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Contents

CONTENTS

RESIDENTIAL PROPERTY MARKET Better the devil we know

Investing in property

Fund Profiles

HEAD TO HEAD: Investec Asset Management and Mazars Financial Services

PROFILE: Marcel Bradshaw, MD of Glacier International, a division of Glacier by Sanlam

SHOCKS AND STOCKS

BLACK ECONOMIC EMPOWERMENT Beyond ticking boxes

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Letter from the editor

letter from the

editor If your home is your castle, as it is to many of us, it’s best to be sure that the castle is not built on sand. Property remains a cornerstone of investments. Many asset managers and property experts will tell you not to consider the home you live in as an investment. But many of us do and for many people the home they live in turns out to be the best investment they ever made. As an investment, though, both listed and physical property carries its risks. This issue of INVESTSA offers plenty of insight into making sure your castle is not built on sand. What is it that makes property such a solid investment? There are a few answers. Generally property is contra-cyclical, so it won’t always move up and down in line with other investment asset classes. History is no sound judge but the long-term performance record from property is impressive, often beating other asset classes. And property is a tangible asset. Even listed property, which you can trade with the same ease and similar liquidity of equities, is backed by a portfolio of physical property. For those who missed the Momentum Collective Investments roundtable discussions at various cities around the country last month, we have a summary of what took place. Property was high on the agenda, with figures to show that it has offered the best returns (in local markets) in six of the last 20 years. Some concerns were noted but the view from Momentum Asset Management is that property remains attractive on a five-year view. With strong direct property fundamentals in place the message is that now is the time to invest in property. Property in Africa features in this issue. Read the piece from Pieter de Wet of Novare Equity Partners on why expected high returns are matched by high risk; and Amelia Beattie from Stanlib comments on the opportunity investors have to take advantage of Africa’s long-term growth prospects.

EDITORIAL Editor: Shaun Harris investsa@comms.co.za Features writer: Fiona Zerbst Publisher - Andy Mark Managing editor - Nicky Mark Art director - Gareth Grey Design - Herman Dorfling | Dries vd Westhuizen | Vicki Felix Editorial head offices Ground floor | Manhattan Towers Esplanade Road Century City 7441 phone: 0861 555 267 or fax to 021 555 3569 www.comms.co.za Magazine subscriptions Sandy Stober | subscriptions@comms.co.za Advertising & sales Matthew Macris | Matthew@comms.co.za Michael Kaufmann | michaelk@comms.co.za Editorial enquiries Greg Botoulas | greg@comms.co.za

investsa, published by COSA Media, a division of COSA Communications (Pty) Ltd.

Copyright COSA Communications Pty (Ltd) 2012, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA

Colleague Fiona Zerbst examines shocks and stocks, those external risks that lie beyond the control of investors. Here’s one shock. Globally, nearly a third of institutional investors say they can’t manage risk because of unpredictable market volatility. I stick with property, writing a speculative piece on what the residential property market might look like after the next elections. Much depends on who is in charge of government.

Communications Pty (Ltd). The mention of specific products in articles or

This all brings me back to homes, castles and sand. The only time sand is any good is on the beach on a sunny day with little wind. I hope that’s what all of you are starting to look forward to.

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Until then all the best.

any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.

INVESTSA

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Shaun Harris

RESIDENTIAL PROPERTY MARKET Shaun Harris

Better the devil we know

Here we are in 2014, just a few months after the national elections. What does the residential property market look like? It was stalling before the elections, just as it was for much of the two-year run-up to the elections. Residential property prices were increasing but only slightly above the rate of inflation. But what now, as property agents and speculators believe pent-up demand and delayed decisions to buy residential property are about to explode in a property market boom?

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To try and answer this question we have to step back two years, to the ANC election party conference at Mangaung that started on 16 December 2012. There were really only two horses in the race: incumbent president, Jacob Zuma, seeking a second term in office and outsider, Kgalema Motlanthe, the deputy president. That was the choice ANC delegations, not we the voting public, had to make for the future leader of the country. Zuma is expected to win, backed by the largest ANC supporting province in his home base in KwaZulu-Natal. Motlanthe has the backing of the anti-Zuma province of Gauteng. That’s the way it stands and, while the election of the man to stand as the next ANC president is expected to be close, Zuma is likely to emerge as the winner. There’s a lot of support for Motlanthe but he has been frustrating the process, at the time of writing not yet declaring himself open to the candidacy. There’s a huge lobby that wants to see a new leader come in and Motlanthe is the choice. But here’s an interesting, if unlikely, scenario. Historically, the person who becomes president of the ANC goes on to become president of South Africa. It’s not the way it has to be and apparently not the way it should be. The role of president of the ANC and president of the country should be split. Say we have Zuma as leader of the ANC. It’s a job he could do better than his bumbling attempts at running the country. He has shown that he can pull the ANC into line as internal clashes threaten to make the ruling party implode.

“Property is a long-term investment and the price paid will become relatively cheap 10 or 20 years hence.”

good administrator, which is exactly what the country needs – someone who can administer the country through the hurdles, mainly economic, that lie ahead. What we don’t want is a flash John F Kennedy or war mongering George Bush; just somebody who can run the country effectively and efficiently. Administrator Motlanthe has indicated he could do just that.

The residential property market would certainly peak up at this sort of arrangement, maybe even resulting in a mini-boom after Mangaung. It’s a digression, but why shouldn’t the next president of the ANC or the country be a woman. There are a number of capable potential candidates. Maybe it’s the wily ways of male chauvinism. Set up the Women’s League so the women don’t interfere in the manly sport of running for president. But there could be surprises ahead. Justice Malala, columnist and sharp political commentator, warns us to take the numbers that should dictate the winner with a pinch of salt. He reminds us that in the run up to the Polokwane Conference in 2007, the numbers were used to fool Thabo Mbeki into believing he would win. We know what happened. The recently fired Zuma won the numbers game. As Malala says: don’t always believe what branch delegates tell you. “It is, after all, a secret ballot.”

Motlanthe strikes one as being a little dull, not that that’s a bad thing as the leader of a country. He is known as a very

Seasoned political commentator Allister Sparks concedes that Zuma will almost certainly win the next elections. He says it’s unfortunate. “For, to be frank, Zuma’s first term as president has been a disaster.” What gives Sparks some hope is DA leader Helen Zille’s call for a united, across party lines opposition party. Fast forward again to 2014: the predictions, the numbers, all turn out to be right and we have Zuma serving his second term. What’s the likely result for the residential property market? Probably just relief, and that’s not a bad reaction from the property market. Let Zuma, about 72-years old and getting a bit long in the tooth, just bumble along as he has before. The best the electorate can ask is that he does not do anything too stupid; just the same old thing and that will be fine by the property market. This is likely to boost

INVESTSA

“What should potential property investors be doing now? The short answer is to buy now. Property prices can be negotiated to below market value.” a residential property buying spree and rise in property prices. Many buying decisions had been on hold waiting the outcome of the elections, a case of should I buy or should I fly? Zuma’s back in town and although boring, it’s not a bad thing. So let’s buy the house and live with the devil we know. The delayed buying decision has been seen in previous elections. Sharp property shoppers have benefited from it, and from other tragic events in the country. I know one individual, not even a property expert, who took a view soon after the killings at Sharpville. The property market had fallen through the floor and many people were queuing up to leave the country. He decided to buy property, just

four or five houses until his capital ran out. Then he sat back and waited. Ten to 15 years later he was selling those houses at ten times what he paid for them. If there are two points worth noting in this story it’s that a property investor must have a view and be prepared to act on it. The second is that property, and particularly residential property, is a long-term holding. That is where and how the value accumulates. John Roberts, CE of Just Property Group, sums this up perfectly. “The best time to buy is at the bottom of the cycle, but there are no definitive bells signaling when that day arrives. It demands reading the trends and

INVESTSA

taking a view – and then accepting that even if you have not succeeded in securing the very bottom of the trough, property is a long-term investment and the price paid will become relatively cheap 10 or 20 years hence.” What should potential property investors be doing now? The short answer is to buy now. Property prices can be negotiated to below market value. But that in turn depends on the view of the potential buyer. Do they want to buy now and see the next elections through? That’s the big question only they can answer.

investing in property

Rise of SA listed property sector

Ian Anderson | CFA, CAIA | Chief Investment Officer at Grindrod Asset Management

South Africa’s listed property sector, once neglected by investors, has come into its own over the past 12 years.

“In March 1999, the sector celebrated the first R1 billion market capitalisation fund.”

uring most of the 1990s, the sector was often used as a dumping ground for out-of-favour properties owned by the large life insurance companies in South Africa. There was little institutional investor oversight to prevent this as the market capitalisation of the sector was less than R5 billion (excluding Liberty International). Today, the market capitalisation of the sector is just under R200 billion and is widely used by both local and foreign institutional investors. The launch of the Marriott Property Equity Fund in September 1996 was a watershed moment for the sector as it provided an accessible entry point for the man in the street and elevated the profile of the asset class. In March 1999, the sector celebrated the first R1 billion market capitalisation fund – in fact both Fountainhead Property Trust (then called the Allan Gray Property Trust) and SA Corporate

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Real Estate Fund (then called Martprop Property Fund) both reached the R1 billion mark in March that year and the sector as a whole topped the R5 billion market capitalisation mark for the first time. At the time of writing, Growthpoint Properties’ market capitalisation exceeds R42 billion, while Redefine Properties’ market capitalisation exceeds R27 billion; clear evidence of the phenomenal growth enjoyed by South Africa’s listed property sector over the past 12 years. It was inevitable that the listed property sector would grow in South Africa, much like it had in developed markets like Australia, Europe, the United Kingdom and the United States. Investors had become increasingly concerned about the limited liquidity provided by investments into direct property, along with the high costs of acquiring and disposing of properties and the administrative burden of collecting rentals and maintaining the properties. Investing in listed property securities enabled investors

to enjoy the benefits provided by property; a high initial yield, inflation-hedged income growth, inflationhedged capital growth and diversification, without the added risks of limited liquidity and high trading costs. Today, South Africa’s listed property sector is dominated by a number of large companies/funds with highquality property portfolios, strong balance sheets, experienced management teams and long track records of delivering inflationbeating distribution growth to investors. They are among the best performing companies on the JSE over the past 10 years and continue to offer investors a competitive initial income yield and the opportunity to enjoy inflation-beating growth in that income stream (and inflation-beating capital growth as a result). The imminent introduction of real estate investment trust (REIT) legislation in South Africa will legislate the tax-free status enjoyed by the listed property companies and funds and provide foreign investors

“The low interest rate environment, which has driven bond and property yields lower, is likely to remain in place at least until 2015 (according to the last communique from the US Federal Reserve).” with a familiar listed property investment vehicle (REITs are the de facto standard for global listed property securities throughout the world and have existed in the United States since the 1960s). The introduction of REIT legislation may therefore provide a once-off boost for the sector as South African companies are incorporated into global REIT indices and foreign demand increases as a result. Local property outlook South Africa’s listed property sector has delivered stellar returns to investors over the past 10 years. The combination of a high initial income yield, inflation-beating distribution growth and a gradual decline in yields across all high-yielding asset classes resulted in returns exceeding 25 per cent per annum over that period and more than 30 per cent so far this year. The current yield on listed property remains attractive relative to the bond and money markets. At the same time, distribution growth appears to have bottomed in the second quarter of this year and is expected to accelerate into 2013 and 2014 as vacancy rates stabilise, borrowing costs

decline and asset management initiatives continue to drive through incremental income growth. As a result, the sector is expected to deliver returns of between 12 and 15 per cent per annum over the next three to five years. The maths is reasonably simple. Investors will start with a seven per cent initial yield and enjoy capital growth of between five and eight per cent per annum (a function of the income growth and a possible increase in yields if inflation and interest rates start rising towards the end of 2013 or early 2014). The result is that listed property is one of the few asset classes in South Africa capable of producing a return that meaningfully exceeds inflation in the medium-term. For investors benchmarking themselves against inflation plus five or seven per cent, listed property will need to comprise a significant portion of the portfolio (around 25 per cent) if the benchmark is to be met or exceeded given the low expected returns from the bond and money markets. Global property outlook There is a similar dynamic at play in global financial markets, with listed property

likely to be one of the few asset classes to produce inflation-beating returns over the medium-term, given the historically low yields on offer in the bond and money markets and the risk that inflation accelerates as central bankers print more money. In the United States for example, the yield on listed property securities exceeds the yield on 10-year Treasury bonds by almost two per cent, which is high by historical standards. At the same time, income growth from listed property in the United States is expected to average between three and five per cent per annum over the medium term. While these growth rates are low by historical standards, they do reflect the benign economic outlook and are not a symptom of company-related issues which undermined the sector in 2008 and 2009.

“The current yield on listed property remains attractive relative to the bond and money markets.” The low interest rate environment, which has driven bond and property yields lower, is likely to remain in place at least until 2015 (according to the last communique from the US Federal Reserve). This should support current valuations in global property markets as well as lower the cost of capital for the larger, financially sound REITs and, in this way, boost income growth in the short term. Property fundamentals are unlikely to improve in the current economic climate, although there are a number of markets (most notably in southeast Asia) that have weathered the storm and continue to offer growing market rental levels.

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investing in property

LISTED PROPERTY’S

GREAT HISTORICAL STORY IN PERSPECTIVE Mariette Warner | Listed Property Fund Manager | Absa Asset Management

or the first three quarters of this year, listed property again significantly outperformed other asset classes, generating a total return of 31.1 per cent compared with the All Bond Index of 13.0 per cent, the All Share Index of 12.1 per cent and cash of 4.1 per cent. This track record has been intact for 10 years. The consistent reaction from the investment community has been that listed property has done so well, that it is time to reduce exposure. This has not been the right decision. However, at some point conventional wisdom must prevail. In order to make an informed asset allocation decision, this great historical story must be placed in perspective. The economic factors that have driven this performance are a combination of long bond yields, GDP growth and the global quest for yield. From 2003 to 2012 to date, the SA Listed Property Index (SAPY) has increased by a multiple of four. This strong run can be divided into three segments, each with a different positive performance driver. From 2003 to 2005, the SAPY increased by 113 per cent (28.7 per cent per annum) because of falling long bond yields – from 10 per cent to 7.5 per cent. During this time, earnings growth from listed property was weak because of low GDP growth (less than four per cent) from 2001 to 2003, exacerbated by speculative development leading to high vacancies in the office market. Price growth was not supported by earnings growth. From 2006 to 2009, the SAPY increased by 29 per cent (6.6 per cent per annum). Long bond yields were very volatile and on a trend line basis increased from 7.5 per cent to 9 per cent which is negative for listed property prices. However, earnings growth from listed property was strong. The compound average earnings growth of a relevant basket of 10 stocks was 13.8 per cent per annum in nominal terms and 6.6 per cent per annum in real terms. This was as a result of good GDP growth from mid-

2004 to mid-2008 at an average of 5.2 per cent per annum. Earnings growth buffered the negative impact from the bond market. From 2010 to 12 October 2012, the SAPY increased by 45 per cent (13.9 per cent per annum) during which time long bond yields decreased from nine to seven per cent. The negative economic growth of 2009 and sluggish growth since then of less than four per cent per annum was felt during this period, resulting in lower earnings growth in the listed property sector. The average earnings growth generated by the same basket of stocks declined to 7.0 per cent per annum in nominal terms and to 2.4 per cent in real terms. These two factors together explain just over 30 per cent of the 45 per cent growth in the SAPY. The extra push can only be explained by the quest for yield. This is verified by the performance of Growthpoint’s share price which gained 68 per cent compared with the SAPY’s 45 per cent. This was not because of exceptionally high earning’s growth. Growthpoint delivered the same as the average for the basket over this period. It is the largest market cap with a 21 per cent weighting in the SAPY, has a 15 per cent foreign shareholding and is highly liquid. In the quest for yield in the listed property sector, Growthpoint is the most accessible and therefore enjoys high demand. Having put the great historical story in perspective, what can be expected going forward? Bond yields are at historical lows and SA GDP forecasts for 2013 are muted, generally below three per cent.

