Twenty Third Floor
Technical Business Advantage

According to a Fin24 story this morning, the FSB is probing smaller unit trusts.

The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.

Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.

The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.

It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.

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Lightstone have a trick up their sleeves. Their raison d’être is collecting, analysing, understanding and packaging data for themselves and others to use to understand past, current and future property valuations.

Their housing price index is more robust (and more independent) than those of the banks based off their own data and target markets. Rather than consider only the average price of houses sold in that particular month (which is a function of house price growth / decline but also how the type, condition, size and location of the houses sold that month differ from the prior month and year) they consider repeat sales where the same property has been bought and sold more than once.

This data is combined or “chain-linked” to provide a continuous measure of house price inflation over time.

House Price Inflation 2010 source: lightstone.co.za

The result of all of this data, best-in-class methodology and analysis? When Lightstone says “opportunities abound in local market” I actually listen. Since their business model is to sell information, I’m more likely to trust what they say.

I haven’t played Monopoly in a while (preferring Settlers of Catan, Carcasonne, Tigris and Euphrates and even Cranium), but after a recent conversation I started thinking about the game dynamics. There is surprisingly much that is relevant to the current story of our economy.

1 The Competition Commission is necessary

Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.

Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society. (more…)

Ok, so that is an unfair title. But you’ll understand what I mean:

Zurich Financial Services has just been fined £2.3m for a data loss event incurred in 2008 in South Africa.

Zurich joins HSBC, Nationwide and Norwich Union in the club of companies fined by the FSA now.

In fairness, the fine wasn’t so much for losing the data, but rather for:

• losing
• unencrypted data
• and not having monitoring and controls in place
• so that it was only discovered and reported to regulators a year later

The South African perspective

The FSA’s seriousness about these issues is mirrored in our looming Protection of Personal Information Bill. This is not the same as the disturbing proposals for a Protection of Information Bill which covers public or government information. (more…)

I blogged recently about why I park on the fourth floor of the Cape Town airport parkade, and also about understanding and utilising unlikely but extreme events to your advantage. There is actually a link between these two posts.

Parking on the top floor does have a cost. It takes longer to drive up all the ramps and does, perhaps, on average take longer than parking on the most convenient floor every time. This extra time is a premium I pay to reduce the potential for really bad outcomes and thus optimising the parking problem. For example:

• I avoid the situation of attempting to park on a lower floor (trusting the untrustworthy electronic vehicle counter) and, after driving around for a while trying to find parking, having to give up and try a different floor. This much longer time, even if it only happens rarely, is a much worse outcome than 30 seconds on every flight. It can easily be the difference between making and missing a flight.
• I don’t have to worry about remembering where I parked my car. I don’t know that I am more forgetful than the average traveller, but travelling almost every week makes each trip blur into the next. I don’t waste headspace on trying to remember where I parked my car, and I don’t worry about forgetting. I have the peace of mind from having purchased a time of insurance against the risk of forgetting where I parked.

I get no value out of successfully memorising my car location, but gain from removing this risk and this worry from my routine.

If your company has a foreign currency exposure due to imported input components, this is a risk and a worry over which you have no control. Your energies are better expended elsewhere, on the operational and sales issues that you can effectively change. Get rid of these risks and get on with your real business.

Search Engine Optimisation (SEO) is an unfortunately necessary part of driving traffic to discover a website. Good content is necessary but not sufficient.

Why SEO is necessary

A large percentage of web traffic is directed by search engines. After all, this is how Google has become the giant company that it is. I tried to track down some hard statistics on this, but they varied widely and didn’t seem all that credible. Nevertheless I think it is clear that this traffic is signficant.

Search engines use algorithms and automated scripts (“spiders”) to understand the importance, quality, relevance and popularity of content on the web. A radiographer takes xrays without being able to see directly the same picture as the xray will produce. A photographer taking black-and-white photographs needs to ignore the colour in the viewfinder and imagine the light and shadows and shapes of the final photograph.

If your website has excellent content, but structures it in a way that is not readily accessible to a search engine’s spiders, then the spider will pass on by without sending humans to visit your site. Two easy examples may help:

1. Flash content – the content may look great and be ground-breaking and useful, but since most spiders don’t currently “understand” Flash content, it will be ignored.
2. Login, registration and forms – if large parts of a website are accessible only after filling information in a form or registering and logging in, the spiders won’t get in the door.

