Core-Satellite Investments - Assignment Example

Question One: Core

Exposure

EFT Name

ETF Purchase Price

ZAR

Number of Units Purchased ZAR

Total Exposure

ZAR

Percentage

%

USA

DB X-Trackers Col in USA ETF

2,997

55

165,000

33%

Europe

New Europe Property Investments Plc

18,600

9

167,400

33.48%

South Africa Top 40 Equities

South Africa 40 Index

41,900

4

167,600

33.52%

Total Exposure

500,000

100%

Table 1: Table showing the core portfolio allocation

Source: (SaxoTraderGO, 2016)

50% of the available resources have been allocated to the core portfolio which consist of US equities, Europe Equities and South Africa top 40 Index.

DB X-Trackers Col in USA ETF

DB X-Trackers Col in USA ETF is a fund registered in South Africa as an exchange Traded Fund (Bloomberg Markets, 2016). Its main objective is to replicate MSCI USA Index’s performance. The MSCI USA Index has been designed to measure the performance of developed equity within the USA. The DB x-trackers are affordable and convenient since they can allow one to invest small amounts of upto R1,000 through a lump sum payment or monthly instalments. This security not only provides the opportunity to subscribe ad redeem available units at the net value of Assets, but also track the performance of a given portfolio (db x-trackers ETF Team, 2013). Other advantages of DB X-trackers are solid performance and the ability to diversify offshore.

New Europe Property Investment Plc (NEPI)

NEPI is an incorporated company dealing in commercial property. Its headquarters is in Isle of Man. Its main focus is on investments in offices and retail assets within Romania (Bloomber Markets, 2016). This company acquires, manages and develops retail assets in the European Market (ft.com, 2016). Compared to its peers, NEPI has high potential for growth, and the industry within which it trades also has high potential of growing.

South Africa 40 Index

South Africa 40 Index is a tradable, capitalization weighted Average index which constitutes the 40 largest companies (based on market capitalization), as included in the FTE/JSE Index (Bloomberg, 2016). The FTE/JSE Index provides investors in South Africa with a comprehensive set of indices which measure major industry’s performances (FTSE Russel, 2016). This is an appropriate component of the portfolio due to its features such as coverage, investability, liquidity, transparency and availability (FTSE Russel, 2016).

Question Two: Satellite

Share name

Share’s three-letter short code

Number of shares purchased

Price of share when purchased

Total exposure (nominal value of position

DRDGOLD

DRD

100.00

752.70

75,270.00

Lonmin

LON

3.00

4177.67

12,533.00

Anglo American

AGL

16.00

14870.00

237,920.00

Wescoal Holdings

WSL

393.00

189.00

74,277.00

Total Exposure

400,000

Table 2: Satellite portfolio

Source: (SaxoTraderGO, 2016)

40% of the available resources were allocated to satellite assets consisting of DRD Gold, Lonmin, Anglo-American and Wescoal Holdings.

DRDGOLD

DRDGOLD company limited activities include production and sale of gold in South Africa. It retreats its gold from tailings within the central Witwatersrand basin. DRDGOLD faces a number of risks by operating in the gold mining industry. Such risks include political and economic instability, litigations and natural calamities. In spite of all these risks and challenges, the DRD stock has the potential of continued growth first, because the economic environment of gold will continue to improve the attractiveness of gold o investors within and outside South Africa (Barnes, 2009).

Lonmin

Lonmin PLC explores, mines, refines, markets and produces Platinum group metals such as palladium, Platinum, rhodium, ruthenium and gold. The company’s by-products such as gold, nickel, copper, cobalt and chromium also add to the revenues of the company. The products and by-products of the company are used as catalytic converters and also in making jewellery. Recent statistics have shown a continuous growth in the EPS and dividends of the company.

Anglo American

The Anglo American Company is a mining company whose portfolio consists of commodities such as iron ore, coal and manganese together with other base metals like nickel, copper and precious metals like platinum and diamond. The company has based its main operations in Europe, Africa, Asia, Australia, North America and South America (Bloomberg Markets, 2016). Despite the fact that the company has had a significant drop in the reenues, EPS and dividend cover, the dividend yield grew by 18.36% in 2015 compaed to 2014 (London Stock Exchage, 2016).

Wescoal Holdings

Wescoal Holdings Company mines, processes, supplies, sales and distributes coal and coal related products, and has its operations mainly in South Africa. Compared to its peers like Keaton Energy, Petmin Limited, and Sentula Mining Ltd., Wescoal has the highest performing stock in terms of P/E ratio, Price/Book Value, and Price/Sales. Its revenue has also grown at the rate of 45.95% over the last five years (ft.com, 2016). Given the price levels and the high growth, more buyers of its products will suface, which means that the stock is likely to grow in its value.