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Historical patterns have shown that GDP growth in a four to six per cent band is necessary to generate high real earnings growth from listed property. This suggests much lower returns over the next 12 months. However, earnings growth forecasts for listed property are in line with inflation and forecast forward yields compare well with 10year bond yields. Therefore, from an asset allocation perspective, listed property is still a meaningful prospect. The greatest risk is that bond yields will rise, either from further downgrades to SA from rating agencies caused by internal issues or a rise in interest rates globally. The former is nothing new. The latter depends on when long bond yields will rise in the US. The latest round of quantitative easing has effectively anchored these until 2015. Essentially, defensive asset classes have rerated and this is unlikely to change until growth assets again show potential. How long will it take for meaningful economic growth to resume in the US, the UK and the Eurozone? This is when the great crystal ball becomes misty.

investing in property

Key trends from the listed property sector Anton de Goede | Property portfolio manager | Coronation Fund Managers

isted property has experienced a stellar past few years, outperforming all the major asset classes over three, five and 10 years as at end September 2012. This trend also remained intact for the past 12 months, with the sector delivering a total return of 32 per cent. In addition, the market capitalisation of the sector is approaching R200 billion as international investors increasingly show interest in anticipation of the introduction of formal REIT (real estate investment trust) legislation within the next six months. As a mainly income-yielding asset class, listed property tends to track long bond yields and has therefore benefited from the continuous decrease in local bond yields, which in turn rerated over the last 10 years on the back of improved fiscal discipline since the late 1990s. Key trends from the listed property market August usually provides a good barometer of where we are in the property cycle as 60 per cent of the sectorâ&#x20AC;&#x2122;s market capitalisation is involved in financial reporting. The sector delivered a weighted average distribution growth of 5.9 per cent (year-on-year growth for the period June 2011 to June 2012). The key trends from the recent results announcements are similar to what has been experienced in the earlier part of the year and include stabilising and even improving vacancies; mostly positive rental reversions on existing tenants and total occupancy cost remaining a key driver of what is tolerable for tenants. Landlords, however, need to stomach rental cuts to convince new tenants to commit in all three sub-sectors; office, industrial and retail. While A-grade office vacancies continue to improve, B-grade vacancies are stabilising, but demand for this space remains weak. In terms of the retail and industrial sub-sectors, there is little scope for further value to be extracted from filling up strong retail centres and overall industrial

vacancies given that vacancies are already at fairly low levels, while large capital spend is necessary to reposition weaker centres and industrial mini and midi units for tenanting. Operating cost ratios are stabilising and even improving, with an increased focus on electricity and water efficiencies.

â&#x20AC;&#x153;Landlords, however, need to stomach rental cuts to convince new tenants to commit in all three subsectors; office, industrial and retail.â&#x20AC;? Listed property companies continue to recycle capital into new assets. What is evident is the increase in appetite for speculative developments through land banking (buying and holding raw land until it is profitable to develop), while existing projects in the ground are mostly industrial (logistics and distribution-linked within industrial parklike environments) and office (in vicinity of Gautrain stations) driven. The capital investment of some of the more recent listings within the sector continues (rural, township and commuter retail remain firmly on the radar screen, with yields being paid moving into the eight per cent levels), which is also going hand in hand with equity issuances. Larger property funds are using the opportunity to clean up their portfolios, leading to some churn within the sector, while another trend is that many companies are looking to gain a foothold in the African continent in some way or another.

especially since funding costs are being fixed at historically low levels. However, the fortunes of the sector continue to be very closely tied with that of the bond market and therefore implicitly to the potential of another ratings downgrade of the country in the coming months due to negative domestic macroeconomic pressure building. A wild card remains the potential of another interest rate cut as the SA Reserve Bank continues to focus on domestic growth instead of inflationary risks linked to the weaker Rand. As we are close to the bottom of the interest rate cycle, we caution investors to expect more muted returns from listed property going forward compared to what was achieved historically. At Coronation, we invest in property with a total return mindset through bottom-up stock selection. We take all of the above factors into account when assessing the relative value within the listed property sector. This includes the appropriate yield level at which a stock should trade in relation to its sub-sector exposure and gearing risk, as well as the long-term growth potential of the underlying rental stream. The Coronation Property Equity Fund remains top quartile within its universe over one, three and five years as at end September 2012.

Prospects Within the direct property market, there seems to be a gradual return of positive momentum. We believe this should start to reflect in positive distribution growth momentum over the next 12 to 18 months,

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investing in property

Property as part of

a well-balanced investment strategy Scott Field | Executive: Finance and Sales | FedGroup Financial Services Executive

The new Regulation 28 allows greater weighting for property in pension funds’ portfolios. FedGroup financial services executive, Scott Field, discusses different ways to invest.

rom an asset management perspective, an encouraging change to Regulation 28 is the differentiation of immovable property and participation mortgage bonds which were previously classified under the same asset class. Satisfying a key investment principle of asset diversification, the differentiation between the two asset classes now permits a pension fund to invest up to 15 per cent of its assets into participation mortgage bonds and an additional 15 per cent in immovable property. Property is considered as one of the largest and most widely held asset classes. As a tangible investment, satisfying the moderate risk appetite, property presents itself as a secure and balanced investment. The change to Regulation 28 has opened up immovable property as an asset class to pension fund trustees. Pension funds considering property as part of a well-balanced strategy are presented with various options.

High return, high risk In boom times, property syndications have rewarded investors with high returns. However, the failure of many high profile syndications has confirmed that the expected return does not always compensate for the risk. Property syndication failures occurred primarily because

investors were invested in unsecured debentures, with only a small amount of that investment secured by property. Due to their structure, property syndication is not recommended as a vehicle for pension fund monies.

Buying physical property – a difficult approach Regulation 28 states that a fund may now invest up to 15 per cent of its assets in immovable property. To ensure diversification, it also states that no more than five per cent may be invested in a single property. So while a fund now has the opportunity to buy physical property, there is difficulty in this approach, especially for small and medium-sized pension funds. The difficulty of this requirement lies in the price range of property. A pension fund typically invests in industrial and commercial property within the range of R10 million to R20 million. Let’s assume that a fund invests in a R10 million property. That R10 million represents only five per cent of the fund’s asset allocation. Upon calculation, this suggests that a pension fund would need to be worth R200 million, to even consider including a single property as part of its investment strategy. Another concern with purchasing direct property is the active ownership role that a fund would

need to adopt. Because pension fund trustees are usually not made up of property managing agents, expertise and maintenance becomes questionable. Does a board of trustees hold the expertise necessary to choose a suitable property at a suitable price? And once purchased, who will take care of the maintenance and management of the property?

Indirect ownership, significant return Without directly having to own or manage property, a pension fund can invest in immovable property as an asset class. A property portfolio is a mechanism through which investing in direct property market is made possible. Funds are presented with two options when considering a property portfolio: a listed property fund or an unlisted portfolio. A listed property fund, as illustrated in the graph, is vulnerable to market sentiment. The volatility of shares has a direct affect on listed property. As a result, it is vulnerable to market sentiment and thus fails to offer the stability of direct property fundamentals. An unlisted property portfolio offers diversification from the equities market, as its performance is not linked to market sentiment. The capital stability and consistency of rental income supports the value in an unlisted property portfolio. An unlisted portfolio offers significant returns based on the property fundamentals of being rental income and capital appreciation. The significance of this return is that as inflation escalates, so does the property rental price and the overall value of the property. An increase in inflation means an increase in an investor’s return.

Figure A. This illustrates how a listed property fund mirrors market sentiment.

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Investment returns generated from both listed and immovable property have proven to be very beneficial for pension funds over the last 20 years. However, with legislation now stipulating specific differentiations in the asset class, it is becoming increasingly important to understand the complexities involved when investing to ensure the benefit of any exposure is maximised.

INVESTING IN PROPERTY

PROPERTY DEVELOPMENT

IN SUB-SAHARAN AFRICA ON THE UP Pieter de Wet | head of research at Novare equity Partners

conomic growth and improving infrastructure on the rest of the continent have seen South African investors as well as property developers take a keen interest in opportunities north of our border. Given the debt crisis in Europe, high entrance barriers in Asia, as well as uncertainty about prospects for the US economy, interest in Africa is understandable. However, the high returns expected from property development on the rest of the continent can be easily matched by high risks, if these are not managed properly. Opportunities in sub-Saharan Africa are being fueled by the growing middle class and associated consumer spending, which in Accenture’s 2011 report on the sub-Saharan African consumer, is forecast to increase by 4.3 per cent compounded annually from 2011 to 2020. Africa is also urbanising rapidly. In 2010, 60 per cent of the population lived outside of the cities, of which there are 52 across the continent with populations greater than a million, the same as the whole of Europe. The Indian subcontinent with its huge population and North America have only 48 each. The UN estimates that 45 per cent of Africans will live in cities by 2020. This young, affluent and urban middle class is increasingly looking for modern amenities, from office space to retail and housing. At present, the supply of these facilities is extremely low, with the lack of modern shopping space a good example. Retailers like South Africa’s Shoprite and Pick n Pay have a high demand for access to African consumers. Doing business on the rest of the continent is, however, not cheap. In Mercer’s 2012 cost of living index, Luanda

was ranked the second most expensive city for expatriates in the world. In the top third of cities monitored, 20 were African. When it comes to property development, costs are significantly higher than what South African developers are used to. The rule of thumb is that if we take the cost of developing in South Africa per squaremeter as one unit, in Nigeria a similar development will cost you twice as much, in Malawi it will be 1.6 times as much, and in Zambia 1.4 times. For example, if the cost per square-metre to build an enclosed mall in South Africa is R8 200, in Nigeria it will be R16 400 and R13 200 in Malawi. In addition, the tariffs charged in Africa for power, water, road freight, mobile telephone services and Internet access are multiples of those paid in other parts of the developing world. The infrastructure backlog experienced by most countries contributes significantly to these high costs.

“It is estimated that around two-thirds would have to be earmarked for new capital expenditure with the remainder being utilised to operate and maintain existing infrastructure.” The World Bank’s African Infrastructure Country Diagnostic (AICD) estimates than an annual $93 billion is needed over the next 10 years, equating to 15 per cent of the region’s GDP and more than twice the amount estimated by the Commission for Africa in 2005. It is estimated that around twothirds would have to be earmarked for new capital expenditure with the remainder being utilised to operate and maintain existing

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infrastructure. The power sector accounts for 40 per cent of the required investment. In terms of dealing with the backlog, Africa is spending some $45 billion a year, with an additional $17.4 billion potentially available if resources were applied more effectively, according to the World Bank. Although the gap is not being fully bridged, progress is being made across the continent. This is reflected in higher economic growth rates, not entirely attributable to the East’s strong appetite for Africa’s raw materials. Better infrastructure equates to a much easier business environment, especially so for property developers. Finding the correct properties and dealing with relatively slow-moving government and local authorities can be additional stumbling blocks for investors. On the legal front, it is encouraging that, according to the International Property Rights Index, subSaharan Africa is broadly in line with its BRIC counterparts where property rights are concerned. At present the best route to gain exposure to the property market in the region is to invest directly or via one of the growing number of private equity vehicles that are starting to make an appearance. REITs are still mostly limited to South Africa. The few that do represent the rest of the continent are characterised by low liquidity. Given the still difficult landscape faced by property developers and investors, it is advisable to partner with a company that has a track record in the countries in which it is operating. Strong local networks as well as support structures are valuable in getting things done and in understanding the nuances that differ markedly from one market to another on the continent.

INVESTING in Property

The case for investing in real estate developments

in Africa has come Amelia Beattie | STANLIB Chief Investment Officer: Direct Property Investments

Investors have historically shied away from investing into Africa as a result of political risk, corruption and the lack of infrastructure, to name a few. Twenty years ago, investment opportunities were few and far between. Recent changes to South African retirement regulations (Regulation 28) now allow investors in retirement funds to invest an additional five per cent into Africa. This represents an opportunity for investors to take advantage of Africa’s long-term growth prospects. Strong investment returns in Africa In the midst of a bleak global economic outlook, the investment case for Africa is stronger than ever. Despite the fiscal crisis in Europe, the social and political unrest in the Middle East and North Africa (MENA), stagnant growth in Latin America and East Asia, sub-Saharan Africa (SSA) continued to show solid growth. SSA expanded by approximately five per cent in 2011 compared to a global average of 1.9 per cent. Retail property development is set to boom on the back of the continent’s growing population, increased infrastructure spending and a rising middle class seeking greater access to consumer goods. The GDP growth for the next 10 years is forecasted at an average of 6.3 per cent. This growth is as a result of the rich resource economy on the continent which drives wealth and, in return, drives consumer disposable income. Some of the markets likely to see notable expansion of retail-lead real estate environments are Nigeria and Kenya, according to Amelia Beattie, chief investment officer of direct property investments at asset manager STANLIB. Beattie says in these countries the rising income from an increasing number of people entering the workforce will drive the consumer spending required for sustainable retail environments.

Patience will have to be part of every investment manager’s investment thesis as it is nonnegotiable to be entrenched in the economic society of these countries to drive sustainable returns for investors. Many of the perceived investment risks of the past can now be mitigated through astute investment methodologies and techniques. Management of risk “Through our modular approach to property development, we take control of the whole value chain involved in the development process, from start to finish,” says Beattie and adds that this process mitigates the concern of many investors that African countries do not have access to key resources needed in property development. “Through our partnership with some of the major players in the industry, we are able to achieve economies of scale to manage development costs.” STANLIB Direct Property Investments partners with owners of land within African regions to ring fence their rights to land ownership. These partnerships provide a platform through which to build sustainable relationships with local authorities. “While spending power is still relatively low compared to South Africa, and a large percentage of the African population

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remains poor, there are now enough ‘feet’ for multinational retailers and property developers to build a business case for investing,” Beattie says, adding that several other African nations were also on the radar for increased retail development, although mostly in the longer term. Responsible investing “We are seeing rapid urbanisation; a population that has higher levels of disposable income; governments which are investing in their economies and driving infrastructure spend; and a continent that has been more resilient than most to the recession,” says Beattie. “That is attractive to investors and multinational retailers, who see a ready market and, in turn, drive the development of new shopping centres.” The development of these projects acts as a catalyst of economic growth in a sustainable manner. Construction workers are employed in the construction phase, so employment is created on a primary and secondary basis through these developments. These are all pillars of responsible investing which is in line with principles of investors across the continent. “Other than the strong investment case for the African continent, physical property provides investors with access to a tangible asset. Never forget the real in real estate,” Beattie concludes.

fund profile

Momentum Property Fund Nesi Chetty | Head of property at Momentum Asset Management

1. Please outline your investment strategy and philosophy for the fund.

6. Please provide some information around the individual/team responsible for managing the fund.

The property investment team invest in stocks with a high income yield and that have good growth prospects in distributions in the long term. The research process and philosophy in property is concentrated on investing in those companies that are located in strong geographic nodes and have the potential to manage their vacancies and improve on rentals. The fund does not sacrifice yield at the expense of quality and ensures that the selected property shares are defensive through various property cycles.