There are other considerations that are postulated to be relevant:

• Duplicate content “dilutes” the scores of any individual page
• Many links to irrelevant, poorly rated pages can suggest that your site is not providing useful info to the user. This effect is stronger since search engines try to separate “link farms” and rings and other methods to make a collection of websites appear more connected than they are in reality.
• Poor choice of keywords that searchers may often use, or targeting terms that are widely targeted by a range of other websites.

A typical SEO strategy is quite complex and takes times, effort and money

A typical SEO strategy would cover analysing the target audience of a site, understanding the site content, understanding the site structure, doing keyword analysis, checking out competitors, generating a few good quality inbound links if applicable, possibly generating some linkbait content, installing appropriate tools (e.g. Google Analytics) to monitor traffic and then repeating the cycle once the customer behaviour is better understood. Key metrics are site traffic generated, low bounce rates, long time on the site, repeat customers, higher sales (or more contacts if online sales aren’t part of your service) and higher search rankings.

All of this takes time (both from the SEO but also from the website owner). There are many fly-by-night organisations claiming to do SEO with neither the knowledge or the business ethics to get it right. It is probably because it is a poorly understood, sometimes arcane speciality, that these companies get into business with low starting capital costs.

How not to do SEO in ten easy steps

I received an unsolicited email from Zenteq recently. I’m not providing a link to their website as I have no reason to believe they can deliver anything useful.

1. Sending unsolicited email (aka SPAM). This is typically a bad idea. Best case scenario you get a few new customers. Worst case scenario you irritate a huge block of potential customers, have your mail server and/or IP blocked as a source of spam, have your ISP close down your website for abuse and so on.
2. Use bright (as in reflective safety wear) green text and truly ugly formatting. Not a professional image by far.
3. Offer to “SEO” the website by submitting to 600,000 search engines monthly. This is irrelevant and a giant waste of money.
4. Charge R350 per month. In the short-term, this is far too little. The work involved at the outset of optimising a website for search engines requires several full days of work. However, in the long-run, this may well be too much. Since there appears to be no reason for the client to stay with Zenteq, we have a familiar problem where the business model doesn’t make sense for a serious operator and thus it’s likely that it isn’t a serious operator. (on trawling their webpage I see there is a R1000 upfront fee as well. Nice not to include this in the email. It still isn’t enough for serious upfront work)
5. No description of other components of SEO strategy, or examples of prior successful work.
6. “From” email is marketing@fire-equipment.org, “Reply to” is newheights70@telkomsa.net but the content directs the reader to info@zenteq.co.za. So which is it?
7. Structure your email so that it gets stopped by the spam filter built into both Thunderbird and Apple’s Mail application.
8. Include icons on their site claiming valid XHTML code, but then fail the test when the button is clicked.
9. Analysis of google results shows no links to zenteq.co.za.
10. And my favourite – a search on google for “seo site:za” which searches for the top websites relating to “seo” within the “za” domain doesn’t have zenteq listed in the top ten pages. A first-page listing is almost an requirement if you expect any number of click-throughs.

So who guards the guards, and who optimises the optimisers?

Would you lend money to Country Foods Limited? According to the Z score perhaps you should have participated in the listing in October 2007. Based on their prospectus and audited financial results for the year to September 2007, their Z-score was high within the grey zone, within reach of the coveted “safe zone”. As recently as June this year, Business Report was describing their winning recipe.

Now, with complaints of non-payment from suppliers, a resigned founder and CEO, vague comments about restructuring and now a request to be suspended from the AltX. Not an ideal scenario. The Z-score now? Well into the danger zone based on the interim numbers I have.

The cause of the decreased Z-score? Two primary items account for most of the change. First, from Business Report:

In its first-half profit statement it reported that profit fell 96 percent to R219 000 because of a late crop and power cuts.

The second is the share-price and thus implied market value, down from a listing price of 100c to 15c.

So, the Z-score certainly demonstrates consistency with the change in fortunes of the company. To this extent, it is a success. As for the use of the Z-score to manage a turnaround,  the two useful suggestions the formula spits out to the acting CEO?

1. Increase earnings
2. Increase market value

Because I know I wouldn’t have thought of that without the Z.

I attended workshop presented by the famous credit analyst and model builder, Professor Edward Altman. He is probably most famous for the invention of the seemingly immortal Z score, which is still in use 40 years after its creation in 1968.

During the workshop, Professor Altman recounted a story about how a company managed themselves out of near-failure using his Z score. I’m not denying the facts of the story, and I’m not even saying that use of the Z-score at this company (GTI Corporation) didn’t help the turnaround. I am proposing that using Altman’s Z-score to manage turnaround would be ill-advised.

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