When chatting to investment professionals, two issues keep cropping up: the expectations of investors and the greed of CEOs.
Dries du Toit and Daniel Kriel of Sanlam Investment Management raised these themes this week in presentations to the media and clients.
Greed and expectation feed off each other: investors see executives creaming off bigger bucks in bad times and expect higher returns. Yet, as with everything else in the investment field, investors should try to take a dispassionate view.
The disclosure of directors’ pay and their dealings in company shares were the most sensational achievements of the King reports on corporate governance. In every company report I receive, the first thing I read is how much the top dogs are paid.
So I read with glee that Anglo American’s Tony Trahar’s package was £1,2-million (about R14-million) for the 2002 financial year. Is that too much? I don’t think so, and not because I find him so approachable.
The real question is: What is the going rate for top executives of companies of similar size and structure, like Rio Tinto or BHP Billiton? Obviously, he should earn at least as much before someone else offers it.
The Institute of Directors argues that one should look at executive pay as a proportion of earnings. This rarely gets reported in the media, partly because it is not readily presented in the financials, and very few journos have the inclination, or the capacity, to calculate it.
The next question is how to manage investor expectations. What should you expect from your investments? Should you be content to beat inflation? Or expect inflation plus 10%?
The answer starts with a phrase I hate: It depends. The first consideration is that higher risk brings higher rewards.
Kriel says we are currently in a bear market worse than that of 1929. The longer it lasts, the longer recovery takes — and the longer it will take to reach pre-crash highs.
Sanlam expects single-digit returns in the next year or two. For the 12 months to March, a balanced global portfolio lost 11%.
The analysts’ advice to hacks was to write the story of this time next year. The outlook appears to be 3% lower interest rates and an inflation rate firmly below the 6% upper limit of the government’s inflation target.
Du Toit points out that international best practice recommends a spread of 60% in equities, 30% in bonds and 10% in cash. Kriel calls for a return to basics, urging a
thorough look at property, whose bubble is still inflating, as a source of investment growth. The key, he says, is a long-term perspective and “buying at the worst of pessimism”.