Nesi Chetty is the head of property and fund manager for all property investments within Momentum. He is assisted by Pelo Manyeneng, a property analyst. 7. Please provide performance of the fund over one, three and five years (please include benchmark).

The fund has roughly 75 per cent of its exposure in large-cap, blue-chip property counters, but has also been selective in investing in new property listings, which account for 15 per cent of the fund. The offshore exposure is taken through Capital Shoppings in the UK and NEPI.

Fund

Benchmark

1 year

36.97%

37.10%

3 years

21.19%

20.69%

5 years

11.72%

11.26%

8. Please outline the fee structure of the fund. 2. What are your top five holdings at present? The annual management fee 1.43 per cent, inclusive of VAT. Top five holdings in the fund include Growthpoint, Redefine, Capital Property, Resilient and Hyprop. 3. Who is the fund appropriate for? The fund is appropriate for investors who seek capital preservation and long-term growth in income. The momentum property fund provides an effective hedge against inflation and stable returns with less volatility than a traditional equity fund.

9. Why would investors choose this fund above others? The Momentum Property Fund has a good track record of achieving upper quartile returns for investors. The fund performance has been tested in various market cycles and the research process, methodology and philosophy of the team in terms of selecting good property shares is impeccable. The Momentum property team regularly inspects property assets that the fund is invested in.

4. Have you made any major portfolio changes recently? We have recently increased our weighting in Vukile, which is now a much larger company in terms of total assets after acquiring the Sanlam property portfolio. We have reduced our weighting in Growthpoint slightly, taking some profits after its incredible performance this year. Delta is a new listing, which has very good office tenants included in the portfolio and has a yield of 9.1 per cent. 5. How have you positioned the fund for 2012? The fund is positioned very defensively and will benefit from continued good growth in the retail and industrial sectors. Low interest rates, coupled will a favourable vacancy outlook, will benefit the fund. We have positioned ourselves in those companies likely to deliver above-average distribution growth for 2012.

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Fund profile

STANLIB Global

Property Fund Keillen Ndlovu | Manager | Stanlib

1. What are your investment strategy and the philosophy of the fund?

Objective • T he fund invests in the global property market comprising of predominantly developed economies. • To provide superior long-term investment performance based on sound fundamental research.

5. Please provide some information around the individual/team responsible for managing the fund.

Portfolio characteristics • The fund aims to outperform the UBS Global Real Estate Investors Index. • Manager selects stocks from the bottom up rather than attempting to take regional bets. • The fund has a very strong bias toward investors rather than developers. 2. What are the fund’s top ten holdings? Top 10 holdings

Portfolio %

Simon Property Group Inc

7.1%

New Europe Property Investments

3.7%

Public Storage

3.5%

Boston Properties Inc

3.0%

Unibail-Rodamco Se

2.9%

Wharf Holdings LTD

2.5%

Prologis Inc

2.4%

Ventas Inc

2.1%

Westfield Group

2.1%

Avalonbay Communities Inc

2.0%

•

e focus on defensive attributes such as balance sheet W strength, tenant stability and core rental earnings.

eillen Ndlovu, head of listed property funds and portfolio K manager. Ndlovu started his property career in 2004 at Standard Bank Properties and moved to STANLIB in 2005. Since joining the group, he has been part of a successful and consistent investment philosophy and process that has led to the property team winning numerous awards for top performance for local and global property funds. He currently manages about R22 billion of listed property funds for retail and institutional clients spanning across local (South Africa), Africa (including South Africa), global developed and global emerging markets. He is assisted by Riaan Gerber on the offshore funds. Gerber has been with the team for five years.

6. Please provide performance of the fund over one, three and five years (please include benchmark).

Gross total returns in ZAR to 30 September 2012 1 month

3 months

Year to date

STANLIB Global Property Fund

-0.83%

6.37%

24.12%

UBS Global Investors Index

-1.04%

5.38%

22.40%

Outperformance

0.22%

0.99%

1.72%

6 months

1 Year (ann.)

3 Year (ann.)

Since Inception (ann.)*

STANLIB Global Property Fund

16.88%

36.42%

20.24%

UBS Global Investors Index

16.24%

33.85%

19.42%

Outperformance

0.64%

2.57%

0.82%

31.2% 3. Who is the fund suited to/appropriate for?

•

I nvestors who seek a diversified portfolio of global property stocks that aims to diversify exposure away from the South African listed property market. Investors who need to add diversity to their offshore cash, equities and/or bond exposure. Investors who need to add diversity to currency exposure.

4. How have you positioned the fund for 2012? Investment style • Involves selecting companies that generate above average growth in their rental streams. • We invest in companies that are trading at reasonable values relative to their growth prospects.

*Since fully invested September 2009.

The fund was launched in 2004 and was outsourced to an external manager who used the EPRA/NARIET benchmark. It was brought in-house in July 2009 and took up to the end of September to be

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fully invested in line with the new benchmark – UBS Global Investors Index. There is a choice of two funds: the Rand-denominated STANLIB Global Property Feeder Fund or the US Dollar-denominated STANLIB Global Property Fund. 7. Please outline the fee structure of the fund.

conferences around the world. For example, this year we have been to Hong Kong, Australia, Zambia, UK, Romania, Singapore, Germany, USA and Brazil. This enables us to make well-informed decisions. We apply the same model that has led to our consistent success in the South African listed property market.

Various pricing structures are in place dependent on how you wish to access the fund. It is available directly from STANLIB, or via external platforms. The STANLIB Global Property Feeder Fund A class currently has a TER (total expense ratio) of 1.68 per cent, which includes an ongoing financial adviser trail fee. 8. Why choose the fund over others?

•

T his benchmark that we have chosen has provided the best risk-adjusted returns, i.e highest returns with the lowest risk. It focuses more on property investment companies paying out rental income rather than property developers. We make it a point that we travel to all the continents (South Africa, every year to meet with management, leasing companies and do site visits. We also attend major property

STANLIB Global Property Feeder Fund Winner of the Property – Indirect Global Morningstar 2012 Awards: Best risk-adjusted performance over 1 and 3 years. Our objective is to provide superior long-term investment performance based on sound fundamental research.

Visit us at www.stanlib.com or call us on 0860 123 003 STANLIB Asset Management Reg. No. 1969/002753/06 An authorized Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (License No. 26/10/719).

STANLIB Global Feeder AD FA.indd 1

Compliance No: D8R966

2012/10/15 1:20 PM

HEAD TO HEAD

Investec Asset Management portfolio manager

A ngeli q ue

R auville

Portfolio Manager | Investec Asset Management

1. Properties – listed and physical – have performed extremely well in the last 10 years. However, there are concerns that there is little value left. What is your view? We acknowledge the listed property sector’s performance has surpassed all expectations; however, in the context of a low interest rate environment and for investors seeking yield, we continue to see value in the property sector. We are unlikely to see such significant re-pricing going forward in what is likely to be a benign growth environment off the back of the global economic environment which continues to grapple with a myriad challenges and scarce growth. That said we believe at current prices South African listed property still offers attractive value compared to global property markets as well as local income investments such as cash and bonds. We believe international investors will continue to search for a degree of certainty from investments: yield and growth. The SA listed property offers both these, making it an attractive investment in the current economic climate. With listed property offering bond-like characteristics with an element of growth (income and possibly capital on the back of income growth), we believe this should underpin returns from property. 2. Do you think the ongoing economic crisis will impact on returns going forward? SA listed property will not escape the volatility of global equities. SA property

fundamentals are, however, likely to remain stable. 3. D o you think property syndications have damaged the view of property as an investment? For some, perhaps, but there are significant differences between property syndications and listed property investments, and for informed and educated investors the history of property syndications should not influence the decision on investing into listed property. Key differences between syndications and listed property investments include liquidity, transparency and diversification – all elements that listed property investments offer and syndications did not.

attractive forward yields, we believe will result in generating superior returns for our investors. 6. What are the biggest mistakes investors tend to make with regard to property as an investment? Property investing made easy: take the emotion out of investing and buy quality income streams from well-located assets that are managed by passionate, credible and astute people. 7. What factors should investors consider when looking at property as an investment?

4. W hat factors should investors consider when choosing how to invest in property?

Management, assets, track record and the security or defensiveness of the underlying income stream. Remember the all-important rule about investing into property as mentioned above.

In the case of listed property funds, key points for investors are track record, management experience, transparency and quality of and understanding of the underlying asset base (properties, leases – terms and tenants). We place an emphasis on management, specifically the track record and ability to match or exceed investor expectations.

“We believe international investors will continue to search for a degree of certainty from investments: yield and growth.”

5. How do you choose between the different property funds? Our core focus has always been to target listed property funds that are going to deliver superior distribution growth on a consistent basis relative to peers and are managed by credible and passionate people. Targeting these funds at

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HEAD TO HEAD

mazars chief operating officer

M arius

F enwick

Chief Operating Officer | Mazars Financial Services

1. Property â&#x20AC;&#x201C; listed and physical â&#x20AC;&#x201C; has performed extremely well in the last 10 years. However, there are concerns that there is little value left. What is your view? There has always been a close correlation between property values and long dated bonds mainly because both are influenced in a similar manner by interest rates and inflation. If we consider only this factor and the current low yields of long dated bonds then yes, listed property is currently fully priced and probably overvalued. However, we must not discount the income potential of property. Even if property is considered to be fully priced or expensive, the rental income stream will largely remain intact. 2. Do you think the ongoing economic crisis will impact on returns going forward? The biggest risk under the current economic crisis is two-fold. Firstly defaults on rental payments by tenants leading to loss of rental income and secondly pressure on landlords to reduce rental and future escalations. If the international economic crisis continues then a reduction in rental income as well as capital losses on property due to the reduced income is very possible. 3. Do you think property syndications have damaged the view of property as an investment? Only to those investors who were exposed to a failed syndication. Too many syndications were allowed to be marketed and the fundamental structure of the majority of them was flawed due to onward selling and profiteering between linked organisations. Itâ&#x20AC;&#x2122;s a pity

because the principle of syndicating is solid. Unfortunately, this strategy was tarnished by a handful of greedy individuals. Investors who had exposure to only listed based property investments (unit trusts and shares) still view property as a good investment. 4. What factors should investors consider when choosing how to invest in property? The main consideration is whether to invest directly by physically purchasing property or invest into a property investment, i.e. listed stock, unit trust or ETF. Direct property ownership should be considered if you are experienced in the property market and you understand all the underlying issues with property ownership, taxes, rental law and the commercial property market in general. Generally this type of purchase is geared and caution must be taken with interest rate movements. The biggest downside of direct property ownership is illiquidity. Listed property stocks, unit trusts and ETFs offer diversification, low transaction costs, managed rental pools and liquidity. This is probably the better option for the majority of investors. 5. How do you choose between the different property funds? The listed property stock market is very limited. This implies that the limited investable universe will lead to very close returns between the various property unit trust funds. This however is not the case. Over three years, the best performing fund provided 26.08 per cent per annum and the worst performing fund

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returned 11.6 per cent per annum. Average returns amounted to 22.5 per cent between 20 funds. Interesting is that passive index tracking provided a return of 26.2 per cent per annum over the same period. If investors prefer active management it makes sense to stick to the fund managers that have the long-term experience and track records. If you are happy with achieving returns equal to the market then ETFs are the answer. 6. What are the biggest mistakes investors tend to make with regard to property as an investment? The challenge is to tone down return expectations over the next couple of years. The last 10 years created unsustainable growth expectations. Property values can be as volatile as normal listed shares. Investors often think that property cannot provide negative returns. Investors are often also not aware that the income component of a listed property stock or unit trust is taxable. The published return is therefore pre-tax. 7. What factors should investors consider when looking at property as an investment? Over exposure to any single asset class including property is not recommended. Be aware of the impact that interest rate cycles and inflation have on property and that the current interest rate cycle is very close to the bottom if not right at the bottom. When interest rates increase, property values will rerate downwards and capital losses are a very real possibility. Property will, however, always provide a healthy income stream. Remember that this income stream is taxable.

profile | GLACIER by sanlam

M arcel B radshaw M D of G lacier I nternational , a division of G lacier by S anlam

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“When dealing with a start-up, there are higher

expenses initially and the desired results may not be apparent immediately.”

1. You were appointed managing director of Glacier international in January 2010. What have been the biggest challenges over this period?

The biggest challenge has been to establish and run a start-up operation, Glacier International, as part of a much bigger and more mature business – Glacier by Sanlam. When starting a new business you need to be more aggressive, make quick decisions and have the freedom to implement strategies which may have high risk attached to them. All of this needs to happen in the context of the larger business which already has established processes, philosophies and an entrenched culture. There’s a constant challenge to manage the expectations of the bigger business. When dealing with a start-up, there are higher expenses initially and the desired results may not be apparent immediately.

2. Do investors often make the mistake of seeing international investment as Europe and the US, and excluding other regions? Yes, this often happens. A decade ago, we often saw financial services companies selling the idea that because South Africa is an emerging economy, there is no need for investors to have further exposure to other emerging markets. We don’t believe this is the best route to take. 3. Which regions should investors look at internationally? The debate at the moment is whether to invest into fast-growing emerging markets

(Brazil, India and China) or into developed markets which are currently offering good value. My view is that you should have exposure to both markets, with a slightly higher exposure to developed market companies that receive a portion of their earnings from emerging market economies.

transparent and well-regulated industry that serves the interests of all participants. Unfortunately, it sometimes happens that the pendulum swings too far and we end up with a situation where we have too much regulation. The implementation costs are always a concern.

4. Should investment in the rest of Africa be part of a portfolio or are the risks too great for investors who are already part of an emerging economy?

7. How do you expect the markets to perform over the course of the next year?

People often make the mistake of seeing South Africa as a pure emerging market economy, and in many ways we are. But if we look at our growth rate, we are more comparable with developed markets. I believe that Africa as an investment destination is appropriate for clients who want to invest aggressively into high growth economies. 5. What is the biggest challenge investors are facing right now?

