slow some days, but then they also don’t mind if you hog their space for a few hours without ordering much more than coffee. Not that you can work for more than your laptop battery time, as there are no plug points for customers. This is a good spot to meet clients, suppliers or colleagues. Even though there’s not much privacy, everybody else is too busy with their own meetings to bother with yours. Don’t leave without one of their perfectly brewed pots of tea or their Nutella laced hot chocolate. Healthy, tasty lunches too.

Origin Coffee Roasting, Hudson Street

A place of worship for coffee lovers – you have to experience this space at least once. Unfortunately, I could not pick up an i-Burst signal here, but friendly and engaging staff tailed me with my double espresso in my quest to find one. Perhaps better for lively meetings than solitary slogging away at your computer.

Sage Organic, Hatfield Street

This petite, organic coffee shop close to Parliament can easily accommodate up to four laptop users. Their breakfasts arrive in generous portions and the French-speaking waiters are friendly, but let you get on with your work. Due to the size of the space and not enough white noise, Sage is not ideal for business meetings.

The Wellness Warehouse, Kloof Street

After surviving the growing pains of its first year, the Wellness Warehouse has managed to create a serene enough spot in the middle of buzzing Kloof Street. The space works well for meetings, as well as solitary work, and there is a laptop counter with power points for about five people. This is also a convenient place to recycle your home office paper – bonus.

Vida e Caffe, Kloof Street

This particular outlet is great for take-away coffee or checking out customers from the surrounding film and other interesting industries. But you don’t really expect some quiet time from a brand built around lively staff chatter and loudly broadcasted orders, do you?