Question Three: Discretionary

Share name

Share’s three-letter short code

Number of shares purchased

Price of share when purchased

Total exposure (nominal value of position

Harmony Gold

HAR

20

5,000

100,000

Table 4: total exposure for HAR

Source: (SaxoTraderGO, 2016)

The remaining 10% of the 1,000,000 was allocated to JSE listed Share. The HAR stock was selected because of the reasons discussed below.

Company

Code

Share Price 31/12/2015

Share Price 31/05/2016

% Change

Current rice

Harmony Gold

HAR

1560

4592

194.36%

5,196

Table 3: HAR performance

Source: (SaxoTraderGO, 2016)

Harmony Gold is a company for mining and exploring gold in South Africa, Papua and Guinea (Bloomberg Markets, 2016). The HAR stock is a solid momentum because of the following main reasons. The stock price change of HAR in January 2016, was 0.39% compared to 0.05% industry average (Zacks Equity Research, 2016). This places the stock in a strategic position. The price change afterwards also copares favourably compared to its peers in the industry. Secondly, its full year earnings have grown by approximately 23.8%, beating the industry average, thus the strong momentum of HAR stok may be long lasting. Thirdly, the HAR earnings estimate have been reestimated and is moving towards a more favorable position. This has helped to boost its attactiveness to investors(Zacks Equity Research, 2016).

Fundamental Analysis of the portfolio

Core

Satellite

Discretionary

• DB X-Trackers Col in USA ETF
• New Europe Property Investments Plc
• South Africa 40 Index

• DRDGOLD
• Lonmin
• Anglo American
• Wescoal Holdings

• Harmony Gold

ZAR 500,000

ZAR 400,000

ZAR 100,000

Table 4: Core-satellite Portfolio

In spite of the challenges faced in the mining industry, the intrinsic value of the stock portfolio is likely to grow within the next year, due to the past performances and the fact that the companies operates in a revenue growing industry.

Macroeconomic analysis

South African GDP has had a 1.3% growth rate upto December 2015, compared to 1.6% in 2015. In spite of this drop, South Africa still remains one of the richest countries in Africa and one of the leading producer and exporters of gold, platinum, chromium and iron ( Ferreira , 2016). The mining industry contributes approximately 6% to the GDP. Other contributors include service and utilities, indusstry, construction, manufacturing and the public administration industries ( Ferreira , 2016). The FTSE/JSE index consists of approximately 99% of the free float capitalization market. The recent trends in this index indicate a continuous rise in the value of stock over the past 5 years (Bloomberg Markets, 2016).

Industry Analysis

A report by Price WaterHouse Coopers (PWC) has shown that there was a significant drop in the market capitalization in the year 2014, by 19% to R545 billion. The report further states that the mining industry has lagged in its performance since 2010, compared to other industries which have had continouous growth in their market capitalization. The slaggish performance growth has been attributed to various challenges experienced in the local mining environment such as issues relating to labour and issues within the global eonomic environment. Inflation has also impacted negatively on the prices of the commodities like gold, platinum, coal. There are also other risk fators which have posed a challenge to the operations of the mnng companies such as foreign exchange flactuation, high reliance on third party infrastructure, regulatory, political and legal risk factors, and high input costs (Price WaterHouse Coopers, 2014).

Conclusion and Recommendation

The above analysis is not so conclusive. An investor must consider other factors when making a decision to invest in a particular stock. For example, the changing market conditions may result to an unprecedented change in the attractiveness of a particular stock. Secondly, the available information in the trading websites, does not include all the companies. One may therefore miss out on the small compettors and in some cases, leading companies in a particular industry may be overlooked, hence the investor may again miss out on the bagain stocks. Further analysis therefore needs to be done by investors before putting their money in any particular portfolio.

The use of core-satellite investment method may prove useful to investors in such cases as it may lower the risk exposure of the portfolio as a whole. By seleting highly volatile, medium and low volatile stock, the investor is bound to have a smallerloss compared to one who has put all the eggs in one basket. In times of high profitability, the investor will also manage to scoop higher profits for the stoks that are well performing. This may also offset the low performing or loss making stocks. This means that the investor may be at par with other investors in terms of stocks performance, or slightly below the other investors who have not used the core-satellite strategy.