I would say the search for yield. It’s definitely the biggest challenge for retirees. For investors in the capital build-up phase, I think that the noise in the media around the world economy could present a challenge if it discourages them from investing in equity markets.

I expect international markets – especially Europe and the US – to outperform the local market. I am, however, very concerned about the South African market. The consumer is under enormous stress. Also, our market has run very hard and is currently expensive when compared with Europe and the US. Low interest rates will support all risk assets over the next year or two. 8. If you had R100 000 to invest, where would you invest it? I’d invest the funds in European equities, more specifically high dividend-producing European companies.

6. Do you think all of the regulation in the financial services industry is justified? Yes, we’re dealing with investors’ hardearned savings and, in many cases, their retirement money. As such, we need a

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Shaun Harris

BLACK ECONOMIC EMPOWERMENT Shaun Harris

Beyond ticking boxes

Black Economic Empowerment (BEE) is a way of life for South African companies. In its truest form itâ&#x20AC;&#x2122;s a noteworthy endeavour affecting not only the company concerned, but a host of stakeholders, from the BEE partners to the broader beneficiaries. If itâ&#x20AC;&#x2122;s a good BEE deal, beneficiaries will include communities and the recipients of various trusts, often aimed at education and training.

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But little in life arrives in its truest form. As with any business deal, there are good BEE deals and bad deals. There has been much criticism of BEE, and in recent years attempts to improve the structure of deals and make sure it reaches as many recipients as possible, brought about the so-called broad-based BEE. We won’t try and get into the subtleties around the many abbreviations attached to BEE. But the broad-based part is important. The most common criticism of BEE deals is that instead of spreading economic wealth to a large audience it has only enriched a select few. This was certainly true of many of the early BEE deals. To a large extent, though, BEE has got beyond it and is benefiting more stakeholders today. But criticism remains. According to secretary general Gwede Mantashe, even the ANC feels that BEE legislation has failed to transform the economy because it was too narrowly focused on BEE shareholdings and dividends. There are problems with the recently revised BEE Codes but we’ll get to that later. It’s not hard to find working examples that contradict what Mantashe says. For instance, Pretoria Portland Cement (PPC) is busy implementing the second phase of its BEE transaction, a large deal valued at R1.1 billion. A big batch is going to PPC’s permanent staff, about 2 400 people, but it goes further down to around R50 million going to women’s groups in the Bafati Investment Trust. That’s spreading the benefits of BEE pretty wide. Companies are a bit constricted by legislation when structuring BEE deals. It’s good and bad: good because it nudges those companies that might otherwise ignore BEE to adopt the minimum

requirements, and bad because companies that fully support BEE are not entirely free to structure the deals the way they want to. The dominant BEE Act is criticised for, among other things, lacking clear definition. The revised BEE Codes, gazetted for public comment by the Minister of Trade and Industry, Rob Davies, are perceived to have problems, perhaps unintentional, that could affect a number of companies. The biggest concern is that the revised codes will effectively act retrospectively. For some companies this means that they may have to restructure and even refinance existing BEE deals. That’s a step backwards and could affect some companies severely. What it shows is that legislation around BEE remains a problem area, yet one that South African companies have to comply with. However, sound BEE deals can still be structured and perhaps the clearest way to illustrate this is by example. The Shanduka Group, with Cyril Ramaphosa as its chairman, has picked up criticism, but it has evolved to become a true broad beneficiary of many recipients. Ramaphosa was one of those select few to benefit from the early BEE deals but he has used wealth generated in those early deals to ultimately spread BEE benefits wider. Shanduka’s model works on various levels. “The performance of BEE investors has been mixed. Yet, in many the aim is to make BEE participants move from being investors to operators,” says CEO Phuti Mahanyele. The first sign of this wellstructured BEE deal is that Shanduka spreads its investments wide.

It has interests in resources, industrial, financial services, property and food and beverages companies. The second indication is the way it uses these investments. In some cases it retains minority holdings, typically in large companies, if it feels these minority holdings can be used for further BEE wealth creation. It often takes significantly higher equity stakes where it can have representation on boards and influence company decisions around BEE. At other times it goes for control, the above-mentioned moving from being investors to operators, where it appoints the CEO and can dictate the companies’ BEE policy. On another level, Shanduka supports emerging and small business, through its Shanduka Black Umbrellas. This assists small business to become BEE compliant and develop further. And it focuses on sustaining BEE developments through education and training. “The depth of skills is absent. We need to develop skills and Shanduka places an emphasis on this,” Mahanyele says. Other BEE deals aren’t as well structured. It may be for reasons beyond the control of the company, or that the deal wasn’t that well structured in the first place. But if conditions change within the industry that company operates, it has to make changes to protect the company and shareholders. Construction and engineering company Group Five is in the process of restructuring its BEE shareholding to adapt to changing conditions. The main reason, but Group Five says not the only reason for the restructuring, is the failure of one of its BEE partners, iLima.

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Group Five will buy back the 11.2 per cent stake held in the company by its other BEE partner, Mvelaphanda, and direct this towards trusts. One is for its black staff, who can apply for benefits to reach professional status. The second trust will aim at providing bursaries and scholarships to study in line with the requirements of the group. This will protect shareholders and add a new dimension to BEE at Group Five. But how do potential investors, and their financial advisers, judge the value or risk of BEE structures before investing in a company? What’s important is to try and judge what the BEE structure is achieving. Is it a case of only empowering and spreading wealth, among a few BEE partners (probably individuals), or do the benefits of the structure go further and spread wealth and benefits more broadly. An investor should have second thoughts about a BEE structure where the participants aren’t happy or don’t seem to be benefiting. The benefits can be measured in a number of ways. Is the BEE scheme above water (is it worth more than the costs of the initial investment); do BEE participants have an active say in policy at the company; and most importantly, are there plans, like educational trusts, in place for the benefits of the BEE structure to be sustained and develop further. BEE has gone far beyond ticking boxes, at least for most companies. But investors and advisers must make sure of this. A good BEE structure, or upcoming BEE deal, will be good for them as well.

ASSET MANAGEMENT

SA DOWNGRADE TO potentially AFFECT INVESTOR CONFIDENCE Moody’s Investors Service downgraded South Africa’s government bond rating in September 2012 by one notch to Baa1 from A3‚ bringing it into line with the Fitch‚ as well as Standard & Poor’s ratings. Moody’s kept the rating outlook negative sparking concerns on the effect that this could have on investor confidence.

oody’s said the key drivers for the downgrade included the rating agency’s reassessment of a decline in the government’s institutional strength amid increased socio-economic stresses, and the resulting diminished capacity to manage the growth and competitiveness risks. Malcolm Charles, portfolio manager, Investec Asset Management says this downgrade was probably the most expected rating action South Africa has had. “Moody’s put South Africa on negative watch last November and they have made it well known that it was a serious probability that the downgrade would follow. It therefore came as little surprise and the expected impact has already been largely factored in by the market,” he says. However, Melanie Brown, CEO at Global Credit Ratings (GCR) says the downgrade is premature. Brown says a key input into any decision about South Africa’s credit rating must be the conference in December. “While we disagree with the move by Moody’s, it does not come as a complete surprise. Of the three international rating agencies, Moody’s rating was a notch higher.” Brown notes that an economy such as South Africa, which remains reliant on transformation and development, needs to provide investors with regulatory certainty and administrative efficiency. “This in turn requires laws and policies that are clear, definite and consistently applied by the current administration and its successor, with any policy changes a result of the shifting economic landscape, so as to maintain stable debt ratios.’’ She adds that continuing strikes and wage demands are having a hugely detrimental effect on South Africa’s image around the world. “Perhaps

more importantly, they come at an already difficult time when international ratings agencies had already expressed their concern about populist pressure and uncertainty around policy direction, which could undermine commitment to low budget deficits and debt targets.’’ “While some market movement and Rand weakness is expected, I don’t believe it will be significant because the move aligns Moody’s rating with the other two, so it’s largely driven by sentiment at this stage. However, if the rating moves from BBB+ the impact will be far more significant,” she adds.

SA retirement funds set for lower returns Retirement funds in South Africa face a difficult time over the next few years with trendless markets, lower growth, high volatility and increased probability of losses all set to impact on their performance. As a result, the net effect will be that members will have less to retire on than originally anticipated.

“If the rating moves from BBB+ the impact will be far more significant.” Windall Bekker, partner at Rezco Investment Group, says the low return and trendless environment in investment markets is expected to continue for the next three to five years. “This assumption is based on our expectation of Europe being in a recessionary environment, growth estimates from China being lowered and South Africa’s commoditydriven economy being negatively affected.

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“We also believe that the South African country risk premium for investors is increasing on the back of, among others, increased corruption, labour market conflict, increased government intervention in the economy and infrastructure decay. This makes South Africa less desirable for overseas investors and has a negative impact on the economy.” Bekker says that in order to mitigate the lower returns, members need to understand the current status of their retirement fund and ensure that they comprehend what their fund’s investment strategy is and whether that strategy is properly aligned to their investment goals. “Members have a few options when considering their investment strategies. For one, they can choose a fund with higher returns and higher risk. This is generally more appropriate for members with long-term investment horizons who can take on more market risk and potential for growth with the corresponding higher risk.”

Economic Commentary

The South African economy has yet to fully recover from the 2008/9 crisis Thabi Leoka | Head of Macroeconomic Research at Standard Bank

ts strong links with Europe, China and the US means that SA could sink, alongside these economies. Household consumption, the backbone of SA’s economy, is slowing. The implications for slowing household consumption expenditure are significant, given that household consumption accounts for almost 60 per cent of GDP. Uncertainties surrounding the domestic economy, employment, financial markets and the uninspiring housing market are partly to blame for the low consumer confidence. Significantly, consumers are faced with headwinds and consumer credit health is deteriorating. Worryingly, consumers are growing more and more dependent on credit to cover their monthly expenses and with salaries increasing at a slower rate than in previous years, consumers are feeling the pinch. This is evident in the increase in household debtto-disposable income ratio, which increased to 76.3 per cent in Q2:12 from 75.6 per cent in Q1:12. Despite above-inflation salary increases still enjoyed by consumers and interest rates at the lowest levels in decades, consumers are playing catch-up. The primary reason for this is that prices of basic goods are skyrocketing, making it difficult for consumers to adjust their standards of living. For the poorest 30 per cent of South Africans, the cost of the food basket as a share of average monthly income increased to 38 per cent (from 35 per cent in July 2011). For the wealthiest 30 per cent of the population, the cost of the food basket increased to three per cent (from 2.8 per cent in July 2011). According to the National Agricultural Marketing Council, at the retail level, the price of domestic white maize increased by 37.5 per cent in July 2012, compared with July 2011. A five-kilogram bag of super

maize meal increased by 46 per cent in July 2012 compared to a year ago. In the same period, foods such as peanut butter, cabbage, tuna and milk increased by 10 per cent or more. Furthermore, increases in electricity and water continue to cut into consumers’ discretionary spending and the escalating indirect taxes, which include fuel taxes, adds to the burden. In July this year, the National Energy Regulator of SA (Nersa) approved an average tariff increase for City Power of almost 12 per cent. It is not surprising then that more and more consumers are turning to unsecured lending to supplement their salaries. Growth in credit card utilisation – an indication that households are supplementing their budgets using revolving credit and therefore engaging in relatively distressed borrowing – increased by more than eight per cent year on year in August. The good news is that those who are keeping up with their monthly instalments have increased from a year ago and fewer consumers have had judgements or administration orders brought against them. Arrears are rising, but still some way off the distressed levels seen in 2009.

those whose income is greater than R15 000, by 21.8 per cent. In general, credit markets may not operate perfectly because of limitations on how much information a lender has about the quality of the borrower, or limitations on how well contracts between lenders and borrowers can be enforced. A consequence of such credit market imperfections might be that borrowing can take place only against collateral, such as land, buildings or even machines. If that is the case, then changes in the value of collateral will affect the ability of firms and household to borrow. This could have important consequences for aggregate economic activity.

Unsecured lending continues to increase. While loan repayment may be steady, the high interest rate charged for unsecured loans, together with slow income growth, could darken the outlook for households’ credit outlook. Should unsecured lending continue to grow at current rates (12-month average of 21.8 per cent), the risk is that a mismatch could develop between consumer loans and underlying consumer credit health. Unsecured lending is only 21 per cent of total private sector lending; however, from a year ago, it has increased by an astonishing 36.1 per cent. Even more worrying, individuals with a gross monthly income of R10 000 or less continued to take on more unsecured credit. This group increased its appetite by 62.4 per cent in Q2:12, and

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Regulatory Developments

NEW HEDGE

FUND POLICY FRAMEWORK WELCOMED, BUT SOME ISSUES TO CONSIDER

Johan Loubser | Director at ENS (Edward Nathan Sonnenbergs)

ational Treasury and the Financial Services Board released a policy document in September that will have a marked impact on hedge funds and collective investment schemes. While the policy document could have some very positive effects on the hedge fund industry, there are a number of matters to be addressed and stakeholders are urged to provide their comments to the National Treasury and the Financial Services Board.

consisting only of qualified investors who invest pursuant to private arrangements. Retail hedge funds, that will be permitted to market themselves more widely, will be subject to a greater degree of regulation and will, among other things, be required to meet investor redemption requests within 14 days, publish a key investor information document (KIID) containing short-form prescribed information aimed at assisting investors to understand the investment product, and will be subject to prudential investment requirements,” says Loubser.

This is according to Johan Loubser, director at ENS (Edward Nathan Sonnenbergs), referring to the policy document, which was released on 13 September 2012, ‘The Regulation of Hedge Funds in South Africa’.

The policy document further proposes that each hedge fund will require a collective investment scheme manager approved under CISCA. Service providers to hedge funds such as prime brokers and fund administrators will be subject to specific regulatory requirements. Loubser says while there are many details still to be worked out, the publication of the policy document and the changes set out therein should have some encouraging effects on the industry.

Loubser says the policy document sets out a framework for the direct regulation of hedge funds in South Africa. “At the moment, hedge funds are not directly regulated in South Africa, but are indirectly regulated through the regulatory oversight which the Financial Services Board exercises over hedge fund managers, prime brokers and fund administrators. This policy document proposes that hedge funds be directly regulated as a new category of collective investment scheme under the Collective Investment Schemes Control Act (CISCA).” The policy document proposes that hedge funds be categorised as either restricted hedge funds or retail hedge funds. “Restricted hedge funds will be subject to lighter regulatory requirements and must have a restricted investor base

“We believe the regulation will promote investor choice. Having hedge funds regulated through CISCA will permit investors who have to date been wary of investing in unregulated investment structures, or who may not have known of suitable hedge funds because of restrictions on marketing, to gain exposure to alternative investment strategies through a regulated investment product which can be marketed under

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an established regulatory framework,” he says. According to Loubser, the regulation will likely encourage further product innovation in the collective investment scheme industry through the creation of more portfolios following different investment strategies.

“This policy document proposes that hedge funds be directly regulated as a new category of collective investment scheme under the Collective Investment Schemes Control Act (CISCA).”

Retirement Investing

Advertorial

THE BENEFITS OF UMBRELLA FUNDS Hugh Hacking | Head of Retirement Fund Solutions at Old Mutual Corporate

Umbrella funds pave the way to peace of mind and great employee benefits for employers of large organisations.

tricter regulation, increased governance requirements and a greater accountability for investment performance over the past few years has resulted in a noticeable shift by employers from managing their own retirement fund towards joining an umbrella fund. This is essentially a retirement fund to which multiple employers can belong. Umbrella funds are particularly attractive to employers as they allow employers to transfer away the responsibilities of the retirement fund management and trusteeship while still retaining control of important decisions around the benefits, investments and communication to their staff. Good umbrella funds embed the expertise of the providers, and can generally offer better value, lower cost, more flexibility and better governance than their stand-alone counterparts. As more and more employers make the move to umbrella funds, the focus should be on ensuring a smooth and hassle-free transition. Here are a few simple things to consider: 1. Don’t change too many things at the same time. Change needs to be managed. Employers should follow a structured and step-by-step process to make the shift and aim for continuity. Avoid extensive changes to the benefit structure at the same time that you make the move to an umbrella fund. Choose a financial services partner who has extensive experience and can help

you make this transition seamless by consulting on all steps of the process. 2. Make sure your existing administrator is in order. Ensure that the current fund is shut down timeously to avoid unnecessary costs and administration into the future. 3. Make sure that you take your staff along on the journey. Communication with staff is crucial during the transition phase. Keep all employees in the loop of any changes and ensure that they are well aware of the benefits that the change will bring them.

“Good umbrella funds embed the expertise of the providers, and can generally offer better value, lower cost, more flexibility and better governance than their standalone counterparts.” To help you add value as an employer and choose a solution that works for you, the Old Mutual SuperFund has a range of retirement and business risk solutions that will help your employees save for retirement and protect them financially in the case of death, illness or disability. From a basic no-frills package to a high-end investment strategy, our three plans are designed to suit your employees’ differing investment goals. Best of all, they suit any type of business, whether you’re a small start-up or a multinational corporation.

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Wealth Management

Human issues

take centre stage when managing family assets

Eddy Oblowitz | CEO of Stonehage South Africa

The rich are becoming more conscious of what they pass on to their successors, not only in terms of total assets, but values and structures, too. In this light, succession planning is becoming an increasingly professional service offering of a multi-family office.

hy choose a multi-family office over a traditional wealth manager? Call it a Freudian slip but the respective names give it all away. A family office looks after a family’s affairs holistically. A wealth manager, for all their explanations, will be found to have their focus firmly fixated solely on the money. Eddy Oblowitz, CEO of Stonehage South Africa, explains that once the affairs of a high net worth family have been appropriately structured, wealth management will be found to be little more than a byproduct. “As a multi-family office, Stonehage is responsible for the management of wealth across generations; these last two words colour our every activity.” Of greater importance in the sustainable management of a family’s affairs are risk management, governance and succession planning, he explains. “The starting point in a process would typically be the formation of a family council to formalise long-term strategy within a comprehensive policy document that incorporates risk tolerance, governance structures and procedures, as well as succession planning,” says Oblowitz. Central to all of this is skills transfer, with family members identified to run aspects of the estate with a process of accelerated advancement for the identified successor, who might shadow or deputise for the current patriarch/matriarch. Various core committees would be appointed to report to the family council on their activities, one being devoted to succession planning. A calendar of regular formal meetings reviews business, investments

and lifestyle assets, as well monitoring governance and policy issues. “By adopting the same formal approach to governance as companies do, wealthy families benefit from the virtues of transparency, accountability and fairness and entrenchment of family values,” adds Oblowitz. “This is what a multi-family office brings to a client. It is capable of creating a family bond which in many respects preserves the integrity and culture of a family which might otherwise find itself dispersed all over the world, they losing its identity (as well as eroding its assets).” Stonehage brings a business-like focus to family activities, which often include philanthropy, and manages diverse family members who want to get involved in how their money is deployed. “To each activity we bring our skills built up from dealing with families since 1976. These skills include due diligence and governance to ensure family strategies and objectives are achieved. We provide a professional framework for investment: committees are run purely along business lines with regular board meetings, active governance, full transparency and a keen eye on the costs of administration,” he adds. “Philanthropy is the one activity that most encourages ‘family building’ and for this reason – as well as a natural inclination by wealthy clients for it – we encourage this activity on a formalised structured basis. It has multiple benefits. In reality it has little to do with concepts of charity, conscience or religious beliefs, but is a desire to facilitate positive social change. It is really about changing the social mind-set of beneficiaries away from dependence.”

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Oblowitz explains that wealthy families, especially into the second or third generation, typically become geographically dispersed, multi-generational and highly varied in interests and occupations. Philanthropy is sometimes the only vehicle that pulls them together and gives each the opportunity to contribute and develop new skills, whilst remaining aligned to the family values. We work with individual family members as to what they personally care about. We set up committees governing the foundation which themselves become microcosms of our broader client governance processes. Depending upon the family set up, they can be highly democratic. Not everyone in a family has business acumen, but they are each given the opportunity to develop skills and participate. Many find the skills transfer highly empowering. In addition, the activity directs families to governance protocols it may otherwise never have considered, such as debating family values, sharing values and establishing interdependence. In this manner, philanthropy is a positive means of preserving wealth: families which might drift apart and blow their individual inheritances learn to work together as a family. “They begin to see that a family’s main asset is its family members, and therefore begin to invest in those members. It creates a focus on those not participating in business, and in the next generation,” says Oblowitz. He concludes that given the practical advantages of a family office, even people who do not consider themselves in the ultrawealthy category should positively consider what it can do for the human capital within their own families.

Practice Management

ENHANCING RETIREMENT BENEFITS Paul Kruger | Head: Communication, Moonstone

September 2012 saw the release of the first of four documents by the National Treasury, inviting discussion on intended retirement provision reforms. This comes in the wake of the overview paper published by the Minister of Finance entitled Strengthening Retirement Savings on 14 May 2012.

n reviewing these documents, it is clear that the storm caused by Rob Rusconi’s paper on the cost of retirement revision to the Actuarial Society has by no means subsided. One of the first actions flowing from this was an agreement between the industry and the then Minister of Finance, Trevor Manuel, to compensate clients who were adversely affected by severe penalties when they effected changes to their retirement and savings products. When the ill-named Statement of Intent was signed, late in 2005, it contained all the nice phrases required to create a sense that justice had been done and that this would continue into the future. In what the media termed an admission-of-guilt fine, the industry agreed to pay a sum of a R3 billion to make up for excessive penalties on both RA members and endowment policyholders. The media release, announcing details of the agreement, quoted Minister Trevor Manuel as saying: “We operate from the premise that the retirement fund industry is regulated, supervised and licensed. The act of licensing a fund or insurer is a permit to render a service in the letter and spirit of the relevant legislation, in exchange for which fees can be earned.” It appears that not every product house remembered the bit about the “letter and spirit” contained in the agreement. Others appear to treat it with less circumspection than it deserves.

equally between the three parties – the investor, the product supplier and the intermediary. In the case of the adviser, there is a clawback of commission, despite the fact that the cause of the change had nothing to do with the quality or accuracy of the advice. Causal factors can include premium reduction, premium cessation or transferring accumulated funds to another provider, among others. In an address to the Cape Town branch of the Pension Lawyers Association in September, the deputy pension funds adjudicator, Muvhango Lukhaimane, expressed concern about the interpretation of some life offices. According to Personal Finance, they claim that “…they are entitled to charge the maximum penalty every time there is what is termed a ‘causal event’. They base this on the presumption that an annual premium increase leads to the formation of a new contract.

In the current economic climate, all three the causal factors mentioned above can easily become a reality. One would assume that, in the letter and spirit of the agreement, the agreed maximums would be honoured. Apparently, it is not. The Office of the Pension Fund Adjudicator (PFA) intends to refer such cases to the FSB for investigation. Unfortunately, this applies only when the PFA received complaints. How many others will never come to light, simply because of consumer ignorance, or apathy? If a fund member considers moving to another fund, hoping to get better returns, the penalties are such that careful calculations are required in order to make an informed decision. If the member stays, who knows whether he will be better off? From a consumer perspective, it appears to be a case of: heads you win, tails I lose.

“One would assume that, in the letter and spirit of the agreement, the agreed maximums would be honoured. Apparently, it is not.”

A crucial aspect of the agreement concerned the way in which penalties would be handled in future. The term “causal event” would be an important determinant in the application of the maximum amounts that life offices would be allowed to deduct from clients funds. Very specific steps were agreed upon to ensure that the cost of unforeseen changes would be borne more

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CHRIS HART

LABOUR, GOVERNMENT

AND INVESTMENT Chris Hart | Chief Strategist at Investment Solutions

he Egyptian stock market lost 55 per cent of its value from its April 2010 peak to the 2011 December low in US Dollar terms as the Arab spring took its toll on the country’s economy. The economic growth rate fell to 1.8 per cent in 2011 compared with over five per cent the previous year and unemployment climbed from nine per cent to over 12 per cent over the same period. A weak exchange rate also translated into a high inflation rate, which stood at 10.2 per cent in 2011. In many respects, South Africa could face a similar fate. Investors have enjoyed the JSE, posting fresh all-time highs in 2012 and inflation is at a cyclical low. The SA Reserve Bank has been able to keep interest rates down at multi-decade lows. Until spring 2012, SA provided key competitive offerings, including yield, growth and solvency, to the investor. However, the investment climate suddenly soured after labour unrest exploded in the wake of the Marikana tragedy and a distinct unease has followed. The labour unrest has also spread to other sectors of the economy. Labour unrest is not new to SA but it was generally on the decline to 2008 and, in many ways, the country was gaining a reputation as a relatively stable and reliable labour jurisdiction. This has steadily reversed over the past few years and there is now a strike season that begins with the public servants bargaining council. The latest labour unrest is more ominous. It has taken place outside the system and the initial round managed to extract better concessions than those achieved within it. The most immediate consequence is that formal wage agreements are not holding and there are no guarantees that those reached with wildcat strikers will hold either.

Business finds itself isolated and government, which appears powerless to act, has been encouraging it to negotiate with the wildcat strikers. Cosatu-affiliated unions are now also taking a more militant line to avoid losing traction with their members. Ahead of the elective congress of the ruling party in Mangaung, the cool heads have gone to ground. The big lesson of Polokwane is that your political career is over if you cross the unions. It is therefore quite possible that it will be more than two years before the situation stabilises. The economy can be expected to face extreme challenges. Already job creation has stalled since 2008 and social tensions have risen as a consequence. The wage increases have been unrelated to productivity, which will challenge SA industrial competitiveness. At the same time, the global economy is slowing, with recession in Europe and the US probable. A recession is also possible in Japan, as is a hard landing in China. This is already filtering back into the SA economy, with the leading indicator flagging the risk of a recession. Domestic labour unrest implies the possibility of recession is rising. A recession in SA could be prolonged. Already the current account deficit has widened and

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the ratings agencies have begun downgrading the country’s credit rating. Government welfare spending is rising faster than can be sustained and a recession will merely hasten the advent of further rating downgrades. Lack of competitiveness will also result in more job losses. Investor flight will lead to a weaker currency, which means higher inflation, reinforcing a vicious cycle.

“Lack of competitiveness will also result in more job losses. Investor flight will lead to a weaker currency, which means higher inflation, reinforcing a vicious cycle.” Essentially, the investment climate has soured. The degree of uncertainty and risk is rising, and while SA’s stock market has been setting new highs, this may reverse on investor flight.

SUNEL VELDTMAN

Learn how to live - from people facing death Sunél Veldtman, CFP CFA is the author of Manage Your Money, Live Your Dream, a guide to financial wellbeing for women. She is also a presenter and facilitator. Sunel is currently the CEO of Foundation Family Wealth and has more than 20 years of experience in financial services, most of which as a private client adviser.

friend passed away recently. In a moment, she was gone, unexpectedly. We were in shock and left to think about the huge gap that she had left in our lives.

I wondered what she would say if she could tell us now what really mattered. Did she have unresolved issues? Did she have a bucket list? If so, how many dreams had she ticked off? What would she say about how she was remembered? What legacy will she leave?

1. “ I wish I’d had the courage to live a life true to myself, not the life others expected of me.” Ware identified this as the number one regret of the dying. Many people die without even having attempted to reach some of their dreams.

In the financial industry, we often portray the value of our products and services through pictures of couples walking hand in hand on the beach, or through grandparents with their grandchildren. The underlying message is: “Our products and services will bring you happiness.“

2. “I wish I didn’t work so hard.” This was a regret shared mainly by men. They missed out on their children’s youth and the companionship of their spouses. By simplifying your lifestyle and making conscious choices along the way, it is possible to not need the income that you think you do. And by creating more space in your life, you become happier and more open to new opportunities, ones more suited to your new lifestyle.

Certainly people who are more financially prepared have a better chance of achieving some of their life goals. Research reveals that there is a strong connection between wealth and happiness but only until our basic needs are met. Once these basic needs are met, the link is vague.

3. “I wish I had the courage to express my feelings.” Many people suppressed their feelings in order to keep the peace with others. Many developed illnesses relating to bitterness and resentment. Authentic relationships include the honest sharing of feelings.

Maslow’s hierarchy of needs points to more advanced needs like achievement and acknowledgement, followed by selfactualisation. We have made some progress in the industry towards speaking to clients about these issues. We advise them to have life goals and to pursue their bucket lists. But do we know whether the achievement of these aspirations will bring happiness and fulfillment at the end of their lives?

4. “I wish I had stayed in touch with my friends.” People faced with death realise the value of true and longlasting friendship. In the last few weeks, life boils down to love and friendship.

Bronnie Ware wrote a book, The Top Five Regrets of the Dying, after years working in palliative care. She assisted patients who had gone home to die and identified five common wishes that emerged when patients were questioned about their regrets or asked if they would do anything differently.

5. “I wish that I had let myself be happier.” Happiness is a choice and many don’t realise this until they are faced with death. They realise that in the end what others think is not so important. The story goes that when he was close to his own death, Maslow came to the realisation that something was missing from his hierarchy. He told his daughter that self-transcendence or being involved with something bigger than you was what mattered in the end. Awareness of others may be more important when it comes to achieving your own happiness. In light of this, big questions need to be answered by our industry. For example, is it morally defensible to advertise personal loans with pictures of happy families watching TV on their beautiful lounge suites, when the consequence is an indebted family that has to work overtime to repay the loan? Should we help our clients maintain a lifestyle that will most likely leave them with grave regret? Should we sign clients up for products that will lock them into their current jobs for years? We can learn from people facing death. Even achieving all the items on your bucket list may not bring happiness if it doesn’t involve relationships and authentic living. The pursuit of a meaningful, authentic life should be our top priority. We may even find happiness.

“People faced with death realise the value of true and long-lasting friendship. In the last few weeks, life boils down to love and friendship.”

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ALTERNATIVE INVESTMENTS

Food and agribusiness sector is key to africa’s economic development Herman Marais | Managing Partner at Agri-Vie

he potential of agriculture and its twin sectors of food and agribusiness in Africa are immense and if effectively harnessed will be key drivers of Africa’s economic development and global competitiveness in the forseeable future. This is according to Ernest Tettey, chief portfolio office at the African Development Bank (AFD), who says that within the subSaharan African (SSA) economy, agribusiness forms a significant and growing sector. “For several SSA countries, the share of agribusiness services and manufacturing is expected to account for at least a third of GDP growth rate.” The AFD has a mandate to contribute to the sustainable economic development and social progress of its regional members by mobilising and allocating resources for investment in its regional member countries. According to the University of Pretoria’s agricultural economics and rural development department head, Johann Kristen, South Africa spent R140 billion on agriculture and ground development between 2000 and 2010. He highlights that during this period there were inconsistencies in the principles and policies for agricultural and rural development in South Africa, as the spend often did not meet its intended objectives. Herman Marais, managing partner at Agri-Vie, the sub-Saharan private equity fund investing in food and agribusiness, agrees, stating that investing in emerging farmers without them having ready access to know-how and markets can be counterproductive. “Africa has more than 60 per cent of unutilised arable land globally. In Agri-Vie’s investment model, investing in vertically integrated food and agribusinesses

that offers opportunities to contract farmers and outgrowers goes hand in hand with technical assistance that empowers emerging farmers with know-how on good agronomic and business practices,” says Marais. Tettey explains that the AFD is a key investor in Agri-Vie, which provides an appropriate vehicle to channel funds for meeting Africa’s growing investment needs in agriculture. “The AFD holds a seat in the private equity fund’s advisory board, which ensures that other important cross-cutting objectives are mainstreamed into investee companies. “The bank’s presence further seeks to align Agri-Vie’s fund structure and terms with international best corporate practice. It also aims to ensure compliance with international environmental and social standards.”

“For several SSA countries, the share of agribusiness services and manufacturing is expected to account for at least a third of GDP growth rate.” He says that several countries in the SSA region have comparative advantages in agriculture in terms of land availability, soil fertility, good climatic conditions and water availability. “However, with the current challenges in the global food environment, the

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need to invest in the region’s agriculture sector has become more imperative than ever. “These investments will contribute to job creation, enhancement of food security, income generation, poverty reduction and skills transfer,” says Tettey. Marais adds that Agri-Vie’s fund is on track to delivering its targeted, risk-adjusted returns. “Our multi-disciplinary investment team has established strategic relationships in its target sectors and countries, giving the fund access to an ongoing flow of often exclusive investment opportunities. “With sustainability as a key investment criterion and its cross continent investing, investors benefit from specialist sector knowledge and a risk-diversified portfolio of direct investments.” Agri-Vie was recently rated by the Global Impact Investment Rating System (GIIRS), outperforming both developed and emerging market indices. “Being only the first private equity fund of scale (US $110 million) focusing on the food and agri-sector, and launched from South Africa in 2008, Agri-Vie has completed more than half of its capital deployment and envisages completing its current investment programme over the next two years,” says Marais. “We are partnering with exciting food and agribusiness companies in South Africa, Ethiopia, Uganda, Rwanda, Tanzania, Kenya and Mozambique. Several of these growth companies are set to become household names in future years.” “Private equity investments of this nature also aim to support crucial infrastructure development. Under its mid-term strategy, the bank seeks to increase selectivity and develop a more robust private sector,” concludes Tettey.

BAROMETEr

HOT

Foreign direct investment improvement in SA Trade and Industry Minister Rob Davies revealed that foreign direct investment (FDI) has substantially improved since South Africa took a blow during the global economic crisis. The increase in FDI into South Africa has been partly attributed to increased trade with BRICs countries. South Africa less affected by European debt crisis Moody’s investor service stated that South Africa had become more resilient to economic incidents in Europe, specifically the European debt crisis. This has been attributed to the South African economy becoming more integrated in the world economy. R16 billion of foreign funds expected to flow into South Africa More than $2 billion (R16 billion) worth of offshore money is expected to flow into 12 South African government bonds, given the inclusion of these bonds in Citigroup’s World Government Bond Index (WGBI).

NOT

Zimbabwe’s debt hinders sustainability According to the International Monetary Fund, Zimbabwe remains in debt with almost R90.4 billion. The large debt hampers sustainability in the Southern African nation as it is larger than the country’s gross domestic product. Labour unrest affects SA’s mines Coal of Africa (CoAL) reported a record low share price as a result of weaker coal prices and ongoing strike action that spread from platinum and gold mines to the coal sector. South Africa downgraded by Moody’s South Africa’s government bonds have been downgraded by one notch to Baa1 from A3 by credit rating agency, Moody’s Investors Service. The rating outlook remains negative due to the uncertainty around the government’s ability to spur economic growth for the country. This marks the country’s first credit rating downgrade since 1994.

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SIDEWAYS

“More than $2 billion (R16 billion) worth of offshore money is expected to flow into 12 South African government bonds.”

US economy to grow, but less than expected The US economy grew by 1.3 per cent in the second quarter of 2012. However, the growth is far less than previously estimated, which was expected to reach 1.7 per cent.

morningstar

ACTIVE vs PASSIVE

FUND INVESTING David O’Leary, CFA, MBA Director of Fund Research, South Africa Morningstar South Africa

tatistics can be a dangerous thing. As my statistics professor once warned our class, “Give me a statement you’d like to prove and I can find you the statistics to back it up.” Or as Benjamin Disraeli more dramatically put it, “There are three kinds of lies: lies, damned lies, and statistics.” In the investment industry, there are numerous studies that attempt to decipher whether actively managed funds are better than passively managed funds. Many studies have pointed out that the majority of actively managed funds fail to beat their benchmarks. The implication is that investors should instead buy low-fee, index-tracking exchange-traded funds (ETF). For some reason this topic tends to polarise people; they either become staunch supporters of active management or fiercely loyal index-fund and ETF enthusiasts. It is considered sacrilegious in some circles to use both approaches in a portfolio. The obvious solution that gets lost in the debate is this: you should purchase the best available option in a given category whether it is managed actively or passively. But the statistics remain. And in my experience it indeed seems that the average unit trust has tended to do worse than the benchmark index. But while there are many uninspiring unit trusts out there, it would be a mistake to dismiss active management altogether.

best, regardless of whether those securities are included in the benchmark. At the other end of the spectrum, purely passive funds are run by professionals who use various techniques to efficiently copy an index as closely as possible. Actively managed funds charge more money because it takes more time and effort to construct an original portfolio than to copy an index. And correspondingly, passively managed funds should charge less.

“The trouble with the whole active-versus-passive debate is that most studies take a binary view of the fund universe where every fund is either purely passive or active.” On the surface it all seems pretty black and white; but there’s a lot of grey in between. There are many funds that largely mirror the benchmark index but will deviate to varying

The trouble with the whole active-versuspassive debate is that most studies take a binary view of the fund universe where every fund is either purely passive or active. In truth, the distinction between the two is often blurry at best. And it is this ambiguity that can render statistics on this subject misleading. We’d do much better to think of funds as being placed along a spectrum ranging from more active to less active. At one extreme, very actively managed funds are run by professionals who scour their eligible investment universe to find the securities that they believe will perform

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degrees. The less a fund deviates from the index, the less likely its return will deviate much either. Practically speaking that means the more passive a fund’s investment strategy, the lower its fees need to be if it hopes to beat the index. Sadly there are a lot of pretty passively managed funds that charge fees as if they were far more actively managed. It is this group of funds that skews the overall statistics and can lead people to conclude that actively managed funds don’t earn their fees. That tends to be true if your definition of an actively managed fund is any fund that isn’t perfectly passive. But from a practical standpoint that’s not a very useful definition since it isn’t all that difficult for investors to avoid the more passively managed funds that charge higher fees; what some people like to call closetindex funds. By narrowing your search to truly active funds – funds that hold very different investments than the index – your odds of selecting a winning fund will improve dramatically. Put another way, there’s no guarantee that actively managed funds will beat the benchmark. But buying more passively managed funds that don’t come with a corresponding price discount is certainly a recipe for chronic underperformance.

etfSA.co.za

september 2012 – etfSA.co.za MONTHLY SOUTH AFRICAN ETF, ETN AND INDEX TRACKING PRODUCT PERFORMANCE SURVEY Mike Brown | Managing Director | etfSA.co.za

he latest Performance Survey for the period ended 28 September 2012 shows that commodity-based funds, such as NewGold, plus ETNs investing in silver, platinum and soft commodities, have dominated the performance total returns over the periods surveyed. With commodities now coming into greater focus as an investment asset class, the easyto-understand, low-cost and transparent exposure to physical commodities provided by exchange traded products is pertinent. JSE-listed ETPs covering foreign commodity

markets also fall under the ‘inward investments’ regulations for exchange control purposes, enabling local retail investors to have unlimited exposure to such commodity ETPs without any impact on their foreign exchange allowances. The full performance survey of all 58 ETFs/ ETNs and 15 index tracking unit trusts is below. The full etfSA Performance Survey is below. The etfSA Performance Survey measures the total return (Net Asset Value (NAV to NAV)) changes including reinvestment of dividends)

for index tracking unit trusts and Exchange Traded Funds (ETFs) available to the retail public in South Africa. The performance tables (attached) measure the one month to five year total return for a lump sum investment compared with the benchmark index returns (including reinvestment of dividends). Note, as the FTSE/JSE calculates the index without taking into account any brokerage or other transaction costs, index tracking products will typically underperform the index because of their transaction and other running costs.

etfSA.co.za Monthly Performance Survey. Best Performing Index Tracker Funds – 31 August 2012 (Total Return %)* Fund Name

Type

5 Years (per annum)

Fund Name

Type

3 Years (per annum)

NewGold

ETF

22.79%

NewGold

ETF

25.47%

Prudential Property Enhanced

Unit Trust

14.99%

Prudential Property Enhanced Index Fund

Unit Trust

24.06%

Satrix INDI 25

ETF

14.17%

Satrix INDI 25

ETF

23.98%

Proptrax SAPY

ETF

13.41%

Proptrax SAPY

ETF

22.08%

2 Years (per annum)

1 Year

Standard Bank Silver-Linker

ETN

36.31%

NewFunds eRAFI FINI 15

ETF

38.78%

NewGold

ETF

27.55%

Prudential Property Enhanced Index Fund

Unit Trust

36.36%

Standard Bank Gold-Linker

ETF

25.37%

Proptrax TEN

ETF

33.50%

Satrix INDI 25

ETF

23.39%

Proptrax SAPY

ETF

33.42%

DBX Tracker MSCI USA

ETF

22.57%

Standard Bank Platinum-Linker

ETN

32.60%

6 Months

3 Months

Standard Bank Wheat-Linker

ETN

39.86%

NewWave Silver

ETN

31.08%

Standard Bank Corn-Linker

ETN

39.78%

Standard Bank Silver-Linker

ETN

28.94%

Proptrax SAPY

ETF

18.06%

Source: Profile Media FundsData (28/09/2012)

NewWave Platinum

ETN

16.86%

Standard Bank Platinum-Linker

ETN

16.30%

* Includes reinvestment of dividends.

Now, for the FIRST TIME ever, all South Africa’s ETFs & ETNs on a SINGLE WEBSITE. • Everything you need to know about each ETF/ETN • Absa (NewFunds), BIPS (RMB), DBX Trackers, Investec, Nedbank, Proptrax, Satrix, Standard Commodity Linkers • Transact online all ETFs/ETNs • Low costs • Easy access and switching • From R300 per month • From R1 000 for lump sums

Visit the website: www.etfsa.co.za or call 0861 383 721 (0861 ETFSA1)

INDUSTRY INDUSTRYNEWS NEWS

Appointments

Glacier by Sanlam has announced the appointment of Leigh Köhler as head of Glacier Research with effect from 1 October 2012. Köhler was previously head of the investment administration team, a division of client services, at Glacier. Köhler will head up the team of investment analysts, which supports the sales function within Glacier by providing independent opinions on collective investment funds and distributing various investment tools and publications to assist financial intermediaries in making better investment decisions. Köhler holds a BCom (PPE) from UCT and a BCom (Hons) in economics from Unisa.

Investment management company Remgro has appointed former Vodacom CEO Pieter Uys to its management team with effect from April next year. Uys would also serve on the company’s management board. Uys joined Vodacom over 20 years ago as part of the company’s initial engineering team subsequent to which he served as managing director and chief operation officer before being appointed as the cellular network company’s CEO in 2008.

Maitland celebrates R1 trillion of assets under administration milestone Maitland, the international wealth and fund services firm, has doubled its assets under administration (AUA) in the past two years to reach a record R1 trillion at the end of August. According to Andre le Roux, head of business development at Maitland, the international trend is to outsource fund administration as investors and regulators increasingly demand independent oversight of client investments. “The global financial crisis and recent scandals in the banking and financial services sectors are causing investors and regulators to apply increasing scrutiny around control processes in order to protect investors. They want to see the valuation and reporting of assets separated from the investment process in the interests of good governance.” Maitland’s fund services business conducts independent outsourced fund administration for 85 fund manager clients both locally and internationally. Client funds range from traditional to alternative, with trading strategies across multiple developed, emerging and frontier markets.

Vladimir Nedeljkovic has been appointed as executive director of collective investments company, Newfunds. Nedeljkovic was previously the principal head of ETFs and index products at Absa Capital. Before joining Absa Capital, Nedeljkovic was the head of financial research at Equinox Structured Products from 1998 to 2001. Nedeljkovic holds a bachelor of science (honours) degree in electrical engineering as well as a master of science degree in electrical engineering.

pSG Online recognised at SA’s Top Stockbroker Awards PSG Online was named the top overall ranking as well as the top active day trader at the SA’s Top Stockbroker Awards, organised by Investors Monthly and held at the JSE. In the overall ranking, PSG Online had the top score of 27 out of 30, up from 25 last year, with other ranked stockbrokers also showing improved scores from the previous year. Other winners included Sanlam iTrade which won the People’s Choice award. IG (formally IG Markets) clinched the prize for contract for difference

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(CFD) trading, while Standard Bank Online Share Trading was recognised as the top stockbroker for young savers. Mark Humphreys of Standard Bank OST said the firm had relatively low costs with a wide selection of product offerings including face-to-face assistance and online material, which appealed to young stock market investors. Branch manager at IG Markets, Shaun Murison, said the company was proud to accept the award for CFD trading. “It’s nice to be acknowledged for our innovation. We believe our competitive costs for clients are also an advantage because cost is the first barrier to profit.” Investec Wealth and Investment won the sophisticated executive award, and Sanlam Private Investments and BFJ Private Services receiving honourable mentions.

Prescient consolidates all unit trust funds under own brand Prescient Investment Management (PIM) has announced the consolidation of all its unit trust product offerings to the retail (individual) market under its own brand. This includes its flagship funds; Positive Return, Income Provider (Flexible Income) and Bond QuantPlus, previously available only via Nedgroup Investments (Pty) Limited. PIM is a leading quantitative investment management house which was launched in 1998. The business started as an institutional investment manager, managing assets for pension funds, medical aids, unions and corporations. Its initial entry into the retail market was small, generally via multi-managers and investors close to Prescient. Eldria Fraser, CEO of Prescient Investment Management says over time, a retail distribution relationship was forged with Nedgroup Investments, where they appointed Prescient as manager of the Nedgroup Investments Bond Fund, which followed Prescient’s Bond QuantPlus investment process. “The distribution relationship grew, resulting in an additional three mandates being awarded using Prescient’s proven intellectual processes. This relationship has been very good for both Nedgroup Investments and Prescient, with the four funds growing to over R11 billion in total assets.” The funds are the Nedgroup Investments Flexible Income, Positive Return, Optimal Income and Bond Funds. Prescient and Nedgroup Investments will ensure that these funds are appropriately managed until such time that the transition to the newly appointed managers is complete. This is expected to be on or before 30 November 2012.

Coronation receives Best Africa Fund Manager 2012 award Coronation Fund Managers has once again been named as Best Africa Fund Manager at the prestigious annual Africa Investor Index Series Awards, the only international, pan-African awards that recognise and reward Africa’s institutional investors. Peter Leger, portfolio manager at Coronation Africa, says having been recognised in three out of the four years since the funds launched is testament to the success of Coronation’s investment philosophy. “This approach is designed to consistently deliver industry-leading risk adjusted returns.”

“The distribution relationship grew, resulting in an additional three mandates being awarded using Prescient’s proven intellectual processes.”

Expanding on Coronation’s investment approach, Leger explains the single investment philosophy which is ingrained in the Coronation culture. “We are a long-term, valuation-driven investment house that aims to identify mispriced assets trading at discounts to their long-term fair value.”

low base, we continue to see enormous opportunities in these markets with many businesses trading well below their fair values.”

There are compelling reasons why Africa offers a unique long-term investment opportunity and as a result investing in the region has become a highly competitive space. “There are no short-cuts to delivering consistent capital growth from this region. Since the funds’ launch four years ago, we have spent a vast amount of time doing in-country research. Simply stated, we believe it is the only way to deliver superior stock-picking, particularly with a focus on minimising downside risks. The hard work is paying off, with total cumulative returns in excess of 70 per cent since inception,” says Leger. Commenting on the outlook for the African continent, Leger says: “Coming off a very

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PRODUCTS

Cadiz launches Cadiz Stable Fund Cadiz Asset Management has announced the launch of the Cadiz Stable Fund. The fund aims to provide investors with reasonable real returns (inflation plus three per cent) in the long term, while focusing on reducing the variability of returns year on year. As such, exposure to growth assets, defined as shares and property, will not exceed 40 per cent. The fund is therefore suitable for conservative investors and, in particular, those requiring an income after retirement. Paul Hutchinson, head of Cadiz Collective Investments, says the Cadiz Stable Fund adds a conservative alternative to our multi-asset class investment solutions and builds on our very successful institutional inflation plus three per cent investment mandate. “It also provides investors with a conservative step down from our award-winning Inflation Plus 5% unit trust.”

The fund will be broadly diversified across asset classes, including listed equity, listed property, bonds, inflation linked bonds, cash and other appropriate instruments, for example, derivatives. This exposure will be actively managed and will change over time to reflect our current assessment of interest rates and equity trends. Commenting on the outlook for the Cadiz Stable Fund, portfolio manager and chief investment officer, Francois van Wyk says with inflation having peaked and the monetary policy stance being accommodative, the fund is well placed to achieve its investment objectives over the next year. “Growth assets are likely to benefit from ongoing risk normalisation on the back of low real interest rates and global growth expectations stabilising. The fund is well balanced between defensive assets with growth certainty and capital protection characteristics on the one side, and undervalued growth assets with above average inflation beating prospects on the other.”

Absa Capital and Absa Islamic Banking launch Islamic Forward exchange contracts Nedgroup Absa Capital in partnership with Absa Islamic Banking, has launched Islamic forward exchange contracts. A need was identified for a Shari’ah-compliant forward exchange contract as the conventional contracts are impermissible for Muslims. The Islamic forward exchange contract is governed by Shari’ah law which, among other requirements, forbids the payment or earning of any interest. Islamic finance standards are set globally by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The contract takes into account and aligns with the AAOIFI guidelines. “The Islamic forward exchange contract is specifically aimed at importers and exporters. However, it will also appeal to the Muslim business community in South Africa, which would prefer to purchase a product that manages the associated risk of foreign currency exposure and conforms to Shari’ah law,” says Karl Sieber, head of trade products at Absa Capital. Clients use forward exchange contracts to manage the risk posed by exchange rate fluctuations when conducting transactions with international trade partners. An Islamic forward exchange contract enables a client to buy or sell currency at an agreed exchange rate, on a specified date or within a specified period. “This contract is another way of offering clients more flexibility, and reflects the innovative approach of our business,” adds Sieber.

Investments Cash Solutions launches the Corporate Money Market Fund Nedgroup Investments Cash Solutions has launched a new money market fund for the ultra-cautious money market investor: the Nedgroup Investments Corporate Money Market Fund. The fund is the lowest risk money market fund available in South Africa, and as would be expected with the lower risk investment guidelines, the yield is likely to track slightly lower than traditional money market funds. However, there are many potential investors who have requested such a fund, as while they like the money market fund proposition, they are uncomfortable with some of the potential underlying exposures. The Nedgroup Investments Corporate Money Market Fund is prohibited from investing in paper issued by non-banking corporates, parastatals or banks that do not have a rating of F1+ or better. This means that the fund

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cannot invest in Abil or Investec paper. The fund is, however, permitted to invest in paper issued by Absa, Nedbank, Firstrand, Standard Bank and local branches of offshore banks with an AA or better rating. Additionally, the fund is permitted to invest in paper issued by, or explicitly guaranteed by the South African Government. The fund may not use conduit structures and will, at all times, hold at least 10 per cent of its value in liquid assets. The Nedgroup Investments Corporate Money Market Fund offers all the benefits of money market funds namely: better yields than call; immediate access to funds – same day if notification is given before 12h00; spread of counterparties; the convenience of a call account; highly regulated; and an independent trustee – Standard Bank of South Africa. This fund is suitable for corporate and institutional investors who would like their funds to generate higher returns than call, but are uncomfortable with certain exposure that traditional money market funds have to corporate paper and second tier banks. It is also Regulation 28 of the South African Pension Funds Act and Regulations 29 and 30 of the Medical Schemes Act. The minimum investment is R10 million.

MEXICO, egypt, UNITED STATES, GREECE, SOUTH AFRICA, UNITED KINDOM, COLOMBIA

Slowing G-20 growth set to continue The Group of 20 (G-20) countries endured a slow economic growth rate of 0.6 per cent in the second quarter of this year, compared to 0.7 per cent in the first quarter. According to the Organisation for Economic Co-operation and Development (OECD), the slow and weak growth is set to continue in countries such as US, Germany, Japan, South Korea, Australia, Britain, Italy and India. However, South Africa, China, Brazil, Indonesia, Turkey should show slight growth. Mexican Government seeks to modernise labour laws The head of Mexico’s Institutional Revolutionary Party (PRI) delegation will pass a labour reform law aimed at modernising 1970s-era dysfunctional labour laws and make Mexico’s powerful, corrupt unions more accountable. Sergio Martin, chief economist of HSBC in Mexico, said even without the union reform, the bill would help create jobs and attract investment to Latin America’s second-biggest economy. President Felipe Calderón says the reform could add 400 000 jobs per year. Arab spring economies face difficulties in the wake of anti-US protests The spread of anti-American protests are threatening the economies of Islamic states. According to Alia Moubayed, senior economist for MENA at Barclays Capital, Egypt, Libya and Tunisia received foreign investment, international aid agreements and other economic incentives to stimulate central banks and ailing economies in the region. However, the attacks will lead to investor delay and a negative investor climate in these areas.

Moody threatens to downgrade US credit ratings The United States faces a possible downgrade of their Standard and Poor’s AAA credit rating. Under President Barack Obama’s administration, the national debt grew by 51 per cent from $10.6 trillion to $16 trillion. According to Moody’s Investors Service, the US rating will be cut unless budget negotiations next year lead to a reduction in the ratio of federal debt to gross domestic product. Greeks protest against spending cuts Greek citizens participated in a one-day strike in protest against planned spending cuts of 11.5 billion Euros as the government plans to slash pensions and raise the retirement age to 67. The Greek Government needs to implement budget cuts in order to receive another international bail out instalment in the near future without which the country could face bankruptcy. However, with record unemployment and a third of the Greek population pushed below the poverty line, there is strong resistance from the public to the proposed cuts. SA ranks first in the World Economic Forum’s (WEF) Global Competitiveness Report South Africa’s financial auditing and reporting standards achieved the number one global ranking for the third consecutive year in the World Economic Forum’s (WEF) Global Competitiveness Report. South Africa ranked number one out of 144 economies and follows the country’s impressive move up from second place in 2009 and fourth place in 2008. UK banks warned of possible downgrade Following reviews of 114 European financial institutions, Moody’s warned that UK banks

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could be subject to further downgrades as lenders continue to struggle with anaemic economic growth, higher regulatory costs and exposure to financially stressed Eurozone countries. Investors flock to buy Sberbank shares Europe’s third-biggest lender by equity value, Sberbank, recently drew robust demand from investors around the world with the sale of its $5 billion (7.6 per cent) stake. Investors were attracted by the Russian lender’s dominant position on the growing domestic market and potential to expand across emerging European economies. The banks in charge of the sale were quoting between 92 and 94 Roubles (roughly US$3.00) per share. Colombia passes tax reform bill aimed at creating one million jobs Colombia has passed a tax reform bill aimed at creating jobs, closing loopholes and simplifying the tax system. According to Finance Minister Mauricio Cardenas, the proposed reform of the long-criticised tax system will introduce a progressive tax rate, aimed at generating a record 103 trillion Pesos this year, up from 86.3 trillion last year. Cardenas noted, however, that the main goal of a long-awaited tax reform is not to further boost revenues but to generate jobs and to encourage companies to hire more workers. This will bring one million Colombians to formal employment within two years. SA in R200 billion deficit Underperformance in SA’s exports due to slowing global growth resulted in a decline in commodity prices. SA’s trade deficit widened more than expected to R200 billion (6.4 per cent) of gross domestic product (GDP) in the second quarter from R152.5 billion (4.9 per cent) deficit in the first quarter of 2012.

Industry Associations

FIA LAUNCHES NEW INITIATIVE TO COMBAT FRAUD Justus van Pletzen | Chief Executive Officer of the FIA

n an effort to combat fraudulent activities or practices that do not comply with the requirements of the Financial Advisory and Intermediary Services (FAIS) Act and negatively impact consumers, financial intermediaries and the broader industry as a whole, the Financial Intermediaries Association of Southern Africa (FIA) has launched a new initiative to enable any member of the public to report matters of concern in relation to any financial services product or services provider, financial adviser or institutions. According to Justus van Pletzen, chief executive officer of the FIA, the new FIA Watchdog facility aims to further enhance the current efforts of the FIA in assisting the regulators and the wider industry in vesting an ever-growing culture of professionalism in the financial services industry. “The establishment of the FIA Watchdog facility

NEW FUND CLASSIFICATION STRUCTURE JANUARY 2013

serves as confirmation that the FIA and its members are eager to enforce and ensure compliant rendering of financial advice and intermediary services to consumers.” “Any matters reported to the FIA Watchdog will be immediately investigated, following which either a solution will be proposed or the matter will be referred to the appropriate FIA executive committee, regulatory body or industry association for further investigation and action. The FIA will then publish the outcome on its website which will serve as an information centre to FIA members who may encounter similar or related matters,” says Van Pletzen. He adds the FIA will take necessary and appropriate action on any industry-related irregularity and non-compliant activity of any provider, product or services supplier or intermediary. “The facility is therefore not

performances will be much easier from January next year when the new Fund Classification Standard for South African Collective Investment Portfolios comes into effect. The Association for Savings and Investment South Africa (ASISA) unveiled the new fund classification structure after which it was approved by the ASISA board early in September.

Leon Campher | CEO of ASISA Selecting collective investment schemes such as unit trusts and comparing their

Leon Campher, CEO of ASISA, says it took ASISA three long years to revise the old fund classification standard inherited from the Association of Collective Investments (ACI) in 2008. He says the new structure applies the where-and-what principle to all funds and has done away with classifying funds according to investment styles such as value and growth. This means that as from next year, all funds will be classified according to the fund’s geographic exposure and its underlying assets (equities, bonds, cash and property).

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aimed at resolving issues of a personal nature. The test for a complaint will be whether, in an objective light, the industry at large or clients may be prejudiced by the actions or failure to act, of individuals or institutions.” FIA members are encouraged to refer any matters to the FIA directly for action instead of approaching the Financial Services Board (FSB) or industry bodies individually, advises Van Pletzen. “Any report made to the FIA Watchdog will be confidential and the anonymity of the complainant will be preserved, if so requested. However, it is important to bear in mind that should further investigation be required, the regulator or industry body may need the particulars of the complainant.” For anyone wanting to report a complaint, a form is available on the website under the tab ‘Watchdog’.

What to expect come January 2013 As from January next year, investors will be able to choose from South African (previously Domestic), Worldwide, Global (previously Foreign) and Regional (new category) portfolios. Each of these categories will be subcategorised into Equity, Multi Asset (previously Asset Allocation), Interest Bearing (previously Fixed Interest), and Real Estate portfolios. The third tier of classification will categorise funds according to their main investment focus, for example Equity – Large Cap, Multi Asset – High Equity, Interest Bearing – Money Market, or Real Estate – General (see table for complete overview). In terms of the new ASISA Fund Classification Standard, fund names must be a true reflection of what the fund is all about.

Events

African Cup of Investment Management conference National Treasury again stressed that pension fund trustees should pay more attention to passive investing as an option. Helena Conradie | African Cup of Investments

n line with the National Treasury’s recent white paper on strengthening retirement savings, retirement policy specialist at National Treasury, David McCarthy, has suggested that pension fund trustees should carefully consider the option of passive investing, with a view to reducing retirement costs. Speaking at the third annual African Cup of Investment Management conference in Cape Town, McCarthy said passive investing, which is often facilitated through exchange traded funds (ETF), was under-utilised and should be explored by trustees as an option to the more conventional active investing. He says National Treasury was particularly interested in seeing more passive investment management in the retail sector, where the uptake has been low. He is concerned that high retirement fund costs were eroding the long-term benefits for members of pension funds, many of whom were poor and entirely reliant on their pensions once they retire. “Trustees need to look at an appropriate pension fund investment strategy, particularly when investments are long term and expenses accumulate dramatically. Passive funds are known to have lower costs. Active management would need very careful justification by trustees,” advises McCarthy. He also questioned the value of performance fees for asset managers in active pension fund management. The National Treasury has said it’s committed to implementing retirement and savings reforms and to working closely with the industry to achieve its goals. McCarthy says he is seeing an increasing move to a blended passive/ active approach.

Helena Conradie, head of sim.smartcore, the passive investment management business at Sanlam Investment Management (SIM), says, “Investors need to carefully consider which index fund to choose in order to take full advantage of the cost-efficiencies passive products offer. Evaluate your requirements and add only the bells and whistles you need, because you will have to pay for them.” An excellent way to avoid excess fund, advisory and management costs, ETFs provide investors with direct access to a basket of shares, such as the Satrix 40. They are also considered more transparent and flexible and require little or no administration as they are accessed electronically. It is important to note that low-cost passive investments can also be accessed in unit trust format (traditionally viewed as actively managed products).

She says interest in passive investing, which is hugely popular in the US, was growing in South Africa. “There’s so much more interest at the moment. We’ve had good inflows this year. Smart beta products are definitely gaining momentum in South Africa.” The head of ETFs and index products at Absa Capital, Vladimir Nedeljkovic, agrees that more interest had been sparked in passive investing this year, adding that the range of ETFs has widened. “The spread is starting to cover different asset classes. The passive core can be very well constructed, as we have products that cover various investment teams.” Sanlam Investment Management is the lead sponsor of the African Cup of Investment Management conference, hosted by IMN, which attracted a record 450 thought leaders and key industry players this year.

“Trustees need to look at an appropriate pension fund investment strategy, particularly when investments are long term and expenses accumulate dramatically. Passive funds are known to have lower costs. Active management would need very careful justification by trustees.” “Passive investment providers are becoming more client-centric. They try to innovate and offer smarter building blocks with which to construct your core portfolio. You get the most efficient solution and only pay for what you need, nothing more,” Conradie adds.

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Momentum Collective Investments Roundtable

Momentum Collective

Investments

Property has long been noted as one of the best-performing asset classes, even surpassing returns from equities. This was a key theme that emerged from the series of Momentum Collective Investments roundtable discussions held in Bloemfontein, Pretoria and Nelspruit during October.

ccording to data collected by Momentum Asset Management, property has delivered the best returns in six of the last 20 years and, on a compound annual growth rate (CAGR), delivered the best value over the same period. Property delivered 18.4 per cent, with equities some way behind on 15.2 per cent and bonds returning 14.6 per cent.

Greg Rawlins

Nesi Chetty

Looking at why South African property in particular has performed well and continues

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to perform so well, Nesi Chetty, head of property at Momentum Investments, maintains that SA property yields tend to be very stable. This is due in part to the fact that SA listed property companies have established anchor tenants in their properties. He also noted that rental growth has outstripped inflation in the last 15 years; escalations are contractual with signed leases of between three and seven years and the property companies by law have to pay out at least 95 per cent of earnings as distributions.

Looking ahead, Nesi notes that distribution yields continue to remain attractive relative to cash and bonds, with real distribution growth in 2013 – 2016. However, some concern arises from the fact that office sector vacancies are still high and property returns are set to moderate off the high base of recent years. He adds that SA property remains an attractive five-year investment relative to bonds and cash (as well as less volatility than traditional equities), and with strong direct property market fundamentals, now is the time to invest.

A presentation by Greg Rawlins, portfolio manager of the MET Global Property Portfolio, touched on the introduction of real estate investment trusts (REIT) into South Africa. REITs are liquid as they are traded on a daily basis on stock exchanges, as well as being regulated by legislation and analysed by institutions and analysts. Rawlins says that REIT legislation will be introduced in South Africa before the end of the year, with most property unit trusts (PUT) and property loan stocks (PLS) expected to convert to a REIT structure.

KEY SPEAKERS AT THE EVENTS

COMMENTS FROM DELEGATES

Nesi Chetty Portfolio Manager – Momentum Property Fund

“I think the MCI Roundtable was a great success, I enjoyed that it was exclusive and that we could interact with the fund managers. I also enjoyed the presentations and the valuable information I got from them. Hopefully we will have many more of these sessions.” Peter Pienaar, MDS marketing adviser: Momentum Distribution Services

Nesi joined Momentum Asset Management in 2002 after completing his honours degree in finance. On joining Momentum Asset Management, he was a member of the consumer industrial team, but assumed non-consumer research responsibilities as well. In January 2007, he was promoted to senior analyst for the life assurance sector in addition to current industrial research and fund management responsibilities. He was subsequently appointed head of financials in 2009 and portfolio manager for the Momentum Financials Fund. Nesi has been appointed as a portfolio manager and head of property for the merged asset management company. He currently manages the Momentum Property Fund and is responsible for the research of the property, beverages and leisure sectors. Greg Rawlins Portfolio Manager – MET Global Property Portfolio Greg qualified as a CA (SA) at Deloitte’s in 1984 and left the profession to become involved in and initiate various entrepreneurial and investment enterprises. The last 15 years entailed an everincreasing focus and ultimately a convergence entirely into commercial property. Property experiences include the direct ownership and management of properties and the creation of a substantial portfolio of listed South African property equities. Over the last nine years, the focus shifted to foreign listed property vehicles where he built up considerable knowledge on matters such as withholding tax, fund raising and REITs. An investment methodology was developed out of these experiences based on high yielding property investment vehicles.

“Property experiences include the direct ownership and management of properties and the creation of a substantial portfolio of listed South African property equities.”

“I found the roundtable extremely interesting and would like to see more of that happening on a more regular basis in the outlying areas like Nelspruit. One is not always able to keep up to date with all matters relating to investments by way of following the media and all other published matter that is at our disposal, so it’s always good to listen and participate in discussions like this with people who are as informed as you all are. This type of information that is gathered is valuable to take back to our brokers, helping us to look more professional and credible to handle their investment business.” Michael Lloyd, broker consultant: Momentum Distribution Services Nelspruit “This was the best fund manager road show I have ever attended. With the practical examples and the illustrations they used it was amazing. With this it makes my life as a consultant for Momentum easier to promote these funds on the Momentum platform.” Sandra Swart, Momentum Distribution Services: Nelspruit “Excellent, the small group made it so personal and special for me. I found it exciting and interesting having such close contact with the fund managers, being able to discuss things in a relaxed atmosphere. A memorable event in my days of being a broker.” Sam Goudvis, Sam Goudvis & Associates “With all the turmoil that we currently experience in South Africa and globally it is nice to hear that you guys see and feel the positive side of investing into listed property with a touch of international investing. I believe that with mixed allocation and long-term focus in the best property you will survive.” Hendrik Kotze, regional manager of central: FNB Insurance Brokers “It was insightful to hear about the opportunities provided by property investments and the excellent historical returns in what has been seen as a tough market in general. I will certainly tell my clients of this.” Rob Mclagan, FNB Commercial “The session was very insightful. I once again realised how important it is not to stereotype asset classes. We live in an era where property can longer be seen as merely property. We have to choose fund managers that can pick the correct sectors within these asset classes. Nesi Chetty and Greg Rawlins clearly understand this concept.” Theoniel Mcdonald, Complete Business Solutions

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they said

They said “The data suggests that financial systems are still overly complex, banking assets are concentrated, with strong domestic interbank linkages, and the too-importantto-fail issues are unresolved.” The latest International Monetary Fund (IMF) Global Financial Stability report said that financial regulation reforms have yet to positively impact the market.

“The bund remains the intra-Eurozone safe-haven asset of choice.” John Wraith of Bank of America Merrill Lynch commented on the rise in German bonds as European leaders Angel Merkel and Francois Hollande clashed over their plans to end the European debt crisis, boosting demand for Europe’s safest asset.

“The interpretation of GDP has to look at the base effect of mining and that the non-primary sector of the economy has slowed down. The boost we got from mining may come to haunt us in the next quarter.” Rashad Cassim, head of research at the South African Reserve Bank, commented on the current state of the local economy.

“If people realise Europe is not going to be a real doomsday scenario, confidence will return slowly but surely.” John Dippenaar, CEO of Petra Diamonds, who sells gems through auctions in Johannesburg and Antwerp, believes that the demand for unpolished stones is set to recover.

“We have made a lot of progress on the personal side. The trick is how do we provide the distribution channels and bring money into the system and for the people to have the ability to make choices about products.” MD of the Banking Association of South Africa, Cas Coovadia, said that South Africa has made good progress in providing banking products to the unbanked, however, he indicated that channelling R12 billion worth of savings from underneath mattresses and into the banks remained a key challenge.

though to 2015 at a mining expo in Las Vegas. “Based on the PMI, the deterioration in the local manufacturing sector has been stark in recent months ... Concerns about domestic production were reinforced by the business activity index, which fell by 7.6 index points to 43.” The managing director of the Chartered Institute of Purchasing and Supply, Andre Coetzee, commented on the declining Purchasing Managers Index (PMI).

“We encourage consumers to concentrate on paying off any debt because the lower the interest rate is, the more of the principal amount you are paying back with each repayment.” Absa chief executive for retail and business banking, Bobbie Malabie, advised consumers to pay off their debts given the cut in interest rates.

“Energy has not previously been a significant venture capital attracter because of its substantial capital requirements, but over the research period the sector has attracted 15 per cent of total investment, making it the secondlargest single sector recipient of venture capital funding.” Malcolm Segal, an executive consultant at South African Venture Capital Association, commented on the recently released research which illustrated a surge in venture capital in South Africa.

“We’ve seen a slowing in economic growth that is more than we expected. We think 2013 could look like 2012 in terms of worldwide economic growth.” Caterpillar CEO, Doug Oberhelman, forecasted moderate to anaemic growth

“The future for banks in Africa is retail.” Bisi Lamikanra, head of management consulting at KPMG Nigeria, estimated the untapped consumer market in Africa to be approximately worth US$1 trillion in potential spending power.

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you said

You said A selection of some of the best tweets as mentioned by you over the last four weeks. @Investor_Spy: “A developed country is not a place where the poor drive cars. Its where the rich use public transport.” - Mayor of Bogota.” Investor Gadget - I am investor gadget a private eye investor. My knowledge and skills of investment go way beyond any human capabilities! My Mind (also my office)

@BeccyMeehan: “We’re going through the weight-loss process, before the runner can set a new record.” Deputy CEO, National Bank of #Greece tells #CNBC” Beccy Meehan - On telly. Lancastrian. Tall. Not really blonde. Journalist. Girl Guide Leader. Mum. Sporty. Great Dane owner. Lover of cheap wine. Optimist. Not in that order. London

@brucebusiness: “CEOs find marketers untrustworthy, unimpressive and disconnected.” Bruce Whitfield - Journalist. Talker. Speaker. Present The Money Show on 702 and Cape Talk, Summit Investor and Finweek writer. Johannesburg

@benedictkelly: “Anyone notice that there are 9 MTN execs on the rich list before the first Vodacom exec? Value for money anyone?” Ben Kelly - Journalist and dad Special Projects Editor at the Mail & Guardian I tweet in my personal capacity. Johannesburg

@Investor_Quotes: “Investing is often about whom you know and not about what you know. Rene Rivkin.” Investment Quotes - Quotable quotations from major investors for inspiration, motivation and insight.

@zerohedge: “ECB’s Draghi Says Greatest Risk to Stability Is Inaction. Shouldn’t that say “inflation”?” Zero Hedge - http://www.zerohedge.com @frasereC4: “Mervyn King: supporting Aston villa is much more stressful than being Governor of the bank of England #4King”

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Ed Fraser - Channel 4 News Head of Home News. Seriously Scottish @LindoXulu: “@JustinFloor: SA bond market surprisingly big in global context: R1.6tn market cap, R21.0tn annual turnover (9% of global). Not bad...” Lindo Xulu - @financialmail, Investigative Financial Journalist | Alternative Investment Writer xulul@fm.co.za South Africa @hiltontarrant: “The Reserve Bank now estimates the economy will grow at 2.6% this year. Not too long ago, this number was over 3%.” Hilton Tarrant - Financial journalist at Moneyweb. Broadcaster. Product guy. Obsessed about mobile, tech, telecoms. Joburg @LindsayBiz: “Gold price at RECORD high in Rand terms. What a pity we’re on strike. Viva!” Lindsay Williams - Football & Fish, Broadcasting & Beer, Wine & Whining, Writing & Wronging Cape Town

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Comic book collecting –

Extraordinary investment returns to marvel upon Before television and the influx of video games, children’s imaginations were captivated by comic books. Asterix and Obelix, Spiderman, Superman, Batman, Mad Magazine and not forgetting Archie and Jughead are only a few examples that were soon replaced by animated, virtual reincarnations and brought to life by means film and digital technology. Although the static and perhaps obsolete comic book may be of very little use to the average consumer, the original issues have brought yield returns to collectors. Most of the blockbuster superhero and animated films screened at cinemas today

are based on comic books that were once read and enjoyed by boys and girls of various ages. Although now older and fuelled by a sense of nostalgia, avid comic book collectors are buying back pieces of their childhood and this is the key price-driving factor in collecting comic books. Another price-driving factor in the comic book collecting world is the rise of electronic versions decreasing the need for physical printed copies. The scarcity factor makes the ownership of printed comic books much more sought after and far more valuable. Mint condition comic books are graded and

validated by Comics Guaranty LLC, also known as CGC, a crucial prerequisite for collectors. The grading works on a scale from one to 10, with 10 being the highest with the likelihood that it is possibly in flawless condition. Interestingly, once graded, the comic books are sealed in transparent plastic wrapping, which contains a holographic verification and barcode. Ironically though, to retain its value, mint comic books are not to be read or removed from its plastic cover as this could result in a downgrade and a decrease in value. As fragile as these investments are, they tend to offer extraordinary returns.

Action Comics No. 1 – $2.161 million Considered by collectors to be the Holy Grail of comic book collecting, a rare copy of the first issue of Action Comics No.1 sold for a record $2.161 million at the end of 2011 at the ComicConnect auction. Superman was first introduced in this issue as well as his love interest Lois Lane and also DC Comics’ Zatara Master Magician. For this reason it is widely considered to be the beginning of the superhero genre. This June 1938 issue, graded at CGC 9.0, is believed to have been owned by actor Nicolas Cage before it was stolen from his home in 2000. It was later found in a storage locker in California in April 2011. Copies of the same issue have previously been sold for between $300 000 and $1.5 million.

Amazing Fantasy No. 15 – $1.1 million The 1962 Stan Lee and Jack Kirby written comic titled Amazing Fantasy No.15 sold for $1.1 million in March 2011. What makes this Marvel issue so appealing is the fact that it marked the introduction of Spiderman. Sales for the Amazing Fantasy No.15 issue were one of the highest for Marvel at that time and resulted in the Spiderman character being commissioned into his own series. It is the only copy with a CGC grade of 9.6.

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Detective Comics No. 27 $1.075 million First published in 1939, an 8.0-graded copy of Detective Comics No. 27 was sold in 2010 by Heritage Auctions for a world record price of $1.075 million. This particular issue is most famous for the introduction of the Caped Crusader, Batman, as well as his crime-fighting ally Commissioner Gordon. The comic was first purchased by a collector for $100 over 40 years ago and was printed with white pages, considered very rare for its age.

TJDR (CT) 39788/E

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